How can the debt industry reduce waste?

I’ve been thinking about waste.

As you probably know, the debt collection industry largely operates on a “no win no fee” basis, meaning creditors typically pay debt collection agencies a % commission when they collect money. This results in much talk about the “cost-to-collect” - but I’m left wondering about the cost to not collect. What about the costs incurred on all those accounts which don’t pay?

The truth is that the accounts that do pay, end up paying for those that don’t.

So, how does that work?

Debt collection agencies work out how much cost they will incur in working a portfolio of accounts, for letters, outbound dial attempts, inbound calls, payment processing and so on. On top of this an agency will add their profit margin. This is then divided by the number of accounts in the portfolio to get to an agency yield per account.

The agency will then calculate the likely total amount of collections and divide this by the number of accounts to arrive at a forecasted gross cash collection per account.
Divide forecast gross cash collections per account by the agency yield per account and you get the % commission

Here’s an illustration:

Agency yield per account       Agency commission          Gross collections per acct.
Agency costs £2.80                   Agency yield £4.00               Ave. balance £350.00
Agency margin £1.20                Colls per acct. £35.00           Liquidation 10%
Total  £4.00                               Commission rate 11%          Colls per acct. £35.00

So back to waste … I’ve been wondering just how much spend is wasted on accounts which don’t pay? Wouldn’t it be valuable to reduce the work on these accounts (fewer letters or dial attempts), or reinvest those costs on accounts more likely to pay? After all, we know all about the ‘low hanging fruit’ - accounts that pay fairly easily, but what about the fruit hanging halfway up the tree that, with a little extra shaking, will liquidate too?  If we invested extra activity on those accounts, which is funded by the reduction of spend on what is basically a rotten apple, could we shake more off the tree?  I think so.

So, how do we reduce waste?

Take customer queries for example. Queries are a prime area of wastage in the collections process.  Swift resolution of simple queries is known to deliver an uplift in cash collections, but queries are expensive to manage, delay resolution and are unhelpful to the customer.  By taking a close look at the query process – finding out the root-cause of the queries or understanding why the same queries re-occur – it is often possible to reduce the number of unnecessary customer queries being raised. Fewer queries mean lower costs.

I’ve realised that reducing waste and investing those savings in more productive activities is the key to more effective collections. All activity is becoming more expensive, and in some areas arguably less effective, so we need to look at how we uplift net collections (that’s after costs have been deducted) in a more intelligent way.  I believe that means understanding even more about the customer by using the data at our fingertips.  We know that Equifax understand this notion and use propensity scoring to eliminate waste.  They take a batch of accounts, and, using the vast amount of data that they hold, can pinpoint the accounts that will bear fruit and identify the rotten apples.  When we combine this information with TDX scorecards and segmentation we can offer our agencies an even fuller picture of their customers, which allows them to better tailor their strategies to the type of customer they have.

I’m also convinced this will also lead to a better experience for the customer  - a win all round!

By Charlotte Mather, Senior Insight Consultant, TDX Group

Embracing regulatory change – and reaping the performance benefits

The past year has seen regulators place their focus firmly on the debt collection industry, specifically on the latter stages of the collection process involving third party suppliers such as collection agencies and debt buyers. It is clear that this part of the process faces greater challenges as a result of the added complexity from having multiple parties involved in collections activity, and the inevitable reduction in control from the utilization of third parties. This is best evidenced through the five-fold increase in consumer complaints originating from third party activity, rather than internal collections, - this identifies the key reason for the interest from regulators.

The industry’s reactive approach towards regulatory change has resulted in a lack of preparation, driving creditors to make performance-damaging decisions. An example of this includes wide-scale reductions in the sizes of agency and buyer panels, even, in some cases, to the extent of a total withdrawal from the market. These behaviors come at a heavy cost; in some cases driving a reduction in collections of over 35% which is unlikely to be sustainable.

However, this trade-off between regulatory adherence and collections’ performance does not have to be a key theme for the industry. As a positive customer experience is inextricably linked to underlying collections’ performance; then regulatory adherence can be utilized to drive collections’ uplifts.

One of the key requirements identified through a variety of regulatory publications, including the OCC’s best practice guidelines for debt sale, focuses upon the need for ongoing monitoring of suppliers. A robust, systematic monitoring solution will immediately identify any compliance breaches by suppliers which can then be effectively managed and mitigated. Furthermore, this monitoring can immediately identify any process exceptions which impact collections, and the subsequent increased visibility can be utilized to align the suppliers’ collection strategies to the wider collections process, i.e. why re-call an account that has just promised to pay.

Another key focus of the regulatory guidelines focuses upon the response to customers’ queries and disputes. Implementing an efficient process and systems to timely respond to queries and disputes will reduce response times, which clearly improves the customer experience. Less well recognized are the performance benefits that this improvement drives; reducing query response times from 21 days to 3 days drives a staggering 40% uplift in resultant collections from these queried accounts.

Our view is that over the next 12 months leaders across the industry will start to realize this vision of improving both compliance and performance, achieved through implementing a pro-active approach towards changing regulation. Companies which do  not just ensure adherence to regulatory requirements, but place their customers’ interests at the center of their third party collections processes and strategies will benefit most, whereas those creditors who continue to simply react to the market will continue to trade off performance against compliance.

Those companies that apply a proactive approach and accept that regulation is changing, will not only demonstrate best practices in regulatory adherence, but also drive significant improvements in their collections’ performance.

By Chris Smith, TDX Group

Are your KPIs measuring the right things?

I recently watched Moneyball, a film based on the real life story of the Oakland As baseball team, who in 2002 were struggling to compete with larger, and richer, baseball teams like the New York Yankees. In order to level the playing field, whilst not obliterating their comparatively small budget for building a team, they focused on statistics, utilising analysis to identify the figures which best predicted a winning team. Rather than focusing on a handful of ‘Major Stars’, they built a team of ‘average’ players, with consistent performance results. This approach enabled them to reach the playoffs for the famous World Series. 

By understanding the Key Performance Indicators for your business you can become more competitive and more confident in your capabilities. The first step of understanding your KPIs is making sure they are set up correctly. Even if your KPIs are established, there is room for reviewing and refreshing them as your business changes.

1. Ensure your KPIs remain aligned to strategy – This may sound straightforward, but is easier said than done. As a company grows the strategy may shift from, for example, pure cash collections towards reducing complaints. However, in our experience, this may be an area your KPIs are missing, as getting a true view of compliance and complaints is often a difficult process and very rarely reported through standardised KPIs.

2. Reflect Business as Usual operations – KPIs are an essential method for monitoring your day- to-day-business. For example, a call centre operation has its Service Level Agreements (SLAs) to meet, but having the KPIs that drive them, e.g. average handling time, peak/off peak answer times etc., will enable you to not only manage SLAs effectively, but make them work for you and drive performance.

3. Measure the right things – Not everything is easy to measure, but everything is measurable. It’s not practical to measure every possible factor of your business, but it is negligent to not measure something that is important to your business. For example, if your current KPIs tell you how long an agent is on a call for, but your focus is currently on customer satisfaction, have you set up a method by which customers can air their praise, or grievances?

Just like the Oakland As and their stats approach to winning baseball games, KPIs are the key details you need to find the winning formula. They enable you to play the averages on the core business, rather than relying on the occasional star performance to save the day.

So, are your KPIs really telling you everything you need to know?

By Stephen Hallam , Consultant at TDX Group