Something that has been spoken about recently is utility
collections in Canada. Many
hydro-electric utility RFPs have come up for tender in the last six
months. While I've written specifically
not long ago about discussing a reasonable contingency rate for this industry,
what is worth further discussion are some of the operational challenges surrounding utility
collections.
Generally speaking, utility paper is very collectible -- in my experience, 30%
is the typical median for third party collection success rates, with the usual proviso that this can be affected
by aging of accounts, client information gathering processes, and internal
recovery attempts at the front end of the credit cycle.
Difficulties to be overcome on utility receivables is that often individual
clients do not list large numbers of files, and these accounts typically
perform poorly on predictive dialer systems.
Because these portfolios are smaller, they typically are not given
dedicated manual attention or an individual work plan by larger collection vendors, which causes a shortfall
in performance. Recently I viewed a hydro RFP
which stated the utility's historical collection liquidation was 5% -- this is
simply deplorable.
So let's look at some of the hurdles that need to be
overcome on both sides of the fence...
Challenges For The
Collection Industry
When a collection agency receives utility paper, it's
important to understand that standard utility assignments aren't one portfolio
-- they are really three separate sub-portfolios combined together, and each
segment requires its own strategy.
q The largest portion of the utility portfolio is a consumer trace
portfolio. Many of these accounts occur
from a change of address rather than a deliberate desire to withhold
payment. Trace tools are important to find
these consumers, as often they will change cities. Credit bureau reports and triggers, data
appends, Canada Post NCOA searches, and a review schedule to revisit trace
files are important strategy points for success.
q The second largest segment of utility accounts are straight-forward consumer
accounts with an average principal balance of $300 to $500. This segment has the potential to liquidate
50-75%, as right party contacts are reasonably viable. Many utility debtors are home owners or are employed
consumers, but they are suffering from financial hardship -- a registered item
against their personal credit report is strong leverage, but it needs to be used with some compassion and patience. This segment of accounts do not require a hard
line approach -- finesse and persistence are an important part of recovery results.
q The last but still significant segment of the utility portfolio is a commercial
segment -- this can be proprietorships or limited corporations with debt
owed. Again, many of these accounts move
to collections because the business relocates.
As well, a common occurrence are struggling
or unstable businesses attempting to evade creditors by changing their
operating name or business structure while retaining the same ownership,
location, or business clientele (most provinces have laws to prevent evasion of
debts in this manner -- refer to the Bulk Sales Act, etc).
Because this portfolio is contains a significant amount of trace accounts, a manual process will prove to be the most effective, with a minimum workflow
cycle of at least 120 days for maximum recoveries. Tools such as leveraging interest on
accounts, credit reporting, and considering larger balances for litigation are
all key components for success.
Challenges For The
Utility Industry
Internally, many utility providers have their collections
and customer service staff intermingled, with credit controls more focused on
customer service. The client service or
credit manager of a utility often wears many different hats and has a variety
of responsibilities. Technical support,
receivables manpower, and customer screening are often resources that are in
short demand to the credit department.
Because hydro utility receivables has a lower range of
average balances owing, and a requirement for a quick turnaround on new
customer integration, internal first party commercial screening of accounts is often not
thorough enough, and proper background information on companies (proprietorship
vs. corporation, personal guarantees, commercial surety bonds as security, etc)
are simply not present.
Externally, most utility providers do not command the
attention or support deserved by their collection vendors. They typically don't list enough files to require
segregate staff -- even medium to large utility providers only list upwards of
300 collection files per month, which would be the minimum of a single FTE (full-time
equivalent, or individual staff member). The average
balance is also lower than a financial institution or financial lender, so it
often is difficult to expect an experienced collection staff member assigned to their
paper.
As well, utilities have a delicate balancing act to maintain
-- while their delinquent receivables are important to their credit cycle and
revenue stream, many utility providers have a strong municipal presence and
involvement in local communities, and their public image is important to
them. An aggressive collection vendor
can often do more harm than good if local image is not considered.
Advice For The
Utility Credit Manager
Whether you are currently reviewing a collection vendor, or
you are seeking to improve your internal credit controls, here are a few points to consider:
q Utility providers with a lower bad debt write off
ratio often have solid credit cycle controls -- this might include multiple contact points for consumers (places of employment, email addresses, cell phones), personal or trade references, update
account information regularly, require security deposits for trouble accounts, have
distinct information gathering templates for consumer and commercial accounts,
and may require personal guarantees for borderline accounts.
q There should be a review and confirmation process of customer data, at least once a year, if not more, to ensure long-term customers' profiles remain accurate.
q An internal receivables team should have a workflow
plan to deal with accounts, including some internal recoveries after termination
of services.
q If you use an RFP to select new collection vendors,
have a scoring criteria that does not necessarily award the business to the
lowest bidder, but can ensure some level of success for a solid net back
result.
q Third party liquidation should be in the range of 25-35%
for primary assignments, and 5-10% for secondary assignments.
q Your collection vendor should be able to demonstrate
some ability to trace your accounts, and report to both Equifax and Trans Union. See the article Auditing Your Collection
Agency http://receivableaccounts.blogspot.ca/2011/12/auditing-your-collection-agency-101.html
q For larger balances owing, have a process to evaluate
small claims court actions resulting in a garnishment of wages or a lien against
property owned.
Conclusion
I have always believed that utility collections can be a
high performing portfolio by first party creditors and third party collection vendors if handled correctly. If you are an energy, utility, or natural
gas creditor and would like to discuss credit cycle strategies, I would be
happy to discuss any challenges you are encountering. I can be
reached directly at 226-946-1730.
Thanks kindly,
Blair DeMarco-Wettlaufer
Kingston Data and Credit
Cambridge, Ontario
226-946-1730
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