The Benefits of a Dedicated Collections System A Decision Analytics briefing paper from Experian May 2009
Introduction The scale and speed at which the recession has taken grip is unprecedented. As the volume of delinquent accounts escalates and the severity of arrears intensifies, executive teams are grappling with cash flow and debts are mounting, leading to rising capital adequacy requirements at a time when capital is very expensive. In an attempt to stem the tide of losses, collections managers have, at last, been given the budget and mandate to implement the technology that will automate and improve the default management process - and to do it quickly. As a consequence, many banks, telecom providers and utilities are turning to vendors of dedicated collections tools to help them turn around their rapidly deteriorating collections performance. Such software tools tend to be designed for a specific market and tailored for regional variances and are invariably supported by a team of collections experts, focused solely on collections software system implementations and debt management best practice. But, as demand for these specialised software systems increases, inevitably so does the number of vendors offering other products with in built collections features, albeit with widely varying levels of functionality and usability. ERP, Billing and CRM providers in particular have begun to aggressively promote their debt management functionality. While, historically, collections has been neither a core focus nor competence for these vendors, existing collections modules are now being opportunistically repackaged as a strategic element of their overall systems offering. Organisations, long plagued with the data connectivity and maintenance issues associated with managing multiple, disparate systems, are understandably drawn to the perceived benefits of licensing collections functionality from their billing and customer facing application provider. Indeed, opting for a single vendor supplier, where the collections functionality is often "thrown in" as a make weight within an overall ERP or CRM package, can make this appear an attractive proposition. However, the true cost of ownership is often masked. With all capital expenditure under intense scrutiny, system selection criteria now, more than ever, needs to focus on overall cost of ownership and return on investment to the business. Key collections criteria Software selection can be a torturous process. As well as the standard price/ feature comparison, the evaluation of numerous criteria such as technology platform, system architecture, service and support and even corporate vision has become an integral part of the selection process. However, in this environment of escalating losses, priority must be placed on those areas that will count most. Four key collections system attributes have emerged as Dedicated versus integrated collections systems - 2
having the greatest impact on a company's bottom line. 1. Depth and breadth of system functionality Early, Appropriate Intervention: Debtor segmentation and the availability of a number of common treatment paths should be standard offerings from most collections systems, is this enough for your business? Or will more granular segmentation, using multiple internal and external triggers offer you a better chance of prioritising those high risk cases, before they even default? Similarly, is the restricted use of the few standard collections paths going to limit your scope to employ the highly targeted collections strategies needed to secure timely payment? Making the most of DCAs: With outsourcing debt to 3rd party agencies or DCAs now standard practice for overwhelmed collections operations, even for early stage arrears, how well does each system handle account allocation? How much manual management overhead will be required? Specialised systems supporting rules based account placement will automate much of your outsourcing effort and ensure debts are passed to the agency most suited to collecting that debt, enhancing the chance of recovery. But outsourcing doesn't mean relinquishing the customer relationship. Customer alienation as a consequence of outsourcing is a risk that can be avoided: Explore how the collections tools on offer ensure concurrency of account data between you and your collections partners Determine how easy it will be for you to comparatively monitor agency performance, and quickly reassign or recall accounts Leveraging your team's strengths: The way in which accounts are allocated within your team will also impact roll rates and overall recovery rates. For each system under review, explore the relative ease with which you can create and adapt workflows tuned to your specific requirements and your team's inherent strengths. Is it intuitive and user driven, without the need for costly external programming or configuration? How well are case management and work / task lists linked? If circumstances change within an account, will the associated pre-scheduled tasks within the debt route be automatically updated, reassigned or dropped without manual intervention? Or, instead, could the customer relationship be compromised as a result of poor data linkage? Managing litigation and debt recovery: An inevitable consequence of rising arrears and tighter lending conditions is the need for banks and service providers to increasingly turn to the courts to seek payments. In 2008 repossessions were nearly double 2007 levels, and in the UK the Council of Mortgage Lenders (CML) expects repossessions to rise again by over 66% in 2009. Energy suppliers and telecommunication providers are expecting significantly increased levels of litigation to recover monies owed. Dedicated collections systems, designed to handle the entire customer debt lifecycle, tend to have litigation and recovery functionality fully integrated. Look for a rules based engine, tailored to your market, which will ensure that all strict legal and regulatory processes are followed and that workflow between all parties involved is automated, minimising errors. Software that automatically maintains a clear audit trail from the time the account went into arrears will also support you in conforming to due process. Dedicated versus integrated collections systems - 3
Enhanced decision making: The availability of comprehensive reporting tools or Management Information Systems (MIS) is often a stark point of differentiation between dedicated collection systems and their ERP or CRM originated alternatives. Take a good look at the range of reports that come as standard, probe the depth of data and availability of real time KPIs specific to your industry. And if they aren't included in the package, how much resource and time will it take to develop them? Will you be required to licence additional reporting technology to access the data you need? 2. System Flexibility This recession has changed the face of collections best practice. With employment in the UK and across the Euro zone tipped to reach 10% by the end of 2009, there will be millions of people who, for the first time, will struggle to meet their financial commitments. Businesses faced with customers who are experiencing significant financial challenges and hardship are now looking to provide alternate strategies that can give temporary respite, enabling once profitable customers to manage in the short to mid term. In many instances there is Government or regulatory backing for the implementation of such initiatives and hence the ability to implement them quickly and effectively underlines a strong commitment to fulfilling corporate responsibility during extremely challenging times. This approach requires collections operations to have flexibility within their systems to manage genuine financial hardship, with a long term view to these customers ultimately recognising the speed and sensitivity with which businesses respond to their circumstances, so that when the economic situation improves, their loyalty and future profitability is retained. Dedicated collection systems have developed powerful income and expenditure evaluation screens and processes and these facilities become paramount in evaluating hardship and guiding appropriate resolutions. Champion Challenger functionality, typically embedded within the market-leading dedicated solutions, allows organisations to proactively test new strategies against existing strategies in a continual cycle of improvement. By enabling you to test the variance of specific work practices on a small live sample, the cost/benefit impact of any change can be accurately assessed in a real time, low risk environment. Opting for a collections system with highly user configurable treatment paths will offer you the flexibility to then quickly roll out the next "Champion" strategy. Highly intuitive drag and drop tools provide a means to immediately adjust any parameters, or to build completely new processes, removing the need for any costly programming alterations. 3. Speed of Deployment Current market conditions no longer permit extended collections system implementation timeframes. A twelve to eighteen month project, where all requirements need to be scoped in detail and bespoke development undertaken, will divert too much valuable resource, and run the risk of strategies already being out of date upon eventual go live. Meanwhile losses through bad debt write-off will have continued unabated. Conversely, companies that can configure and deploy a system that effectively tackles their collections priorities within three months will see an immediate Dedicated versus integrated collections systems - 4
impact on their bottom line. Of course, a three month schedule is aggressive. But a dedicated collections system, if configured for an agile implementation, will allow you to hit the ground running - faster. Key implementation aspects to consider include: a. Will the collections system allow you to define and implement hard hitting priorities first? b. Is it already pre-configured for your industry, your region and your market's regulatory requirements, requiring only minor parameter changes to meet your specific processes? c. Are the vendor staff collections specialists and how much experience do they have in your market, and in agile system deployments in particular? Such a rapid deployment allows businesses to target the majority of debtors in a more meaningful way sooner, with a rapid resultant improvement in cure rates. Additional features and refinements can then be introduced in a more iterative fashion, with reduced risk, cost and disruption. 4. Total Cost of Ownership Comparing a checklist of functionality features is a valuable and necessary exercise in any system evaluation process. However, they inevitably need to quantifiably translate into bottom line benefits. Dedicated collections solutions have been shown to have significant overall cost ownership advantages over their ERP or CRM equivalents; Lower cost of delivery: Initial project delivery costs are usually easy to quantify and compare, and should include any degradation of cash flow and profits as a result of extended delivery timeframes; an agile system implementation results in significantly less disruption to business as usual than would result from an integration project. Post go live, a key benefit of opting for a dedicated solution is the retention of governance of the collections system within your operation, reducing support and ongoing maintenance costs. If the IT department or external 3rd parties are required to establish and amend processes, strategies and collection activities, as they often are with alternative systems, your cost of ongoing delivery will escalate, lead times for any changes will be pushed out and performance will inevitably slip. Lower cost to collect: Optimal collections performance demands that the cost of collecting outstanding monies is kept low. The automation of repetitive manual tasks will obviously drive down collection costs. However, specialist solutions supporting champion challenger tools and providing access to extensive reports will also allow you to compare the relative value of each activity, answering such questions as when to call, how often to call, when to send a letter, what incentive programme works best - and at what cost. The ongoing performance of call centres can also be compared and the relative efficiency and effectiveness of collections staff by time of day, or day of week, analysed, allowing you to optimise your staffing mix, driving operational costs down further. Indeed, research by Experian has shown that organisations adopting a Champion/Challenger approach tend to improve their performance by more than 10% on a year on year basis. Decreased Recovery Window: Faster, more targeted collections activity is proven Dedicated versus integrated collections systems - 5
to reduce days sales outstanding and improve roll rates. The more accurate scoring, segmentation and targeted end to end collections strategies inherent in dedicated solutions will accelerate recoveries. Their use of more flexible work flow tools contrasts with the rigid worklist structures used by many of the less specialist solutions on the market, improving productivity and performance further still. Add on collections Dedicated collections Benefit to modules systems collections team Fixed collections parameters Extensive drag and drop Cost of ownership remains low results in limited and static capabilities allow users to while better prioritisation of functionality - changes require quickly build/amend segments, accounts and optimal strategies costly 3rd party coding strategies, tasks and worklists means more debt is collected sooner Difficult to identify the most Embedded champion challenger Continual refinement of effective and lowest cost and dashboard reporting tools strategies results in ongoing collection strategies. performance improvements Very limited reporting Limited litigation and agency Designed to handle the entire The auto allocation of the management functionality debt management lifecycle right debt to the right agency maximised recovery Typically fully integrated with Proven interfaces to all leading Implementations are less main financial or CRM ERP, billing, fraud risky and manual processes packages but support for communication applications are reduced, saving time and other enterprise and call and payment gateways money centre apps is varied Bespoke development is likely, 3 month accelerated Hard hitting priorities are with extended implementation deployments tackled quickly, ROI proven in timeframes <12 months The gap is widening CRM or ERP collections modules often appear attractive to the holder of a company's purse strings. Integration costs with other back office systems are, in theory, reduced; common service and support contracts are easier to negotiate and manage; and licence fees can be attractive. But such solutions tend to primarily focus on managing very straightforward, high level, high volume, early stage dunning. Years of underinvestment means that the arrears management functionality on offer struggles to match the high levels of flexibility and proactive account handling embedded in the leading dedicated collections systems. With job losses rapidly increasing and the pressure on consumers to service their debt and pay their bills the highest it has been in decades, the gap in performance between agile specialised solutions and the more rigid "integrated" offerings is quickly widening. Instead of adapting to changing debtor circumstance and behaviour, systems that require ongoing 3rd party configuration and which lack robust test and learn capabilities run the real risk of stalling when they are needed most. Advances in interoperability standards have further clouded the allure of these single vendor ERP systems and paved the way for the more rapid introduction of dedicated collections applications. Indeed, the lack of effective DCA management/litigation functionality and poor reporting tools often means the 'integrated' single vendor system needs to be supplemented by a plethora of other Dedicated versus integrated collections systems - 6
tools to cover the debtor life cycle - negating the perceived advantage of such systems in the first place. By rigorously evaluating collection system alternatives, organisations are still likely to find that implementing a specialised solution with open interfaces and industry specific processes will curtail losses and accelerate cash flow much faster than its ERP or CRM collection module equivalent, at a fraction of the risk and with a significantly lower overall cost of ownership. Dedicated versus integrated collections systems - 7
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