How to Maximize Company Profit by Using Third Party Collection Agencies

Why Use an Agency? Several Things to Consider:

1. Cash Flow and Profit Advantages: It is more profitable to use your own efforts for accounts as they come due up to 60 to 90 days delinquent. The chances of recovery are higher. But older accounts are more difficult to collect and require more effort on your end. The use of an agency for older accounts is likely to be more cost-effective and enable internal collectors to focus on higher balance invoices earlier.

2. Get the Customer's Attention: Assigning accounts to a collection agency brings customers action because they know you aren't going to tolerate their delinquency.

3. Aggressive Collection Effort: The collection agency can use more aggressive collection tactics because your firm's image is not involved. This results in improved collections from seriously delinquent accounts.

4. Are Your Credit Policies Impacting Collections? It's easy to extend too much credit when you're trying to entice companies into doing more business with your company. Extending too much credit can lead to unpaid accounts, which can quickly and severely limit the cash needed to grow your company's business.

If you don't stay on top of overdue accounts, your chances of collecting the money decrease over time. According to a survey by the Commercial Law League of America, the probability of collecting an overdue account drops to 73 percent after just three months, to 57 percent after six months, and to only 29 percent after one year.

One way to recover more from your delinquent accounts is to engage a collection agency. An agency has the expertise and resources to locate hard-to-reach customers and collect amounts owed to your company. If brought on board early, a collection agency is likely to recover all or a substantial portion of your unpaid accounts.

5. A Collection Agency is Focused on Collections: In addition to increasing your chances of getting paid, using an agency saves you time and money, two of your most valuable resources. With their custom-designed phone systems, computers, and software, collection agencies can be more effective than your internal efforts in recovering delinquent accounts.

6. Compelling Return on Investment (ROI): Although collection agency commissions can range from 15 to 50 percent of what they recover when internal costs and collection results are considered, there is likely to be a positive and compelling bottom-line impact.

7. Consultative Support: If you desire, a collection agency can offer systems and procedures suggestions to aid you in problem areas.

Selecting the Right Agency Partner:

When selecting an agency, you should:

1. Find out if the collection agency is a member of Commercial Collection Agencies of America (CCA of A). The CCA of A requires members to adhere to a code of ethics. You can be assured they will comply with The Fair Debt Collection Practices Act.
2. Confirm the agency has insurance that will protect your business, should the agency err during the collection process.
3. Learn what is the agency's typical recovery rate is.
4. Ask for a list of references. Contact the references and ask:
   1. On average, how long it has taken the agency to collect on late accounts from the date of referral?
   2. Have they typically collected the entire amount owed or settled for a portion of what was owed?
   3. Were they satisfied with the agency's collection efforts?
   4. Were there complaints about the agency for current or former customers?

Deciding When to Engage a Collection Agency:

A common practice is to turn past due balances over to a collection agency after a delinquency period of three months. The invoice(s) are current enough to be easily documented and are more collectible than much older balances. Ultimately, of course, you should base the decision upon the specific circumstances of each past due balance. There are many things that may influence your decision to retain, or not retain, a collection agency, such as:

1. How past due is the balance?
2. The dollar amount?
3. Your company's relationship with the customer:
   • Have you enjoyed a good relationship in the past?
   • Is continuing that relationship important for the future of your business?
   • If there is no other way to resolve the past due balance and a referral to an agency is needed, the agency should be made aware there is a desire on your part to continue doing business once the issues are resolved. This will help calibrate how aggressive an approach the agency will take.
4. Are there potential disputes?
5. Have normal internal follow-up efforts had no effect?
6. Is the balance to be referred large enough to justify the expense of a collection agency?

How to Evaluate a Collection Agency to Ensure it is Meeting Your Needs?

First, what are Your Needs? The first step in accurately assessing your collection agency's performance is determining what factors in the relationship are most important to your company. Of course, bringing in the cash is going to be high on the list. But there are other qualitative and quantitative components to consider.

Qualitative Factors to Consider When Assessing Your Collection Agency

1. 1. Relationship with the Collection Agency's Collections and Service Personnel: Are they friendly and helpful? Do they listen to you and take your concerns seriously? If you raise an issue, is it handled quickly and appropriately?
   2. The professionalism of collectors: How do the agency's collectors treat you and your staff? Just as important, how do they treat your customers? As stated earlier, you may want to resume business once the past due balance is resolved. Your customers, even those that have occasional cash flow issues, are your most valuable asset. Do the collector's attitude and behavior toward your customer strengthen the relationship or destroy it?
   3. Quality and timeliness of reporting:
      • Are you getting informative status updates on your referrals within a reasonable time frame?
      • Does the agency provide real-time web access allowing you to check on the status of your accounts yourself?
      • If desired, can account updates and payment status be integrated into your credit and collection software?
   4. Flexibility: If you require a special report, is the agency willing to provide it? Are they locked into rigid work standards, or can they work with you to try something new to meet your specific needs?
   5. Value-add: Can the agency help you improve your own internal credit management and collection efforts?
      • Do they have access to industry-specific data and benchmarks?
      • Do they offer educational newsletters, webinars, and training programs?
      • Are there related services they can supply or help you find?
   6. How You Feel is Important: You want to be as objective as possible when analyzing the above qualitative factors. But, when push comes to shove, if you're not comfortable with your agency's personnel or don't feel they are responsive to your needs, you may have the wrong agency. If your overall perception is negative, let the agency know. Give them the opportunity to address your issues.

Quantitative Factors to Consider When Assessing Your Collection Agency
This should be easy. Right? What's the agency's recovery rate? If it doesn't meet your expectations, they're out! But hold on. How was that recovery rate calculated? You may be giving the boot to an agency that's performing quite well.

There are several ways to calculate a recovery percentage and a number of factors that determine a reasonable recovery expectation. There are also other statistics that provide valuable insight into the quality of the agency's efforts.

An agency that is doing its job should be able to provide data about their collection results, and informative, helpful information about the portfolio you place with them.

Metrics You Can Use to Determine Collection Agency Results

Recovery Rate: Recovery rate should be a major factor in your analysis. Typically, recovery rates are calculated on the entire portfolio, regardless of age at placement, date placed, the average size of the account, location of the customer, etc. A recovery rate calculated in this manner may not give an accurate assessment. Consider the following:

1. 1. The recovery rate on all accounts: Keep these factors in mind: the type and age of accounts being included in the calculation, and the percentage of claims still open at the time the recovery rate was calculated. Compare your agency's results to competitive agencies. Consider the following variables:
      
      • Domestic (US) customers only
      • Accounts less than $20,000
      • No more than 5% of portfolios are still open
   2. The recovery rate on closed accounts: Any account that's still open has the potential to be collected. A recovery rate based on closed claims provides the fairest analysis of your agency's results. To improve accuracy, remove from the calculation accounts that involve bankruptcies, have passed statutes of limitations, or have valid disputes. In most cases, these weren't collectible, to begin with.
   3. The recovery rate on claims that have been worked at least 60-90 days: The calculation may be distorted if calculating a recovery rate that includes accounts that have just been placed. Allow the agency a reasonable amount of time to work the claims. When selecting what you consider a "reasonable" amount of time, don't forget to consider extenuating factors, such as age at placement and complexity. Older accounts and those with complex issues often end up with attorneys, increasing the length of time needed to collect.
   4. Recovery rate by age past due: The older an account is when it is placed with a collection agency, the less the likelihood of collection. The Credit Research Foundation suggests 61 days past due as the optimal time to place an account with a third party. It is not realistic to expect the same recovery rate on accounts placed at 61, 120, 180, or more days past due.

Note: When comparing the recovery rate of multiple agencies, make sure all are calculating "age past due" in a similar manner. A standard method calculates "age past due" from the date of the oldest past due invoice.

Recovery rate by location of customer: This is valuable particularly when international accounts are included in the portfolio. Some countries' laws and/or commercial practices make debt collection much more difficult. In addition, not all collection agencies are equally adept at collecting in every country. If you have a significant number of foreign customers in your collection portfolio, segregate recovery rates by country to get a fair picture of the agency's capabilities.

• • Recovery rate by each of your divisions or locations: The agency should be able to set up your account so that you get an overall view of the results, and each division or location gets accurate data for their piece of the portfolio. This can provide essential intelligence into the effectiveness of each division's internal processes. For instance, if a particular division is receiving significantly higher recoveries than the rest of the company, they might have better internal processes that can be duplicated to improve the overall percentage collected.

Method of Recovery: How accounts are recovered has a huge impact on the price you pay for collection. Cost is not necessarily the most important factor, in your decision to refer a past due balance to an agency. It is an important consideration when evaluating how your agency is performing. If the agency is able to collect your accounts in-house, your contingent fees will generally be less than if an attorney is engaged. If the collection can be made amicably, you save additional court costs and the extra (usually 10%) suit fee.

Analyzing at what stage (In-House, Attorney-Amicable, Suit, Judgment) your accounts were collected can provide valuable insight into how your agency is handling your portfolio. If the majority of your accounts end up with an attorney, perhaps the agency is too quick to give up working them internally. Or, perhaps you're the culprit. The accounts might be highly disputed due to some internal deficiencies, or you might be waiting too long to place them.

Time frame to Recovery: Consider how long, on average, it takes your collection agency to collect your accounts. Records should be tracked of the percentage of accounts recovered each month calculated from the day it was placed. Once there is a reasonable history of placements, it's possible to determine a reasonable collection period for the entire portfolio.

As with other quantitative factors, this information can shed light on both the agency's capabilities and the quality of your internal processes. If your target for collection is three months, but the agency is taking six, your next step is to understand why? Look at:

• • The age of your accounts at placement.
  • The quality of your internal collection efforts.
  • The stage at which the collection agency is either collecting or closing the accounts as uncollectible.

Your collections agency can assist with the analysis and should be able to suggest improvements to their collection treatment plan and your internal processes.

Analysis of Your Collection Portfolio
Along with recovery information, an effective collection agency should be equipped to provide you with an analysis of your referred portfolio. This information can help you assess the value of their services and the efficiency and effectiveness of your own internal processes.

Some valuable metrics:

• • Number, amount, and percentage of accounts by age at placement:
    • Are accounts being placed with the collection agency within a time frame that allows for optimal recovery?
    • Is the claim submission process running properly and efficiently?
    • Unless there are reasons not to, are claims placed at 91 to 100 days past due?
  • Reasons for account closings: Understanding why accounts are being closed by your agency can shed light on both the agency's and your own internal deficiencies.
    • If a high percentage of your collection accounts are closed as Skips- is the agency giving up too quickly? Or are you waiting too long to place? Or, are your credit-granting policies too lax?
    • If you're ending up with a lot of Uncollectible Judgments- is the agency suggesting suit without determining if there are any assets to file against?
    • If there are a high number of Valid Disputes- are there internal billing or shipping errors on your side? Your internal staff must also take the time and be sufficiently organized to respond to requests for information from the collection agency collectors.

Whatever the reasons for account closings, it is essential to know and understand this valuable information in order to accurately assess both your collection agency's and your own internal processes.

Conclusion:

The use of third-party collection agencies should be part of the overall collection process and strategy. Collection Managers should not consider a referral a failure. In many ways, it can be a win for your company. Remember your company will only pay for the agency's successes. Internal staff is paid whether a balance is paid or not.

Getting the most out of a relationship with one or more collection agencies, requires due diligence, setting expectations, and monitoring results. Both sides must continually improve to eliminate anything impeding timely collections.