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 |
96 |
||||||||||||||
Bankrupt |
Cnt |
9 |
||||||||||||||
Broken Arrangements |
Cnt |
4 |
||||||||||||||
Claims Paid Client |
Cnt |
9 |
||||||||||||||
Contact Attempted |
Cnt |
106 |
||||||||||||||
Cooperative |
Cnt |
1 |
||||||||||||||
Deceased |
Cnt |
14 |
||||||||||||||
Disputes |
Cnt |
1 |
||||||||||||||
File Closed |
Cnt |
3 |
||||||||||||||
File on Hold |
Cnt |
5 |
||||||||||||||
In Progress |
Cnt |
400 |
||||||||||||||
Incarcerated |
Cnt |
2 |
||||||||||||||
Listed in Error |
Cnt |
5 |
||||||||||||||
No Contact |
Cnt |
27 |
||||||||||||||
No Income |
Cnt |
1 |
||||||||||||||
Paid in Full |
Cnt |
141 |
||||||||||||||
Partial Payment |
Cnt |
77 |
||||||||||||||
Payment Arrangement |
Cnt |
1 |
||||||||||||||
Post Dated Cheques |
Cnt |
3 |
||||||||||||||
Pre-Authorized Payments |
Cnt |
12 |
||||||||||||||
Promise Payment |
Cnt |
3 |
||||||||||||||
Trace |
Cnt |
100 |
||||||||||||||
Uncooperative |
Cnt |
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
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