Receivable/Accounts - Information for Credit and Collection Issues

Monday, April 8, 2013

What's Your Plan For Failure?

At the first collection agency I worked at after I left my role as a credit manager, I was given a coloured flip chart of responses to "excuses" designed to encourage a debtor to pay their bill.  There were hard line responses for "I lost my job", or "I'm getting divorced", all designed to end up with the customer paying their bill.  But every account doesn't end in payment.  It doesn't matter if you work in receivables, collections, or the legal field -- you might strive for resolving every account at all times, but it doesn't always happen.

It is our role in the credit industry to maximize our liquidation of accounts, minimize bad debt write off, and reduce the average aging of an account, but what is your plan to deal with the law of diminishing returns, and have a plan for the accounts that will not, and cannot be resolved?

You Need To Acknowledge Your Success Rate

Whether you are liquidating 98% in your receivables role, or 35% in third party collections, or even 1% as a debt buying company on severely aged accounts, you need to be realistic and acknowledge what your success rate on collections is, and could possibly be improved to.
I often explain to my collection staff that I have trained that all accounts sent to collections can be mapped on a spectrum -- the most collectable accounts on one end that even the greenest collector can arrange payment on simply by reaching the debtor, and the accounts on the other side of the scale where even the most experienced and savvy collector will fail to recover payment.  The accounts on either extreme end aren't the concern, it's the accounts in the middle of the spectrum that are what we struggle to liquidate.

So, if you have a workplan for the successful accounts -- which is usually payment flow; and you have a workplan for the doubtful accounts -- your talk-backs, scheduling of follow up calls, auditing your collection work and technique, and so on; what is your workplan for the far side of the scale, and how do you evaluate your process for the uncollectable accounts?

Your Checklist For Failure

I worked with a collection supervisor at one company who dedicated about an hour a day to evaluating recorded collection calls, and she scored them between 1-10.  This score was totally separate from the fact of whether the account was collected.  She scored them for tone, assertiveness, professionalism, and the ability to work within our company guidelines.  She had accounts that scored 9 or 10, even if they were uncollected, because the collection agent asked all the right questions, maintained their calm demeanor, and brought a sense of consequences to the debtor in the face of refusal to pay.

The supervisor and I built a training recording session of calls that scored 9-10, and we put together a 60 minute orientation program that was played to new collection staff.  This program included successful payments, negotiation of payment arrangements and settlement, answering machine messages, and accounts that refused to pay.  By building this orientation program for new staff to listen to, we were able to educate them on what steps should be taken to collect an account, and how to deal with failure.

Each company will have its own checklist for failure -- this list should address key points that need to be addressed and evaluated before an account is flagged as uncollectable and set aside.

Your Exit Strategy

Most collection agencies have a very narrow plan for answering machine messages -- they have their agents leave their name, their telephone number, and a file number.  That's it.  No variety, no escalation.  So the calls are made, over and over, until the day they suddenly stop.  How do you think that makes the consumer react after the 12th message arrives, and then nothing after that?

If a consumer or commercial client is avoiding contact, disputing a debt, or refusing to pay their account, you need an exit strategy -- one that presents a strong, consistent, authoritative image, but allows you to withdraw from working the account while still leaving an impression on the delinquent debtor.

So, if an account is deemed to be uncollectable by the collection staff, what final message is delivered to the debtor verbally, by letter, or by email?  What is the purpose of the message, and what will it do to strengthen your company's position on credit management?

Review Your Failures

Just because you have not collected on an account, does not mean it should be discarded and never reviewed.  If you look at the image at the top of this blog, you will see a very rough bell curve -- this is typical in a collection cycle.  The initial final demand letters are issued, and calls begin, and ideally somewhere between the 15th to 60th day of the collection cycle, the peak liquidation (point "A") will be reached. 

Broken arrangements and debtors that avoid contact will be followed up on, payment arrangements executed, and files escalated to credit bureau reporting or legal action, but this is a role of diminishing returns.  Eventually, the effort and manpower being invested in recovering the accounts will dwindle to a minimum level (point "B").

If you have a process to review your accounts that have refused to pay, either by assigning them to a different collector, trying a different collection process, reassigning the accounts to a different collection agency, or another similar plan, you can see a surge in your recoveries (much like the spike to the right of point "B" on the chart above).  This process can mean a further 1% to 15% liquidation on the overall assignment of receivables, so a review process can often produce significant improvement on overall liquidation, with a long-term plan that does not simply discard individual accounts.


The credit cycle is all about evaluating risk and returns, and by building a strong work plan.  Your plan needs to address both successes and failures.  Certainly, you should evaluate how your staff adhere to the plan, but it needs to have a flow for the disputes, the refusals, the NSF cheques, and the credit card chargebacks.

If you have questions about how to have a reassignment or review process for collections, or a strong internal credit cycle work plan for your company, feel free to reach out to me.  I’d be happy to respond to any questions or inquiries about strategies for "failure".  You are certainly welcome to email me or call me at my office at Kingston Data and Credit.

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