Accounts Receivable Management (ARM) Outsourcing: An Opportunity Worth Considering

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1 Accounts Receivable Management (ARM) Outsourcing: An Opportunity Worth Considering EXECUTIVE SUMMARY Given the current economic environment, with global banking institutions struggling to generate growth and return to pre-financial-crisis profit levels, the pain of high, uncollected accounts receivable is higher than ever. Given the fact that collecting money for the next sale is equally if not more important than the initial sale itself, many lenders are taking a proactive approach by engaging a third party agency to improve their collections rate. This whitepaper examines the potential advantages and efficiencies of outsourcing the accounts receivable function to an external agency that has proven expertise in collections and recovery. Sutherland Banking & Financial Services Practice By The Numbers 150M+ 45B+ Finance & Accounting Trasactions processed Annually 65% Value mortgage loans originated and underwritten 600M+ 1 Annual savings delivered to our clients Revenues generated from long-term Fortune 500 clients Largest pure play privatelly helld BPO on the planet 28 Years of global business process service delivery experience Overview The debt collection business in the US and globally is on a rise as retail debt and the delinquency ratio grow at an unprecedented rate. As a result, a growing number of banks and lending institutions have shifted their competitive focus from being the leading lender to being the first one to get their money back. Historically, consumer spending has been the backbone of US economic growth. But in the aftermath of the recent global economic crisis, consumer spending has come at an unexpected price. The lenient approach shown by some lending institutions in extending loans to customers has resulted in a growing number of mortgage foreclosures, higher credit card balances, rising delinquencies, and low saving rates. Fortunately, third-party agencies have provided a much-needed helping hand to banks and lenders in their efforts to collect overdue debt and recuperate their losses. Equipped with the latest technology and a specialized pool of trained collectors, third-party vendors have proven successful at improving delinquency rates at a significantly lower cost. The U.S. Debt Collection Industry Some lending companies have a division or subsidiary that acts as its collection agency. However, after multiple failed attempts to collect their outstanding debt, a growing number of lenders are engaging a third-party debt collection agency to recover past due funds and/or accounts that are in default. The economic impact of third-party debt collection is significant. The U.S. economy is based on the premise that those who provide credit whether in the form of products and services or a monetary loan, such as a line of credit or a mortgage can expect to be repaid. Recovery of consumer debt by third-party debt collectors on behalf of America s public, private and nonprofit sectors has a significant effect on our economic health both directly and indirectly. 1

2 Sample Framework for Successful Collections Dialer Options Predictive Preview Manual Calling Management System ACD CRM Operational KIP reporting and MIS Analytics (Customer Behavior Patterns and Trends) Database SQL server 2008 MS Access Telephony & Internet Phone, FAX Internet, and IM Direct benefits are in the form of hiring and paying collection agency employees. Indirect impact includes jobs, compensation and economic activities associated with suppliers to the debt collection industry. These include companies that sell office supplies, telephone service building service, and other goods and services purchased by debt collection agencies. To measure the annual impacts of third-party debt collection on the national and state economies, ACA International, the Association of Credit and Collection Professionals, commissioned global advisory firm Ernst & Young to conduct a survey in the fall of Survey results showed that the third party debt collection industry in the US recovered approximately US$ 54.9B in total debt in 2010, on which they earned US$ 10.3B in commissions. After deducting the commissions paid to third-party agencies, the remaining US$ 44.6B in net debt return represents an average savings of US$ 396 per household, or about 1.8% of the total consumer credit outstanding. The study also found that the states of Texas, New York, California, Florida and Illinois ranked among the highest in debt collection. Early out debt, defined as receivables aged 90 days or less, represented 30% of total debt collected. The remaining 70%, classified as bad debts, consists of receivables aged 90 days or more. In 2010, there were approximately 148,300 employees in the industry, including 133,900 full time employees, 12,900 part time and 1,500 contract employees. The industry also supported 153,300 employees in indirect employment during that period. Key Advantages of Outsourcing Accounts Receivable Management (ARM) The debt collection outsourcing market continues to grow and evolve with the new technologies and geographies. There are numerous advantages to engaging a professional outsourcing company to manage the accounts receivable function. 2

3 Key advantages offered by an ARM Outsourcing Company Save Accounts with Early Intervention Debt collection agencies, if introduced early in the process within the critical time frame of a day window can be largely successful with tactful communications intended to get the account holder re-engaged with the bank and settle their delinquencies. A Bank s Reputation Remains Intact By outsourcing the collections process, banks distance themselves from the role of the bad guy when existing clients are reluctant to pay. The first notice from a collection agency may be enough to spur the customer into action while allowing the relationship between the bank and the customer to remain cordial or neutral. Economics of Specialization in collection Agencies focusing solely on collections are better equipped with the requisite technology. They are experts at attracting and hiring employees with the appropriate expertise, and are able to provide healthier incentives to employees than a bank s collection department can offer. Improves Collection Success Rate Communications from a debt collection agency carry far more authority and impact. While tactful, a collection agency will communicate the gravity and magnitude of rectifying the matter. The very first contact from a collection agency may be sufficient to encourage customers to pay the due amount. Bank can Focus on the Core Business Lending is the core service provided by banks. Debt collection, a painstaking and time-consuming process, is not necessarily part of bank employees skill sets. Collections outsourcing can ease a lot of time and stress by getting a third party involved, and thereby freeing bankers to focus on their core business. However, before engaging an ARM outsourcing company, there are several important factors to consider: Is the collections practice is managed by people with proven banking experience in credit and collections? Will the scope of work include the end-to-end process, from Analytics to Customer Contact and fulfillment? Does the company have proprietary workflow tools, tailor-made for financial products like credit cards and loans? What tools and methods will be deployed to ensure Continuous Process Improvement and Quality Monitoring? Does the company place a strong emphasis on following the Collections Code of Conduct? One of the primary financial benefits of ARM outsourcing is the improved cash fl ow yielded from a faster customer settlement cycle, customer account reconciliation, centralized customer invoice control, and the generation of prompt customer invoices and automated customer statements. For lenders who have experienced the pinch of escalating administrative and staffing costs associated with the accounts receivable function, the savings in labor, financing, and transaction fees may outweigh the cost of outsourcing. Other key advantages offered by a third-party collection agency or ARM outsourcing company are highlighted in the left column of this page. Centre of Excellence (CoE) for ARM Solutions Human Resources, technical expertise and analytical tools form the important pillars of collection and recovery services. Similarly, deploying a specialized and skilled collection team, automating the workfl ow through a feature-rich platform, and employing contact center and payment trend analysis are all essential to ARM success. The figure on the following page highlights the some of the strategic initiatives that need to be adopted by a collection agency in order to increase their collection efficiency for reduced delinquency. 3

4 Key Pillars of Debt Collection Realigning the Operating Culture Go paperless and use e-invoicing for electronic invoices/ statements Increase frequency of sending e-invoices/ statements A standard procedure should be established to handle uncollectable accounts Training and Motivating the Collection Team Set appropriate collection procedures and collection targets Award team members with incentives in proportion to the collection done Train team members to handle difficult customers and to identify prospective delinquent customers Information-Gathering and Review Customer data gathered in the initial application process should be thoroughly reviewed Review past due reports on a regular basis An internal committee to conduct periodic review of collections performance, strategies & processes should be established Bifurcation of Customers Initiate customers segmentation based on their ability and willingness to pay The approach to collection should be based on the category in which the customer is categorized Promote Proactive Approach Communicate product features, collections fees and charges to the customer Establish a mutually agreeable payment schedule Address customer service complaints on priority basis Timely payment should be awarded Predictive Analytics In today s economic environment, it is more important than ever to identify and predict when the bank s debtors are struggling to pay their bills, and to develop a plan to prevent these customers from becoming delinquent. Selectively targeting customers with the appropriate strategy at the right time improves collections productivity and lowers costs. Predictive analytics has emerged as an effective and efficient solution to this targeted approach. Target the right debtors at the right time with the right communication. Predictive analytics can be categorized as (1) Traditional and (2) Strategic. Traditional predictive analytics uses mathematical algorithms to examine current and past account data and the relationships between this data to generate a predictive behavior score. Strategic predictive analytics leverages traditional predictive analytics ability to generate enhancedvalue behavior scores using algorithms, but takes it further by determining break-even points. This allows collections management to target the right debtors at the right time with the right communication strategy. A score would be attached to each and every customer Sample Collections Process Flow Combined with outstanding value, a composite metric termed as value at risk (VAR) would be derived Universe This metric would drive the Collection Strategy Segments formed include: Self Cures Medium default risk Tough Nuts Self Cures Medium Risk Tough Nuts Lesser frequency of intervention Greater grace period before intervention More intensive efforts Testing alternate communication techniques Accelerate field collection 4

5 Case Study 1 Collection Process for a Large Private Bank Client Profile The client is one of the largest private banks of India Business Challenge Organized billing and payment clearance methodologies were not in place. 100% Coverage on the allocated pool was a challenge. Frequent backlog resulted in further revenue loss. Loss of book on de-allocated pool. One-stop shop Audit & Compliance Sutherland s Business Solution Data Curing Updated data profile through field visits, phone calls, phonogram, online directory search and skip tracing. Collection Agency Management: Initiated ideas to cure non-contactable cases with client support. Connected agency with leading service providers across India Successful pickup payment method Strong subcontracted agencies with vast network are the key to expand business for North & South locations Transformation per client constraint is implemented as/when required to ensure client satisfaction. Driving active or matured pool in different phases to successfully achieve and maintain quality benchmark with no escalation. Enhanced productivity along with customer and client satisfaction. Key Value for the Client Cost of collection reduced by 4-5 % Account-to-collector ratio improved by 75 accounts per collector Positive contact to payments ratio improved by 17% Improved contact ratios Choosing the Right Outsourcing Partner In this fiercely competitive financial landscape, there are multiple resources available for outsourcing accounts receivable management. Lenders need to thoroughly research the options, ask open-ended questions (refer to page 3 for a checklist), and select a partner that best fits the bank s culture and business practices. Here s a brief profile of the different types of debtcollection companies in the marketplace today: Typically, the collections agency s role varies based on the delinquency stage of the loan. First-party agencies are often a subsidiary of the company that owns the original debt. First-party agencies typically get involved earlier in the debt collection process and try to maintain a constructive relationship with the delinquent customer. Being a part of the original creditor, first-party agencies may not be subject to legislation that governs third-party collection agencies. Moving ahead in the value chain, if the first party collector is unable to collect the debt, an external third-party agency is hired. Third-party agencies are contracted to collect debt on their behalf for a fee or commission. The financial arrangement between the creditor and third party depends on the service level agreement (SLA) that exists between the creditor and the collection agency. Another type of collections agency known as a debt buyer purchases entire portfolios of bad debt. In this case, the bank accepts a fraction of the debt as payment for passing off the responsibility for collection and recovery. Considering the cost and time involved in pursuing delinquent debt, selling bad debt no matter how much is recovered is more profitable than pursuing the debt internally. Outlook In the aftermath of the recent financial crisis, banks and other financial institutions are increasingly choosing to outsource their accounts receivable management and debt collections function. To minimize their losses, many are outsourcing sooner, even as early as days past due, in order to reduce account delinquency and prevent mounting debit. Financial lenders who outsource their accounts receivable are creating the synergy necessary to improve collections results significantly without affecting their core workloads. 5

6 However, with any collections outsource strategy especially the early stage arrears it is critical to balance profitability with accountability. Banks cannot afford to lose loyal customers, nor see the cost of collections escalate higher than the value of outstanding arrears. Therefore, it s important to spend the appropriate time choosing an outsourcing company that best fits the lender s needs and culture. For a growing number of banks, ARM outsourcing is becoming a risk worth taking. Collection Analytics: A Core Area of Sutherland Expertise Develop and deliver statistical scorecard to estimate and predict the probability of an event to occur Credit Scorecards/Behavioral Scorecard/ Collection Propensity models like cross sell/up sell Forecasting and likewise Products Predictive Analytics 4 1 Sutherland Success Story: Collection Process for a Large Private Bank 2 Quantitative field that deals with modeling, analyzing and optimizing decisions made by individuals, groups and organizations Consumer and Market Insight Optimization/Pricing/MMM Campaign Management Decision Science and Optimization Analytical Platform to enable easy fl ow of information and knowledge and campaign management Reliability Campaign Genesis Card Landscape 3 Data Management and Reporting Data Management and Reporting solutions helps the client in easier and smoother use of the data and reporting ETL and Data Model Data Cleaning De-Duplication Reporting Service 6

7 Case Study 2 Revamping Collections for a leading UAE Bank Client Profile The client is a global bank operating in 13 countries across four continents and organized by various client-focused divisions. Poised for further growth, its vision is to become the number one bank in the region. Business Challenge In a consulting engagement for the bank s Collections and Recoveries Department, Sutherland was asked to study and identify gaps and redundancies, and execute an overall framework of international best practices in order to improve business performance, debt collections and operational control. Sutherland s Business Solution The detailed, two-phase project covered each critical component of the business model. Conducted face-to-face interviews with relevant bank employees and executives, including resources in Collections, Remedial Advances, BIU, Operational Risk, Credit Operations, CwX Project Team, Elite team, Sales and IT to document the as is processes and identify opportunities for improvement. We analyzed thousands of electronic records and reports to understand the bank s current performance. Researched and performed an analysis of the bank s structure, processes and performance (versus the competition) to paint a best practice picture in the geography. Studied bank s existing collections technology platform and reviewed the platform s future road map to identify gaps and validate requirements. Key Value for the Client Reduced overdue inventory by 10% Reduced costs by 20% Implemented Collections system Merged Collections and Remedial Advances Unit Implemented monthly targets Implemented incentive plan Implemented awards recognition (Collector of the Month) Implemented daily huddles and Collections MIS pack The Sutherland Advantage Our ARM practice is managed by people with banking experience in Credit and Collections Sutherland s scope of work includes end-to-end processes, i.e. Analytics, Tele-calling and Fulfillment Our proprietary workflow tool is tailor made for products like Cards and Loans We focus on Continuous Process Improvement At Sutherland Global Services, we place a strong emphasis on Collections Code of Conduct and Quality Monitoring For more information To learn more about Sutherland s Best Practices approach, please contact us at: Established in 1986, Sutherland Global Services is a global provider of business process and technology management ment services offering an integrated portfolio of analytics-driven back-office and customer facing solutions that support the entire customer lifecycle. It is one of the largest, independent BPO companies in the world serving global leaders in major industry verticals. Headquartered in Rochester, N.Y., Sutherland employs more than 30,000 professionals and has 41 operations centers in 14 countries. For more information, visit 7 WP-ARM082514