One of the more interesting topics discussed at the last gathering of my colleagues in the collection industry was that of project management.
From the client perspective, the files assigned to an agency are of paramount importance, and require constant attention – and justifiably so, because without client assignments, a third party collection vendor would have no work. The client must ultimately be satisfied that their files are generating a sufficient return, and are being treated with all the attention that is warranted. But ultimately, how the client perceives their assignments made and the vendor perceives their assignments received may vary significantly. As well, each agency and client has a unique infrastructure and methodology that may differ greatly.
This article will try to shed some light on an internal viewpoint of the agency, and give two examples where both parties will benefit through communication and project management.
The Formula For Success
Ultimately, a third party collection vendor or agency is going to look at a number of variables in an assignment portfolio to determine a workplan. Be it a small client with a handful of files, or a national creditor managing multiple agencies, what ultimately is important to the collection agency is this:
1) Assignment levels (number of files assigned)
2) Frequency of assignment
3) Average dollar value assigned
4) Contingency or Fee Rate
5) Liquidation Rate (either by target assigned, competition levels, or historical track record
This, at the heart of it, determines the path an agency will take to work the accounts. While a client may have an internal process before the files go to collections, a third party collection agency benefits their clients and internally thrives on an economy of scale, and can maximize their return by measuring patterns. It is important that this strength is leveraged on accounts assigned, to everyone’s benefit.
Our First Example
So, if a new client has 50,000 files to assign, with a forward flow of 1,000 files per month, with an average balance of $60.00, and expects a contingency rate of 25%, and a projected liquidation rate of 20%, and it is the client’s expectation that these files will not be worked on a predictive dialer (as the previous agency performed poorly with a dialer strategy), this has a number of serious constraints on the work plan.
Hypothetically speaking, if a manual collection plan was implemented to this client, it may require at least four to eight collection agents (each one taking 300-500 new files per month, so as to cover the forward flow and eliminate the initial assignment in a reasonable amount of time. However, with such low balances, contingency rate, and liquidation expectation, it would require a return far higher than the staff could deliver, as each one might work 120 files per day, reaching 20-25% debtors out of their contact attempts, liquidating another 25% of their right party contacts, so at best generating $112.50 agency revenue per FTE per day (120 x $60 average bal x 25% success x 25% contingency x 20% rpc rate). Obviously, the effect will not generate a cost-effective return for the agency, but an actual loss after overheads are covered.
Our Second Example
For this example, let’s say a financial institution assigns an agency $2,000,000 a month, in 600 first-assignment files. This would make the average balance of their portfolio $3,333.33. The client is providing a flat fee for a legal letter of $25 each, plus a contingency of 15%, with a success rate of 20% over a four month period. The collectors are pushed by the client to achieve payment in full only, as they are only assigned the files for this limited period, and cannot retain files on post-dated payments – this might drive down the collection rate to 5% of right party contacts, although the agents still work 100 files a day and achieve a 20% right party contact ratio.
This would mean two FTE assigned to this program would each be to manage the portfolio, generating a flat fee of $15,000 before collections, with a further $499 revenue per FTE per day (100 files x $3333.33 average balance x 20% right party contact rate x 5% success rate x 15% commission).
Why Are We Discussing All These Numbers?
The whole point of this exercise is this – if a discussion opens up between a client and the collection vendor, a great deal of success can be gained by both parties in the long run.
In the first example, the client introduces this same program to a predictive dialer program, with four agents assigned. These agents would be able to generate 1000 calls per day, of which they would personally handle 250, reaching slightly less right party contacts (15%), and slightly slower liquidation (as the presentation of the debt isn’t as formal or allow the same agent to follow up on a file, but more efforts can be made to reach debtors – let’s say 22% over a ten month period). So in this scenario, the agents would generate $450.00 per FTE per day (1000 x $60 average bal x 20% success x 25% contingency x 15% rpc rate). This is certainly a cost-effective approach, and allows a increased net back over the long run to the client, as long as they are amenable to this displayed approach. As well, the agency may look at this variant, and pledge to their client to reinvest a portion of the increased revenues in trace scrubbing, credit bureau data or a scoring model to drive up the success rate.
In the second example, reorganizing the collection program to a ten month program would allow agents to take further payment arrangements to achieve a higher success rate rather than driving the debtors for payment in full. This would drive liquidation to perhaps 30%, a higher liquidation than a first assignment and second assignment scheme combined. In return, the client could negotiate a 14% contingency, or a reduction in cost of the legal letter from $25 to $15 – this would mean a three-fold net gain for the client, and a more efficient working environment for the agency, resulting in a more efficient $700 per FTE per day, and the client receiving a further average of $160,000 net back recoveries per month, and a reduction of $6000.00 in legal letter fees a month as well.
Collections is more than blindly assigning files to an vendor, and then driving them to a desired success level – in any complex project, there are a number of variables that can take place that are not obvious to either the client or the agency, and ongoing communication is necessary to create a harmonized process in which everyone is working together to a mutual goal.
If there is a pattern of regular assignments, both parties should have a discussion at least once a month and monitor ongoing efforts and challenges encountered. Both parties should be open to new ideas and experimental changes to the existing collection program, and consistently measuring the results of those changes.
If you are a client, you should sit down with your collection vendors, and discuss project strategy and infrastructure with them honestly, and make suggestions to take an existing return on your receivables, and improve it.
If you are an agency, you should not accept work blindly, plugging it into whatever generic collection system you may have – you should build a unique plan for each client, and ensure that weaknesses (either through your agency’s performance, or your client’s restrictions or expectations) are constantly evaluated to increase the net return of your client.
As always, if you have any questions regarding an existing collection portfolio, and options on how it can be possibly optimized, you are certainly welcome to contact myself.
Kingston Data and Credit
Kingston Data and Credit