The changing face of the commercial collection agency
One thing we can say about business in the last decade, change was constant. American business has made a rapid transformation to meet the challenges of the changing economic environment. If you think it’s time to take a breath, I hate to tell you, the pace of change is not slowing; it is increasing! What worked a decade ago to meet customers and shareholders/owners expectations may not work today
Change Represents Opportunity
To effectively run a business mangers must be an agent for change. They must be willing to embrace change. I heard Jack Welch, former CEO of General Electric, in a recent television interview state, “change represents opportunity” He went on to say that his credo was not to fear change but to embrace it-to search for nuggets of opportunity that lie in every changing situation.
The commercial collection agency business has not been immune to change. Many agencies have developed new and exciting products and services to better serve their customers. Change has also affected the traditional collection services commercial collection agencies provide.
Most of the conversations within the League are focused on collections and forwarding, which is as it should be for this is the sinews of the triadic system. The commercial collection agency is an important element in the triadic system and it is important that its partners in the triad, attorneys and law lists understand the metamorphosis commercial collection agencies are undergoing.
In this article, I will attempt to provide the reader with a better understanding of the changes taking place within commercial collection agencies. Most business scholars are in agreement that the root cause of this acceleration of change in the U.S. economy has been globalization-the open and free market economies around the world competing for increasing shares of the global marketplace.
Regarding the commercial collection industry, these changes have resulted in increasing price competition and declining profit margins. The median profit margin for commercial collection agencies in the year 2000 from collection operations was about nine percent. Looking back to 1995 it was approximately 12 percent, a decline of about 25 percent from 1995 to 2000.
In reaction to this trend, commercial collection agencies have developed new products and services that are meeting the changing needs of their customers.
Accounts receivable (AIR) outsourcing is one of these products. In a recently completed survey, called the Kaulkin Report, Kaulkin-Ginsberg Company1, indicated revenue growth from AIR outsourcing rose in the 25 to 30 percent range during the period 1998 to 2000, far outpacing the revenue growth from collections, which they peg at about nine percent. AiR outsourcing is defined as contacting slow paying accounts in the name of the credit grantor. Slow paying accounts normally would not be placed for collection services until they were significantly delinquent, probably four to six months past their due dates.
A/R outsourcing services are concerned with not only with the collection of slow paying accounts and increasing a company’s cash flow, they are also involved in information gathering and providing the agency’s customers with a wealth of information on issues and problems surrounding product/service quality and performance, plus sales, distribution and accounting functions of the business as well. The sophistication of an agency’s computer system allows them to cost-effectively gather, tabulate and disseminate this information to their customer.
A/R outsourcing services may be provided off-site, where account information is downloaded to the collection agency’s computer system and outsourcing personnel initiate contacts with the slow paying accounts. Or they can be provided on-site, where the agency provides personnel at the customer’s site. The customer’s or the agency’s computer system may be used.
Many of the past due accounts businesses carry in their accounts receivable portfolios may not be true collection problems. Depending on the industry a company is serving, it may have up to 18 percent2 of its accounts receivable portfolio tied up in deduction accounts. Deduction accounts, or as they used to be called in the old days of retailing, contra accounts, are usually found in companies doing business with large retailers. Deduction accounts arise from differing interpretations of the terms of sales regarding discounts and allowances.
Collection agencies recognizing this need have developed deduction management services, where they research the deductions and work out solutions with the customer and the creditor.
While both deduction management and accounts receivable outsourcing services are closely related to collections, they require different skill sets from the collection agency’s personnel. In both these services, there is more emphasis on the customer service vs. the collection aspects of the job.
Commercial collection agencies are always searching for ways to better serve their customers and have also ventured into providing the following services:
Training services, on-site and in public seminars for credit grantors.
With consultancy services, the agency reviews the collection operations of its customer and provides a plan for improving those operations. In some cases, they may lead the effort in implementing the recommended improvements.
These services, while not growing at the rate of accounts receivable outsourcing or deductions management, provide additional ways to serve the customer and solidify the agency’s relationship with its customers.
The Collection Side
The collection side of the business is perhaps of greater interest to the other partners in the triad. Let’s take a look at what’s happening there.
In the last decade commercial collection agencies have made effective use of technology to improve collector productivity and become more responsive to their customers’ information needs. That trend is continuing with the application of sophisticated statistical modeling that scores accounts by their degree of collectability or uncollectabilty A collection agency can run the accounts it receives from its customers through these models and be able to categorize those accounts by the likelihood of collectability. This has an important impact on the business as better use of resources can be made to improve collection performance. Most of the larger agencies are using some form of collection scoring. There are now companies selling off-theshelf models that can be used by smaller agencies in their operations.
Mathematical models are also being applied to the sales prospects of an agency to improve the efficiency of their sales force.
There has been a rise in number of smaller accounts-those under $1,000– that are placed with commercial agencies. These commercial accounts largely come from companies in the transportation, overnight delivery service and telecommunication industries. The use of predictive dialers to cost-effectively manage these smaller accounts has expanded in the commercial collection sector. Predictive dialers further expand the productivity of collectors.
Imaging technology has improved significantly over the years and has also come down in price. With the large amount of documents often involved with commercial collections, imaging has provided the commercial collection agency with an electronic filing cabinet and copier combined into one. Imaging technology is integrated with the agency’s computer system and allows a collector to select the documents needed to substantiate an account and send these documents to a debtor with a few keystrokes of the computer terminal.
The biggest technology change, which is starting to be tapped, is the use of the Internet for communicating and integrating systems between agencies and their customers and attorneys to whom agencies forwards accounts. The Internet offers a convenient and cost effective way for conducting this communication. Customers can download account placement right into the agency’s computer system. They can view the status of their accounts online and can print out status reports that keep them abreast of all accounts placed for collection. Likewise, accounts can be downloaded to an attorney and, depending on the sophistication of the attorney’s computer system, right into his/her computer system. Attorneys can update the status of the forwarded account online, thereby reducing the expense of reporting. The use of the Internet to facilitate communications will expand rapidly in the near future.
I would like to dispel a notion often heard at CLLA meetings that commercial agencies have not aggressively marketed the commercial collection marketplace and that account placement has declined. Such is not the case. For example, in 1998, accounts placed with members of CCAA totaled approximately $5.5 billion. In 2000, accounts totaled about $8.6 billion. This year they are on a pace to perhaps exceed $10 billion.
This increase of 154.5 percent from 1998 to 2000 was not achieved by an increase in the number of agencies who were members of CCAA. In fact, the number of agencies who were members of CCAA declined during that period because of mergers and acquisitions.
CCAA members handle about 80 percent of the volume of accounts placed with commercial collection agencies in the U.S. There are markets in industries such as equipment leasing, telecommunications and banking that are emerging as fertile markets for outsourcing and collection services. Members of CCAA are aggressively pursuing those marketplaces. These industries are beginning to understand the benefits and resources commercial collection agencies make available to them for managing their accounts receivable portfolios.
The collection business is a highly competitive one, not only served by collection agencies-both commercial and consumer-but by attorneys as well. Emerging as well are dot com companies, who are essentially collection agencies trying to morph themselves into new entities such as a collection consolidators or attorney networks. These entities, if successful, will only heighten the competition in the marketplace.
Even with the increases in account placement, stated above, some attorneys may not have noticed an increase in forwarded accounts. There are three significant reasons for this:
Agencies have become more circumspect regarding the accounts forwarded to attorneys. The financial returns on forwarded accounts are significantly less than non-forwarded accounts. To better control those costs, agencies are in many cases, only forwarding accounts that have a good likelihood of collection and on which the creditor has agreed to proceed with a lawsuit. On the one hand, this provides attorneys with accounts that should offer a higher degree of collectability. On the other hand, it reduces the numbers of accounts forwarded.
Credit grantors have an increasing aversion to proceeding with legal action on accounts under $5,0003, believing that filing lawsuits on such accounts is not cost effective. This results in a reduction in the number of accounts being sent to attorneys. Creditors rightfully or wrongfully view the courts as inefficient.
Many agencies have reduced the numbers of attorneys to whom they forward accounts. This consolidation has taken place to improve service levels. While in the main this has worked, recent developments and defalcations have prompted agencies to rethink this practice. Agencies are now reviewing whether it makes sense to somewhat increase the number of attorneys to whom they forward accounts, thereby reducing the financial risks from possible defalcations. Where this activity leads remains to be seen.
I hope I have accomplished the mission of this article, which is to share with you the changes taking place among commercial collection agencies. .
Copyright Commercial Law League of America Nov/Dec 2001
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