Collections Isn't A Black Box Process -- Why Aren't We Talking?

Recently, I attended the Receivables Management Association of Canada conference in Toronto.  A number of credit professionals across Canada came together, and talked about our industry, regulation, and shared challenges.  I feel strongly about the RMA, because it is a great forum for the exchange of ideas.   In our industry, that's sadly rare.

Before the RMA formed a few years back, throughout my career I had attended some unsatisfying focused collection industry events.  These events brought to mind a bunch of folks sitting around a table, playing poker, and no one wanted to play their cards first.  It's like everyone believed they were doing something secret and new, and didn't want to give away what they were doing to their 'competitors'.

Now, I may have the unusual belief that there is more than enough business for our industry for everyone, and that transparency is a requirement for all successful companies (not just collection agencies) in this current culture of social media.  Twenty years ago, your clients were privileged information you didn't share -- now consumers freely share that information on Twitter and online discussion forums.  Secrecy, regardless of the inclinations and wishes of business owners, is a thing of the past.

As well, many collection agency owners try to paint an image of their agency is something new -- a hybrid legal/collection service, a specialized boutique agency focused on a single industry group, a customer service agency, and so on -- but let's face it, regardless of the trappings, what we are doing here isn't rocket science -- it's the act of one individual talking to another and arranging payment.  There may be subtle differences in execution, but largely this isn't where companies can stand out from each other.

What *is* rocket science is the culture and structure of the agency.  Clients and competitors often overlook this, focusing on the minutiae of letter scripts or staff training.  What they should be looking at is the way the company is built.

The Real Rocket Science Stuff

Software -- the software the company uses is crucial to operation -- just like a automotive factory allows the company staff to make  cars, the collection software allows collection agents to contact and collect funds for creditors.  Rarely do companies focus on this, but really it's the central tool which makes the company run and delivers results.  At one point I had the unfortunate circumstance to work for an agency with software that couldn't produce collection letters.  Can you imagine the difficulties we encountered?

If an agency is going to be truly different, they need to develop and refine their own software.  Many agencies use 'off the shelf' software, and their costs and licenses spent to maintain it would keep employed a fleet of technical support staff.  That's something to think about.

Structure -- does the company bloat on management and technical staff, or does it pass responsibility to the collection agents?  This can often tie to software and efficiencies, as well as company culture.  If there are collection agents, then supervisors, then managers, and directors, and more, this drives up the fundamental cost for operation, and limits the ability of the majority of the company employees to steer and drive results.

Most agencies have grown without a plan, so they look like a patchwork house with addition after addition added on.  If you are an agency owner, or dealing with an agency, ask for a business plan, and ask what innovations have been brought to bear over the last 12 months, and  who was the author of these changes.  Because if we aren't adapting, we're slowly dying, right?

Culture -- often companies that focus (by client requirement or otherwise) on reactive management rather than proactive management, adds to obstruction to the collection agents doing their job.  This can cause company structure bloat by requiring supervisors and managers to patrol the floor or critique calls in an armchair management fashion, or put limitations on innovation of tools.  Little things, like limitations requiring five to ten minutes and three sets of eyes to process a single payment, or disallowing email as a communication path to staff because it isn't a trustworthy tool are perfect examples of huge but indirect limitations on an agency's ability to perform their role.

Most agencies don't pay any attention to their culture, and this fuels a rotating door for staff, and dissatisfaction amongst all levels of the company.  Who are the 'old guard' at your company on the ground level?  What do they think about the company culture, and the satisfaction of those working at the agency?  And most importantly, who is listening to these team members and doing something about it?

Drive -- Our service role is repetitive.  Find consumers, contact consumers, collect from consumers, and repeat endlessly.  It is so easy for our companies to fall into patterns, and fail to progress and develop.  This is probably the absolutely most important quality of an agency.  If you aren't growing, and adapting, you are being left behind.  Our industry has seen terrific changes over the past ten years, and while it isn't as apparent as it might be in auto manufacturing or software development, these changes impact us just as much as any other company.

What's Your Point?

Why am I rambling on about this?  Because the strength of organizations like the RMA and the survival of our industry depend on us talking to each other.  If we take these points, and start a real discussion, from agency to agency, or creditor to vendor, we can be innovators and thought leaders rather than unthinking vendors.  We can share notes on structure, culture, software platforms, innovation, or change management.  This isn't about who each agency is representing as clients, or sharing 'black box secrets', it's about having a conversation about our differences (and really, we all want to be different), and working together on shared goals -- whether this is appealing for intelligent legislation reforms, or working to improve the image of our industry, we should be doing this together.

If you are a credit or collections professional, and you have some ideas to share, I would strongly recommend joining the Receivables Management Association of Canada.  The website for the RMA is www.rmacanada.org.  I have been a member from almost the beginning of the organization, and I can state I have received a great deal of support, collaboration, and interaction with some amazing people in our industry.

If you would like to have a discussion about the credit industry in Canada, I'm all ears and I'd be very happy to hear from you.  My telephone number at Kingston Data and Credit is 226-946-1730.

Thanks kindly,

Blair DeMarco-Wettlaufer

Kingston Data and Credit

Cambridge, Ontario

226-946-1730

bwettlaufer@kingstondc.com

Bad Debt Write-Off Misconceptions

This is November, which means its Financial Literacy month in Canada.  One of the items I'd like to address this time is the subject of bad debt write-offs, which often confuse consumers, as well as creditors.  This is not an advanced credit management article, but a simple overview to clear up the frequent assumption by consumers and business owners that a bad debt write off procedure forgives or cancels a debt, or prevents collection, when it is simply an exercise in accounting that does not affect liability.

For The Consumer

Please understand, when you use a company for a service that will be billed later, the service or product they provide you is recorded as revenue on their books, even though you haven't paid anything yet.  In double entry accounting, they have recorded this as revenue (or earnings) in the one column, and accounts receivable (or moneys due) in the other.   In normal circumstances, when you pay your invoice at a later date, the accounts receivable balance for you is reduced, and the cash on hand or bank balance is increased. 

However, if you don't pay your invoice, your balance due ages, and at some point the accounting manager needs to decide that the odds of collecting these funds are low, and cancel out that revenue.  In this case, the bad debt is written off, meaning the accounts receivable balance for you is reduced, and the written off debt is charged to an expense.  It's an accounting procedure that cancels expected or precalculated revenue.

What does that mean for you?  That you are forgiven the debt?  Not so.  Products or services have been exchanged, and you the customer will still be liable.

If you later pay the delinquent account, the 'lost revenue' will be re-entered, and the bad debt expense total will be reduced.

It might not sound simple, but its basically keeping track of sales, what is due the company, money on hand, and unexpected losses.

For the Creditor

Small and medium-sized businesses often have strange preconceptions about bad debt write-offs.  Some believe the file must be written off before being sent to collections, others believe that if an account is written off, the company is forfeiting its right to pursue the debt.  While charging off doubtful accounts is part of the credit cycle process, it is not mandatory to have it walk in lock-step with collection or legal actions.

When an account is most likely not going to be recovered, it should be written off from an accounting stand point -- this does not waive any of the creditors rights or remedies.  Certainly, the debt should be written off before the statute of limitation expires.  If an account is later recovered, it can be noted as recovered revenue, and reverse or offset a small portion of the previous bad debt write-off ledger entry.

An issue that often plagues larger creditors is managing bad debt write-offs after the fact.  One of the most important messages I can give a creditor is to set up their system to show the debt amount in their customer management system even after charge-off.  Nothing is more frustrating than a debtor (rightfully) questioning the validity of a debt from a collection agent, and then calling the creditor to be told by a mistaken customer service representative their balance is $0!  This undermines the collection process and feeds the consumer myth that the debt is forgiven if marked as a bad debt.

Conclusion

If you have questions about the process surrounding practices surrounding late stages of the credit cycle and how accounting practices can impact collections, I can be reached at my office at 226-946-1730.  For other advanced accounting questions, Jason Kingston can be reached at 226-747-6944.

Blair DeMarco-Wettlaufer

Kingston Data and Credit

226-946-1730

bwettlaufer@kingstondc.com

Negotiation and Courtesy in Collections

Earlier this week, I presented this topic to the Universities and Colleges Credit & Collections Conference.  While the presentation spoke to some of the specifics of student debt, in general this is an important subject.

From my perspective, there is a tendency for polarization into two kinds of collection approaches, whether it’s a collector or a creditor.  Both are wrong.  Negotiating payment arrangements requires proper presentation of the debt, and very controlled tone and language. 

Now, everyone has different personalities and language, so negotiating payment is an art form rather than a science, but here are my observations. 

The Meek Sometimes Inherit the Calling List

Many creditors (and some struggling or new collectors) are afraid to pick up the phone and call.  In fact, they are probably more stressed than the people receiving the calls.  That’s because they think that a collection call will likely end in confrontation, and most people try to avoid conflict. 

Also, when they get the customer on the phone, because they are afraid of conflict, they use passive language or are unsure of where the conversation should go.  Because of the lack of planning or assertiveness, the call is ineffective, and the consumer does not resolve the account.

If you get butterflies in your stomach when you think of picking up the phone and talking to someone about money owed, take a deep breath -- this is you reaching out to work with them, not get into a shouting match.

Like Lions Before Lambs

The other extreme is a personality that believes confrontation is necessary to collect an account.  In the old days, "sweat shop" collection managers would propagate this believe by telling staff “treat it like these debtors owe you money personally”, or encouraging loud aggressive speaking.  However, just because you verbally “turn someone upside down and shake them for loose change” does not make you a negotiator – collecting by fear and intimidation does not work in this day and age, and while an aggressive collector might collect more in the first 15-30 days, they will not be able to liquidate the full potential of a receivables portfolio in the long run.

In this day and age of consumers posting on the internet, if you are antagonistic, I can guarantee you will hurt your brand reputation, which will influence your entire customer base present and future.  Don't do it!

Real Negotiation

To negotiate you need to engage with the consumer – you do want to establish yourself as an authority figure (and if you are taking legal action, or can affect their credit rating with a press of a button, you *are* an authority figure) before negotiation even begins.  This does not mean yelling, this means laying out your role, and the consequences for not addressing the debt.

Once that’s been done, *then* you can get into the nuts and bolts of the account – how much is owed, how it will be paid, and so on.  If you don’t establish the first part, and have the consumer acknowledge your role, you can never get to this part.

Be prepared to be open minded.  Not everything will end with "Paid in Full".  The whole reason you need to make the call is something has gone wrong, and you need to be somewhat flexible.  Remember that flexible does not mean the customer can't pay -- trade payments for positive reinforcement, leniency for exchanges of information, and always reinforce that actions (on the part of the consumer) speak louder than words.

What Polite Means In Collections

Establishing authority does not mean being rude, abrasive, or antagonistic.  It also means not being subservient or passive.  You should avoid language like “please”, or “could you…”, or “would you like to …”, and instead work on A/B choices for the consumer “are we going to make arrangements on this account, or are we cancelling your services and sending you to our collection agency, which can damage your credit rating?”  That can be done in a courteous manner, without undermining yourself.

If you present a series of A/B choices, what you are doing is mapping out a logic chart where the consumer has input, but you are creating structure for the conversation.  If you have established authority at the beginning of the call, then the rest of the call should fall into the patterns you establish, resulting in a consumer willing to pay, and likely willing to thank you at the end for working with you.  And that is successful negotiation.

Your tone is important too … many consumers are stressed and emotional about their debt, and can easily react badly to someone who is not making them feel they can work with you.  Keep your tone even, polite, properly pace your conversation, and give the debtor a chance to interact with you rather than steamrolling them.

Our Presentation

Below is a link to the Power Point presentation we used while talking about this subject – the pictures attached illustrate the topic I’ve addressed here.  One of the end-slides also contains some useful resources and links for the credit manager to learn about proper negotiation techniques. 

Let me know if you would like to see more power point presentations on the blog, and if you have any questions about negotiation, which we address in our APPRAISE technique, I would be happy to share it.  I can be reached directly at Kingston Data and Credit at 226-946-1730.

Thanks kindly,

Blair DeMarco-Wettlaufer

KINGSTON Data and Credit

Cambridge, Ontario

226-946-1730

bwettlaufer@kingstondc.com