Debt Collection Agencies: The Key to Improved Recoveries? A Decision Analytics briefing paper from Experian June 2007
Introduction Credit lenders exploiting the use of debt collection agencies to manage a proportion of their collections portfolio report dramatically improved collection and recovery rates and increased efficiency. Introduction Why employ debt collection agencies Credit lenders exploiting the use of debt collection agencies to manage a proportion of their collections portfolio report dramatically improved collection and recovery rates and increased efficiency. Furthermore, modern best-of-breed collection systems can manage the complete relationship with a wide variety of agencies from allocation and retrieval of accounts through to commission calculations and payment. This white paper explores the advantages to this approach; the disadvantages, and how they can be overcome; and the system requirements necessary to implement such a strategy. There are two chief advantages gained by engaging DCAs. The first is the additional resources they provide to help with early stage collections where workload is high and resources are stretched. DCAs should act as extensions of the in-house collections department to prevent alienating customers and causing customer churn. Once accounts have aged beyond early stage and into late stage or recovery, the involvement of DCAs positioned as a third party organisation communicates the severity of the outstanding debt. Traditionally, late stage and recovery debts are more difficult to collect in-house, so moving the debt to a third party is seen as a cost effective solution for maximising collections. A number of additional benefits are also gained throughout the allocation of both early and late stage arrears. Performance Monitoring Modern collections systems provide a key tool to help in the allocation of accounts to agencies, which is the Management Information (MI) held within the collections system. MI enables the Collections Manager to monitor the performance and trends of different DCAs, to enable early identification of deteriorating performance and can also help in the allocation of the right debt to the right agency, by allocating agencies the type of debt at which they are the most successful collecting. Save money A key advantage of employing DCAs is to make considerable cost savings. DCAs can help growing businesses to achieve more work when in-house collections staff are fully utilised whilst, in organisations where business is static, DCAs can help to reduce headcount, to achieve cost savings on salaries, National Insurance contributions, pension contributions, and holiday and sickness pay, as well as indirect costs such as training and office resources. Experienced staff In organisations with high levels of staff attrition, considerable benefit is gained by using DCAs. It can take many months to recruit and train the right staff, whilst DCAs are well placed to draw on the expertise of their own experienced collectors. Freeing up resources to concentrate on in-house collections By employing external agencies existing staff are released to concentrate on other business areas, or to work on maximising the collection of in-house debt. Debt Collection Agencies: The Key to Improved Recoveries?- 2
Greater efficiency The collections process can be very labour intensive but, by employing an outside agency which specialises in managing delinquent customers, collections performance can be significantly enhanced. Collections can be far more successful when customers are contacted outside of normal office hours, but it can be costly, or unfeasible to employ staff to work those hours. Modern collections systems that are operated via a standard web browser can enable any internet user access to the system remotely, provided they have the necessary access rights and security clearance. So, selective access can be provided to DCAs to provide real-time access to the required accounts at times when customers are more likely to be available. Real cash flow improvement Faster and improved collections are achieved by employing debt collection agencies which, in turn, releases locked up cash. Enhanced performance Many DCAs report very high success levels at collecting debt, simply because delinquent customers are often more obliging following pressure from an external agency. Furthermore, with the use of a modern collections system, businesses can define the criteria used to determine the allocation of accounts to agencies, enabling them to make the most of the DCAs different strengths by allocating cases according to the performance profile of specific DCAs. The performance of DCAs can be pro-actively reviewed as frequently as required with the use of MI tools to ensure that the type of debt allocated to each DCA is more closely matched to their ability to collect successfully, thereby optimising cash collected. Tackling the disadvantages Knowledge and experience of your organisation and strategies Full investment is required in order to train agency staff to operate in the ethos of the organisation. The agencies should be involved in strategy meetings so that everyone, both internal and external are working towards a common goal. Loss of control Managers who use DCAs frequently report feeling a loss of control. This can be overcome by effective management of the process at the outset. Regular meetings are vital to review management information and ensure that the DCAs are performing to clearly defined performance criteria. Contract negotiations Many DCAs operate on a contract basis. Having the operation driven by contract may not be the most favoured method for the organisation in question, so clear parameters and working regulations must be defined to prevent any misunderstandings further down the line. Loss of staff If the employment of a debt collection agency is at the expense of existing staff, consideration must be given to what you lose in terms of experience within the team. Customer retention The incorrect use of a poor DCA can impact on the customer base by a loss of customer goodwill, with a resulting increase in customer churn. So consideration must be given to the future potential loss of income from cured customers. Debt Collection Agencies: The Key to Improved Recoveries?- 3
Selecting the right agencies Many customers are opposed to collections operations managed overseas. It should be remembered that, whilst resources may almost certainly be cheaper, the resulting increase in collections may not be exponential, as customers may be disinclined to cooperate with such an agency. In-house versus DCA It should be remembered that a significant percentage of any debt collected by DCAs is allocated straight back to the agency in commission, thus it may not always be a cost effective strategy. However, businesses wishing to capitalise on the optimised collections which can result from the use of DCAs may employ an in-house DCA, whereby existing staff simply operate under a different name. This option provides the business with the opportunity of enhanced collections performance without the cost associated with searching for an agency, allocating the right accounts, managing its performance and paying its commission. Of course, this approach requires appropriate resources to be available. The system requirements A modern best-of-breed system will manage a large number of external agencies, including their performance and their commission after they have collected the debt. Businesses can define the criteria used to determine the allocation of accounts to agencies, so that different accounts can be allocated to different agencies according to which are most adept at collecting specific types of debt to maximise on the DCAs different strengths. Systems with business intelligence functionality allow you to review the performance of DCAs as frequently as required, ensuring that the type of debt allocated to each is more closely matched to their ability to collect successfully, thereby maximising cash collected. By leaving the management of all of your external agencies in the care of your collections system, your collections staff can concentrate on maximising in-house collections revenue. Managing the allocation of all of your DCAs enables the negotiation of better rates and the allocation of the right debt to the right agency to achieve maximum recovery. Case study example Traditionally, DCAs are utilised in late term collection, cleared-out/goneaway tracing, recovery and similar activities where factors such as increased cost and effort or increased specialisation are seen as being sufficiently prohibitive when considered against the potential for success, and so discourage the debt owner from performing those tasks themselves. A client in the finance sector selected the DCA Placement Module with their implementation of Tallyman, a software solution for managing customer revenue and collection. The first step towards deploying the DCA Placement Module was to determine just what functions, or debt streams, were required of the DCAs. Often, certain DCAs will specialise in, or offer, more competitive rates for certain functions, whereas other DCAs might have the advantage of greater presence in certain geographic locations. Thus it is not uncommon to appoint a panel of DCAs that will be utilised to service these different functions, or debt streams. Having appointed a panel of DCAs and their specialisations, automated rules were configured in the Tallyman DCA Placement Module to identify the best fit between the debt stream and the DCAs most able to service that debt stream, be it straightforward collection or the more complex goneaway tracing. Whilst simple indicators such as returned mail or telephone feedback initiated the Debt Collection Agencies: The Key to Improved Recoveries?- 4
entry into the DCA goneaway trace debtstream, more complex indicators utilising risk based scores were used to determine whether and when an account should be passed to a DCA for late stage collection or recovery action. Utilising the configured rules, the module s placement engine automatically matched accounts to the most appropriate DCAs, balancing the function required against other factors such as previous placement history or quotas that might have been agreed to leverage the best rates from the various DCAs. This approach resulted in the tough accounts being passed to the DCAs earlier than they might have previously been, whilst the easier accounts were held and worked in-house longer by a small but specialised debt recovery team. Appropriateness and correctness of account data is key to the success of the DCA when working accounts, and daily interface feeds of new placements, updates, closures and withdrawals were established using standard interface agreements that were common to all DCAs operating on the panel. A policy was set within the Tallyman DCA Placement Module to automatically initiate an instruction to withdraw an account from a DCA if no results were seen after 90 days of placement, concluding with the account being returned and then recycled for an automated second placement or simple closure if deemed too tough. Similarly, automated rules were created to vet any closures sent back from the DCA in regard to policy as to when a DCA can negotiate a short settlement in lieu of full payment. A library of DCA performance reports complemented this highly automated DCA placement management solution, leveraging the data produced from such a systematic approach to provide DCA performance and success rates. Going forward, these will be used to fine tune the placement rules as well as to drive more competitive rates from the panel of DCAs. Conclusion Employing debt collection agencies is not necessarily the best strategy for every lender. An organisation s business model is key in determining the employment of DCAs. So, whilst it may be an appropriate collections vehicle for small balances in the telco market, it may not be so for the collection of large complex debt in the mortgage sector. Businesses must also be aware that the employment of agencies has the potential to alienate customers, and thus a loss of future income may result. Ensuring that you have a good collections system in place will streamline the process of allocating the right debt to the agency best at collecting that type of debt and maximise the success of the operation. Debt Collection Agencies: The Key to Improved Recoveries?- 5
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