Early Collections Outsourcing - An innovative approach to debt management in challenging market conditions

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1 Early Collections Outsourcing - An innovative approach to debt management in challenging market conditions A Decision Analytics briefing paper from Experian July 2008

2 Introduction As we start to enter an economic downturn brought about by a combination of the credit crunch and spiralling food and energy costs, the future looks bleak for lenders and consumer credit grantors. Creditors are now paying very close attention to their arrears levels and debt management processes, with one British bank reportedly trying to nearly treble its number of collection staff. At the same time, lenders are urgently upgrading and improving their systems and processes to deal with the rapid growth in debtor numbers. Predictably, this is leading to a staffing crisis as experienced collections personnel are in increasing short supply and the time lag between training new recruits and their being operationally effective is just too long to deal with the larger volumes of early stage debtors. Early, appropriate intervention is proven to be the single most effective tactic in successfully rehabilitating a customer. But, with over stretched staff trying to handle too many delinquent customers, the ability of many creditors to quickly identify and target high risk debtors is swiftly being diminished. One obvious solution would be to turn to external parties to assist with early stage arrears management. The use of Debt Collection Agencies (DCAs) is already widespread for late stage collections and lenders are selling more and more aged debt earlier in a bid to recoup losses. UK agencies now handle three times as much debt as they did in 2000 and emerging credit markets are showing a similar trend; in the Czech Republic the number of consumer debt collection cases passed to DCAs almost doubled last year. Historically however, many companies have been reluctant to outsource their early stage collections for fear of losing control of two of their most precious assets: their relationship with the customer; and their reputation. Indeed, in research undertaken by the Credit Services Association in the UK, more than half of those surveyed (55%) state the key reason for not employing an external debt collection agency is the fear of not having control of what is said and done on their behalf. But with alternative options in short supply, collection managers must seriously consider possible outsourcing partnerships while quickly identifying and mitigating for the risks inherent in such arrangements. Early Collections Outsourcing - 2

3 Addressing the major outsourcing risks Choose an agency with the appropriate experience and knowledge Fundamentally, any outsourcing partner needs to prove they can do the job with the skills, diplomacy and experience necessary for effective early stage collection. Undertake rigorous vetting of prospective partners, visit them, speak directly to the people who will be handling your account and look at the breakdown and availability of resource at its disposal. Will they be able to quickly transfer staff to support your changing needs if necessary? Sector experience is also critical. While you may not like the fact the agency works with your competitors, intimate knowledge of your industry is essential when outsourcing early stage collections. Any outsourcing partner must fully understand regulatory requirements. How do they stay abreast of regulatory changes? Are they involved in the relevant industry bodies? How quickly do they integrate recommended best practice? Protect your customer relationship The majority of early stage delinquent accounts self correct, or need only a gentle nudge to get them back on track. Unwarranted, aggressive collection tactics will drive profitable customers elsewhere. Similarly, engaging high risk customers early with a positive and empathetic approach can make a real difference to their ability and willingness to pay. Avoid customer attrition and improve the likelihood of rehabilitation by ensuring your outsourcing partner operates as an extension of your own team, transparent to your customers. Spend time outlining your customer charter and training them in your rules of engagement. How effective is their training methodology and collections technology that they can quickly integrate the necessary knowledge and implement the specific processes to serve you and your customers? Unless you are significantly cutting back your internal resource, it also pays to determine which accounts should be handled internally and which are best to outsource. This can depend on your own team s skill set and that of your partner and also the level of risk involved. For example, you may prefer to handle low risk, high value accounts internally, while outsourcing higher risk, low value accounts. Protect your competitive position Providing an external party access to a large part of your customer database is not a route to be taken lightly. Likewise, you may have a particularly successful approach to collections with novel strategies that yield higher than average returns. Both your customer database and any collections IP need to be protected. Many organisations insist that only dedicated staff work their accounts, reducing the risk of inadvertent knowledge transfer, but which can prove either costly or restrictive if volumes fluctuate or ramp up unexpectedly. Legal confidentiality contracts are standard, but in the current environment, where your partner could also be working for your competitor, it will pay to be particularly thorough in accessing security risk and implementing the appropriate access controls. Early Collections Outsourcing - 3

4 Retain control and flexibility The key difference between outsourcing early stage collections and the selling of aged debt is that the creditor must retain control of the account at all times. Be very specific in outlining at what stage the delinquent account is to be passed back to your team and, conversely, how cured customers will be reintegrated. Set clear goals from the project outset, establish strict commission and bonus structures for early rehabilitation and, likewise, evaluate if the use of penalties is appropriate for customer loss. Continually measure performance and ensure that you and your partner communicate regularly on how to adjust tactics to improve results. Avoid restrictive long-term contracts which can limit your flexibility to switch partners or return all collections in-house as market conditions vary. Position the purpose of the outsourcing from the outset Both existing collections staff and senior executives need to understand the purpose behind the move to early stage outsourcing. It needs to be positioned, not as a cost cutting exercise or retrenchment of the collections department, but rather a boost to both productivity and collections performance at a time when it is most needed. Leveraging technology for optimal results During the agency selection process, collection managers often spend time evaluating the collections system used by the prospective partner. Although it is indeed relevant, the viability of early stage arrears outsourcing is more often determined by the collections technology deployed by the creditor. Although the cost benefits of outsourcing at this stage are more difficult to quantify, the deployment of modern collection tools and best practice techniques can significantly lower the cost of managing the outsourcing partnership and improve the likelihood of early debtor rehabilitation. Automatic allocation reduces overheads Modern collections tools are designed to handle large volumes of customers, allowing organisations to accurately assign behavioural scores based on data from both internal systems and external bureaux. Accounts can then be accurately segmented according to risk, propensity to pay and other criteria. Those portfolios that then meet the predetermined criteria for outsourcing can be automatically allocated to the collections partner in real time. Where more than one early stage outsourcing partner is employed, the system can be configured to exploit the different strengths inherent in each agency and allocate accounts accordingly. Manual intervention is removed, dramatically reducing a sizeable chunk of the management overhead normally associated with outsourcing. Better data accuracy improves likelihood of recovery However, once an account has been allocated externally, a collections manager still needs to retain both visibility of the customer and full accountability for all debt management activities. It is essential therefore that both parties have the most up to date status of each account and can access the full auditable history of every communication and correspondence between the customer, the creditor and anyone acting on its behalf. Early Collections Outsourcing - 4

5 Collections systems offering web browser interfaces and deploying real time integration technology, such as messaging and web services, have a clear advantage in this respect. If the use of one centralised collections tool for all early stage collections is the preferred approach, authorised external agents with internet access can directly and securely access the relevant live screens and account data with the added benefits of online help, scripting and creditor configured process flows. Alternatively, where the DCA operates their own collections platform, real time data exchange between the creditor s system and the external DCA system is simplified. Data interchange can also include automated event triggers used to request authorisation to proceed to the next escalation level, ensuring that control remains with the creditor. With either option, information concurrency is maintained and data misalignment issues are prevented. The collector is thus able to initiate the most appropriate collections activity, reducing the likelihood of customer alienation and improving the chances of recovery. Better performance management drives continual strategy refinement Collections systems are now available with preconfigured libraries of DCA reports and collections specific dashboards. Such tools measure key collections indicators and allow credit managers to track the relative success rates of each agency in early stage arrears outsourcing. A small subset of each type of account can also be handled internally for comparison purposes and any outsourcing cost benefits benchmarked where possible. And, as the creditor and outsourcing partner work together to develop new collections approaches to cope with a continually changing customer landscape, these powerful Management Information tools can monitor the impact of any test and learn strategies, comparing the relative successes of varying approaches. In this way, both the outsourcing strategy and the collections strategy itself can be continually refined to ensure optimum results. The five key factors in early stage collections outsourcing 1 Treat your outsource partner s staff as an extension of your in-house team - ensure they have the same training and incentives as in-house staff 2 Reassure your in-house operation that this is NOT outsourcing of their jobs - it is adding resources quickly so they can do their jobs better 3 Ensure that your in-house collections system can automatically manage the allocation and tracking of accounts in accordance with your segmentation policies and business rules 4 Make sure that your partner is able to record all collections actions and treatments and update your in-house system for a complete record of all customer communications 5 Pay particular attention to the rehabilitation of customers. Consider additional financial incentives for successful rehabilitation Early Collections Outsourcing - 5

6 A risk worth taking There is no doubt that many lenders, utilities and telcos are now being forced to outsource more of their debt collections activities, and at an increasingly earlier stage, if losses are to be stemmed. However, any collections outsourcing strategy, and early stage arrears outsourcing in particular, needs to balance profitability with accountability. Companies cannot afford to lose loyal customers, nor see the cost of collection soar higher than the value of the monies in arrears. Time spent selecting the agency that is the best fit to your organisation and collections requirements is an important first step when outsourcing early stage debt management. However, the use of highly automated modern collections technology that leverages best outsourcing practice will allow you to extract the most benefit from your DCA partnership. Many manual, repetitive tasks are eliminated, data transparency is improved and performance monitoring is simplified, allowing you to take better control of your bottom line and retain ownership of your customer. As the need to rehabilitate customers sooner has never been more urgent, the move to early stage collections outsourcing is rapidly becoming a risk worth taking. Early Collections Outsourcing - 6

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