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How do you know your outside collection agency is meeting your needs?
In our October 2007 article titled, Selecting the Right Collection Agency, we shared nine things to consider when selecting an Outside Collection Agency (OCA). Once you’ve made your choice, and have some experience with the agency, how can you determine that they are doing a good job? This month’s article offers valuable tips on determining how well the OCA you selected is meeting your needs.
Knowing Your Needs
The first step in accurately assessing your collection agency’s performance is determining what factors in the relationship are most important to you and your company. Of course, bringing in the cash is going to be pretty high on the list. But there are other qualitative and quantitative components to consider.
Tapping into ABC-Amega’s long history as a successful OCA, we’ve compiled a list of factors on which we have reported and been evaluated over the years. At the end of the article you’ll find a sample Quality Score Card to use in assessing your OCA.
Qualitative Factors to Consider When Assessing Your Collection Agency
- Relationship with the OCA’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? Keep in mind, however, that collectors and customer service people are usually different personality types. Good service people will bend over backwards to help you. Good collectors are focused on getting the account paid as quickly as possible. So don’t expect the same type of interaction from both.
- Professionalism of collectors. How do the agency’s collectors treat you and your staff? Just as important, how do they treat your debtors? You may want to resume business with some debtors once the past due account is resolved. Your customers, even those that have occasional cash flow issues, are your most valuable asset. Does the collector’s attitude and behavior toward your customer strengthen the relationship or destroy it?
- Quality and timeliness of reporting. Are you getting updates within reasonable time-frames? Are the updates understandable? Is there a real-time web site that allows you to check on the status of your accounts yourself?
- Flexibility. If you require a special report, can the agency provide it? Are they locked into rigid work standards or can they work with you to try something new that will meet your specific needs?
- 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, training programs? Are there related services they can supply or help you find?
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, however, let your 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’s doing its job should not only be able to provide data about their collection results, but informative and helpful information about the portfolio you place with them as well.
Data to Determine Collection Agency Results
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, average size of account, location of debtor, etc. A recovery rate calculated in this manner, however, does not give the most accurate assessment. Consider requesting the agency provide recovery rates based on the following:
- 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. The Commercial Law League of America (CLLA) lists a benchmark recovery rate based on statistics provided by its membership. The most recent average recovery rate for members is 45.5%. Compare your agency’s results to this benchmark but take into account the CLLA parameters:
- Domestic (US) debtors only
- Accounts less than $20,000
- No more than 5% of portfolio still open
Recovery rate on closed accounts. Any account that’s still open has the potential to be collected. A recovery rate based on closed claims probably provides the fairest analysis of your agency’s results. Even better – remove accounts that involve bankruptcies, have passed statute of limitations, and valid disputes from the calculation. In most cases, these weren’t collectible to begin with.
Recovery rate on claims that have been worked at least 60-90 days. It’s not fair to make a judgment on 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.
Recovery rate by age past due. According to annual surveys of the Commercial Collection Agency Association (CCAA), the older an account when it is placed with an OCA, the less the likelihood of collection. (See Probability of Collecting on Past Due Accounts.) The Credit Research Foundation’s Credit Assistant website suggests 61 days past due as the optimal time to place an account with a third party. Therefore, it’s 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. ABC-Amega calculates “age past due” from the date of the oldest past due invoice. Be aware, however, that we've run across some firms that calculate from the date of the most recent past due invoice.
Recovery rate by location of debtor. 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 debtors in your collection portfolio, segregate recovery rates by countries 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.
Stage of Recovery
How accounts are recovered has a huge impact on the price you pay for collection – and cost, though by no means the most important, is another thing to consider 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 brought into the picture. In addition, if the collection can be made amicably, you save 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
Another factor you’ll want to consider is how long, on average, it takes your OCA to collect your accounts. ABC-Amega has a report called a “Recovery Diagonal” that shows the percentage of accounts recovered each month on a specific day’s placement. Once there is a reasonable history of placements, it’s possible to determine the optimum 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 discover why? Look at the age of your accounts at placement, the amount and quality of your internal collection efforts, and the stage at which the collection agency is either collecting or closing the accounts as uncollectible. Your OCA can assist with the analysis and should be able to suggest changes to their collection treatment plan, and your internal processes that could improve your results.
Data About Your Collection Portfolio
Along with recovery information, a good OCA should provide you with additional data on the portfolio they’re handling for you – information that 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 OCA within a time-frame that allows for optimal recovery? Is the claim submission process running properly and efficiently? ABC-Amega recently uncovered a problem with placements caused by an IT glitch on the client’s end. All claims were supposed to be placed at 91 days past due, therefore, the client rightly expected a relatively high recovery rate – much higher than the CLLA benchmark of 45.5%. Unfortunately, the results were falling far short of expectations. ABC-Amega’s analysis revealed that many claims were actually 12 months or more past due at the time they were placed. Armed with this information, the client was able to ferret out a glitch in their programming that was sending the wrong claims, at the wrong time, to the wrong agency!
- 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 lot of “Valid Disputes” are there internal billing or shipping errors on your side? Over the years, ABC-Amega has had some clients with high closures due to “No Client Response”. In most cases, this was because the client’s staff was so overloaded they didn’t have time to respond to our collectors. Whatever the reasons for account closings, it is essential to know and understand this valuable information in order to accurately assess both your OCA’s and your own internal processes.
Grading Your OCA
A relatively easy way to grade your OCA, or to compare them if you use more than one, is to develop an OCA Quality Score Card that measures the factors you consider most important. A sample scorecard appears below. You can download a similar OCA Comparative Quality Score Card worksheet in Excel® to get you started.
According to the Score Card below, OCA #2 is doing a better job overall.
This article has presented some of the types of reporting ABC-Amega provides to its clients, as well as many of the characteristics our clients have used to measure the value and effectiveness of our services over the years. You’ll most likely have additional parameters that are important to your company. However, regardless of the items you consider important, or whether you lean more toward Qualitative or Quantitative factors, it’s important that you do develop a means of grading your OCA’s performance. This should not be a one-time measurement but an ongoing analysis of the job they’re doing for you.
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This information is provided by ABC-Amega Inc. -- providing 1st and 3rd party commercial collection services since 1929, and collecting in more than 200 countries worldwide. For further information, contact firstname.lastname@example.org.