Liquidation Strategies in Collections

The be-all and end-all of collection agency effectiveness is liquidation – the percentage of funds collected out of debts listed.  Very simple formula:

$10,000 collected / $100,000 listed = 0.10 or 10%

But there’s a little more to it than that.  Liquidation doesn’t just magically show up – there’s work involved, and some things can skew your numbers.  Let’s look at some of the things that can affect it.


Targets

So either the client or the agency will likely have a liquidation target in mind, and it is what the agency will work towards.  It might be 60% for a commercial program, or 1% for a purchased debt portfolio that’s 3-4 years old … but ultimately this is how effective the agency is.  If there are multiple agencies representing a client, they will often measure liquidation against each of them after 6-9 months to see who is the more effective agency.

There are a number of things that an agency can do to maximize liquidation, either with team members assigned to the program, or paying attention to certain segments of the assignment.


Liquidation to Calculate Revenue Per FTE

It would be great if you could assign just one collector to 10,000 files in a portfolio that liquidates 60% -- but it doesn’t work that way.  To achieve liquidation, you need people communicating with consumers and arranging payment.  They can be supported by automation, but it comes down to how many people are effective to achieve liquidation goals.

Some agencies like to look at revenue per file assigned, I prefer to look at revenue per collector per month.  Assuming a collection team member can take 300 new files a month, and the average balance assigned is known, and the expected liquidation is known, then revenue can be plotted.

So, one collector taking 300 files a month on a commercial program, with an average balance of $800, that liquidates 60%, at 10% commission would be a good program.

300 x $800.00 x 0.60 x 0.10 = $14,400

Now, $14,400 per month per FTE isn’t bad at all.

This formula can be used to pro-rate a client that takes anywhere from 10% of an FTE up to 50 FTE, but ultimately it’s manpower assigned vs revenue achieved.  You can use this to gauge whether to add more staff to a program or reduce it, to improve effectiveness.


Liquidation and Commission Rates

Sadly, many RFPs for collection services get awarded to the lowest bidder.  Imagine a consumer utilities program being assigned via RFP to an agency that bid only 12% commission.  The files are an average balance of $300, and the program historically liquidated 5% -- why?  Well, because the agency couldn’t afford to man the program.  Let’s try the formula above, but assume a 20% liquidation goal.

300 x $300.00 x 0.20 x 0.12 =  $2,160

The revenue achieved by this can’t justify a full person who will cost far more than $2,160 with salary and fringed costs, so the agency has to cut corners or lean on automation.  You can throw these files on an automatic dialer, or reduce it to 1-2 calls, or only work the files over a balance of $300 to make the manpower effective, but ultimately liquidation is harmed because the commission rate is insufficient.  So liquidation is the goal, but commission rates can affect how to get there. 


(Just a small side rant -- In this scenario above, ultimately the creditor is the one who loses out -- 5% liquidation at 12% contingency is a net back dollar amount of 300 x $300 x 5% liquidation = $4500 less fees x 88% = $3960, versus 300 x $300 x 20% liquidation = $18,000 less a far more reasonable 20% commission or x 80% = $14,400.  The difference is more than the Purchasing Manager's monthly salary -- makes you think, doesn't it?)


The Law of Averages

If a client assigns a single file to the collection agency, there’s only really two numbers that you can arrive at for liquidation – 100% or 0%, there’s no middle ground.  One collected account makes or breaks success here.  The more files you have, the more liquidation will average out, and the less one single payment can skew the numbers.  If you have 10,000 files, all of which are $200 (more or less), one collected account can only move your liquidation 0.01%.  But it means one angry consumer or one file with bad data can only harm your liquidation by 0.01%.

The important thing, when looking at the law of averages, is to watch for variances – drops or spikes in liquidation in a monthly assignment, trends month to month if liquidation is going up or liquidation is going down, or liquidation by collector on a team that covers a single industry group or client.

The law of averages can be a hard ship to turn if you need to improve performance, depending on the size of the client, but it all comes down to having a solid process and making sure everyone on the team understands it.


The Bell Curve

The law of averages doesn’t happen instantly – you will not achieve on a large program your goal liquidation in 7 days – some liquidation goals may take 6-9  months, depending on how many payment arrangements are needed, or trace or legal work is needed to collect on an account.

Looking at the graph below, you can see that liquidation climbs to 22% over 12 months, but gross collections doesn’t peak until month 11 (this example has a lot of payment arrangements).  It’s important to note that liquidation on this program kind of stalls on months 4-6, but then continues to climb.

Ultimately, if an agency keeps liquidating on a program, the client should leave it with them.  Only when liquidation sharply drops off should they look at closing or reassigning files.

 

Liquidation By File Count vs Liquidation by Dollars

This is where I probably stand off in left field on to my competitors … I prefer to look at liquidation by file count, not dollars.  The dollars doesn't matter.  Don't pull away, I'm not crazy, let me explain.

The reason for this, is it focuses more on process and file management, less about the one big payment.

Looking at the grid below, we have 1094 files assigned – of which we have arranged 141 Paid in Full accounts.  By file count we are at (141/1094) 12.88%.  But more importantly, looking at statuses, I can project what we will liquidate, counting promise payments and payment arrangements along with those Paid in Full accounts (247/1094) or 22.5%.  The client’s goal is 20% liquidation, we will more than achieve that in the long run.  I can also measure how effective we are on contact with the consumer, measuring promise payments and payments against all contacts (247/327) or 75% -- this means when a collection team member makes contact with a consumer, there’s a 75% of payment, which is an effective use of their time.

Also we should measure liquidation against correctly assigned files – you will see files below that are marked Listed in Error – that shouldn’t be held against the collectors if there was a clerical mistake by the client, so actual projected liquidation is against 1094 files minus 5, or 1089 (247/1089 = 22.68%).

Also, we can drill down to look at specific agent performance, perform special letter or email messages on Avoids Contact or No Contact flies, or have the project manager review Broken Arrangements and Disputes accounts. 

And if you are short of liquidation, this sort of report shows areas for improvement.  Let’s say the client wanted 30% liquidation, and we needed to find another 7.5% -- it’s not in the files that the collectors are marking Uncooperative, which only represent 6.76% of the portfolio and 25% of the agents’ time, but it might be in improving your Trace accounts, or Avoids Contact and No Contact files, which are close to 23% of the portfolio.  Sometimes it’s not about just pushing the collectors to ‘do better’.

Measuring liquidation by file count and status means you are looking at the sausage machine and how it works, and if everything runs smoothly, sausage comes out the other end… one big payment or one good month can't possibly skew the liquidation measured by operatoinal process.

		DBColl#
DBStatus			CC4	CC5	DB8	DB9	DJ1	DR3	JL3	MM5	NEW	PA1	SL6	SS4	XAF	TOTALS
Avoids Contact	Cnt			79	14		3									96
Bankrupt	Cnt			9												9
Broken Arrangements	Cnt			3			1									4
Claims Paid Client	Cnt			8	1											9
Contact Attempted	Cnt		1	12			88					1	4			106
Cooperative	Cnt													1		1
Deceased	Cnt			12			2									14
Disputes	Cnt			1												1
File Closed	Cnt			3												3
File on Hold	Cnt			5												5
In Progress	Cnt			1			2				245		1		151	400
Incarcerated	Cnt			2												2
Listed in Error	Cnt			4			1									5
No Contact	Cnt			6	7		13					1				27
No Income	Cnt			1												1
Paid in Full	Cnt			92		34	13			1			1			141
Partial Payment	Cnt			44			10	2	1						20	77
Payment Arrangement	Cnt			1												1
Post Dated Cheques	Cnt			3												3
Pre-Authorized Payments	Cnt			10			1	1								12
Promise Payment	Cnt			2			1									3
Trace	Cnt		3	91			5						1			100
Uncooperative	Cnt			49	13		9			1		2				74
TOTAL COUNT			4	438	35	34	149	3	1	2	245	4	7	1	171	1094

 

Conclusion

So ultimately the important thing is to know what goal you are working towards, and how to measure it.  Every client measures liquidation a little differently, as does every agency – the important thing is to look at what you are doing, and make smart changes, support your collection team, and have realistic goals.

Got questions about liquidation, areas for improvement? Drop me an email, happy to talk strategy.

Thanks kindly,

Blair DeMarco-Wettlaufer
KINGSTON Data & Credit
Cambridge ON
226-946-1730
blair@receivableaccounts.com