Achieving Return on Investment from Modern Revenue Management and Collection Systems. A Decision Analytics briefing paper from Experian



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Achieving Return on Investment from Modern Revenue Management and Collection Systems A Decision Analytics briefing paper from Experian August 2007

Introduction In a climate of low cost operating models and intense competition, any investment in arrears management and collections must be justified. This Briefing Paper examines the return on investment that can be achieved by implementing specialist revenue management and collections systems. Measuring Return on Investment Any system enhancement or new investment in the collections process is looking to achieve a number of key objectives: Improved productivity: more work completed by same number or less staff Improved recovery rates Better customer relationships and the opportunity of future income through ability to sell more goods/services to rehabilitated customers Reduced costs to collect Reduced marketing costs Lower DCA costs Reduced number of Days Sales Outstanding (DSO) Return on investment can be measured through an analysis of how the new system has performed against the key objectives identified above. These all have a cost or value attached to them which can be used to calculate the return on investment. 1 Improved productivity: more work completed by the same number or less staff Improved productivity can be measured by the increased number of cases handled per employee once a modern revenue management and collection system is implemented. In my experience collectors using a modern revenue management system can handle 20% more cases than under previous collection processes. To calculate the potential ROI on a new system, this metric can be applied in two ways. If the level of business is static, it can lead to a reduced headcount in the collections department; if the business is growing, it means that the business can grow by 20% while collections performance is maintained without the need to take on additional staff. Either way, the ROI is the same. For example, when this 20% improvement is considered as a staff reduction, this equates to a collections department of 100 reduced to 80, without compromising the amount of work completed. As a calculation, this staff reduction multiplied by the annual salary and then by the full personnel cost, typically 130% to take into consideration pension, National Insurance, sick pay etc, is a significant annual saving. Improved recovery rates At an average salary of 13,000 the annual saving amounts as follows: 13,000 x 130% x 20 = 338,000. Improved recoveries can be achieved since advanced automation removes the need for skilled collectors to be checking routine payments or issuing letters, enabling deteriorating accounts to be actioned earlier. Advanced segmentation also means that accounts are treated appropriately to the risk of default, again leading to improved recoveries. Typically, specialist collections systems improve an organisation s roll rate by an average of 5% from one cycle to the next. Roll rate is the proportion of outstanding Achieving ROI from Modern Revenue Management and Collection Systems - 2

balances in each delinquency level that roll forward to the next delinquency level one month later, i.e. the outstanding balances worsen from one cycle to the next. Improving the roll rate makes a significant impact on provisioning levels. Provisioning for future bad debt losses is a standard practice at all lenders, with the level and timing of provisions based on the rules and practices in place within the business. Roll rate is the most commonly used method to monitor the performance of collections processes and, while there are many different variations used 2, the following example demonstrates the ROI that could be achieved: Better customer relationships and the opportunity of future income through ability to sell more goods/services to rehabilitated customers If 10 million rolls from one cycle down to two cycles down every month, then a 5% improvement would mean 500,000 would not roll over. A typical provision on two cycles down might be 15%, so on the 500,000 not rolling over, and not therefore being provisioned against, would equate to a 75,000 saving per month. Over a year this figure amounts to a total of 900,000 which would otherwise had to have been provisioned for subsequent write-off. Once a delinquent customer has been cured i.e. restored to paid up to date status, they are in a position to buy again and are, therefore, once again a valuable customer. Modern revenue management and collection systems help to reduce customer churn by improving an organisation s cure rate. For example, let us assume that the cure rate of those customers who enter the collections process is 70% and that, after the implementation of the new system, this improves to 75%. On this basis, a collections operation that sees 500,000 customers enter the collections process over a 12 month period will cure an extra 5%, i.e. 25,000 are rehabilitated and available to buy additional goods and services. When considered as a calculation, the figures are significant; a typical additional profit per rehabilitated customer per annum could be 75, equivalent to an increased profit on the bottom line of 1,875,000. 3 Reduced costs to collect A key advantage of any best of breed system is the ability to draw on modern technology in any customer communications, so that the traditional letter or phone call can be replaced by an SMS or email. For example, let s consider that a customer is delinquent for 6 months, and in this period 8 letters are posted and 12 phone calls made. If we estimate that a letter costs 0.50 and a phone call (excluding staff costs) is 0.20, then over this period the communications cost to collect equates to 6.40. However, replacing half of these letters with an email will make a saving of 2, while replacing half the calls with an SMS message will save around 1. When this is calculated for the portfolio of delinquent customers the savings are considerable. If over a 12 month period 75,000 customers are in arrears for 6 months before they are cured, then this saving on communications costs of 3.00 per customer equates to 225,000. Reduction in marketing costs A feedback loop from the collection system to the customer acquisition system will help to reduce marketing costs since it will ensure that those customers in arrears do not receive mailings and telesales calls a practice that is all too common in many lenders. The feedback loop can also reduce marketing costs by matching the profiles of existing customers in arrears with those of prospective customers with similar demographic and lifestyle profiles. This in turn reduces the volume of direct mail and telesales calls to new prospects. Achieving ROI from Modern Revenue Management and Collection Systems - 3

A reduced number of customers and prospects targeted can have a significant impact on marketing costs. As an example, let s consider that 6 mail shots are sent out to selected customers and prospects every year (one every two months). Working on a notional marketing cost of 0.75 per mail shot to a marketing database of 1 million, consisting of a mix of existing customers and new prospects, this would represent an annual cost of 4.5 million. If however, we consider that 50,000 can be eliminated from the marketing process using the feedback loop combined with analytics and profile matching, the cost saving to the business is a significant 225,000 (50,000 x 4.50). Clearly the savings could be even more, if telemarketing costs were calculated in addition. Lower DCA costs Most collection processes involve allocating older debt to a debt collection agency (DCA) who will work the debt on a contingency basis, retaining a percentage of any debt recovered. Typically credit grantors will leave a debt tranche with a specific DCA for a fixed period, before re-allocating it to one or more additional agencies to be further worked. A modern revenue management solution will profile and segment delinquent customer accounts so that they are allocated to DCAs with a proven track record of successful recovery from accounts matching that profile. As a result, the DCA will achieve greater success, and correspondingly lower commission rates can be negotiated, leading to a cost saving for the business. For example, if a lender typically allocates a 1 million debt tranche to DCAs every month who then collect 20% of the debt (i.e. 200,000) and charge a 30% commission, then the lender will receive a net 140,000. If the recovery can be improved by just 3% to 23% ( 230,000 recovered) and the commission reduced to 27% then the net recovery per month would be 167,900 - an improvement of 27,900. Over a 12 month period this would equate to a cost saving to the business of 334,800. Reduced number of Days Sales Outstanding (DSO) DSO is the average number of days a company takes to collect overdue revenue. Typically a modern revenue management and collection system can reduce a company s DSO by an average of 2 days. This reduction releases locked up revenue, improving cash flow, with subsequent savings on interest payments. Let s assume that an organisation has 500,000 customers entering the collections process each year, with an average bill of 500 each, making annual sales a total of 250 million. So average sales per day is 685,000. The 2 day improvement here would equate to 1.37 million. The cost of financing 1.37 million over 12 months at 6.5% (2% over base) is 89,050. What collections professionals are saying about ROI: Collections and Enforcement Manager, British Gas In almost 20 years use Tallyman has enabled British Gas to recoup around 300 million; a vast sum which would otherwise simply have been written off. Business Process Manager, First Response Finance Tallyman has reduced the collections personnel by over 30% whilst improving productivity by 100%. Credit and Collections Manager, Severn Trent Water After two years of operation, we have recovered 14 million in unpaid bills, debt reduction of 25 million and a 20% reduction in the costs of collection Enforcement Manager, Legal Services Commission For the financial year 2004/2005 Tallyman helped the organisation recover 28.5 million. Achieving ROI from Modern Revenue Management and Collection Systems - 4

Return on investment in year one based on the above examples Improved productivity 338,000 Improved recovery rates 900,000 Opportunity to sell more goods/services to rehabilitated customers 1,875,000 Reduced costs to collect 225,000 Reduced marketing costs 225,000 Lower DCA costs 334,800 Reduced number of days sales outstanding (DSO) 89,050 Total saving in the first year post implementation 3,986,850 Additional revenue collected 4 million 3 million 2 million 1 million Improved productivity Improved recovery rates Opportunity to sell to rehabilitated customers Reduced costs to collect Reduced marketing costs Lower DCA costs Reduced DSO 2 4 6 8 10 12 months Months after implementation Conclusion Specialist collections software can make a significant impact on the bottom line. Whilst an initial outlay is required, there is a measurable return on investment, with gains that are easily quantifiable. In the current economy with consumer debt at record levels and on the increase, the real question is not whether a company can afford to implement specialist software, but whether it can afford not to. 1 Measuring return on investment is a complex process and unique to every organisation and there is not scope here to allow for every intricacy. The featured calculations are examples to illustrate the various methods in which ROI can be calculated 2 Calculating roll rates and provisioning is a complex process. Different models are used to make the calculations and the featured model is a simple example to illustrate one way in which this can be done 3 http://news.bbc.co.uk/1/hi/business/5235988.stm Achieving ROI from Modern Revenue Management and Collection Systems - 5

720 Waterside Drive Aztec West Almondsbury Bristol, BS32 4UD, UK Tel: +44 (0)1454 892000 Fax: +44 (0)1454 892030 Email: tallyman.info@experian.com Website: www.experian-da.com Experian 2007 The word EXPERIAN and the graphical device are trade marks of Experian and/or its associated companies and may be registered in the EU, USA and other countries. The graphical device is a registered Community design in the EU. All rights reserved.