Creditors Exercising Options for Receivables Management

First Party Collectors
First party collections take place under a creditor's name, either by the creditor itself or by collection agencies working with creditors on fixed price contracts. The primary difference between first party and contingency collections is the stage at which the service occurs: first party work takes place earlier in the receivable's life cycle, typically when a delinquent account is between 30 and 90 days past due but has not yet been charged off by the creditor. Conversely, contingency collections generally take place after a creditor has officially charged off the account.

First party collection services that are not handled internally by a creditor are provided by collection agencies servicing accounts that are between 30 and 90 days past due. In these instances, collection agencies work under a creditor's brand, supplementing clients' in-house collection efforts with trained collectors and specialized technology tools. These collection activities draw largely on the same expertise and resources as other types of customer care.

Importantly, providers of first party collection services are paid differently than providers of contingency collection services. First party services are generally conducted on a fee-for-service basis, whereas contingency collections generate revenues proportionally with the success of collection efforts. While early out collections can be conducted on a contingency basis, the fees for first party services tend to be lower than the fees for contingency collections.

Particularly among smaller collection agencies, first party collections may be undertaken as loss-leader engagements or bundled in a suite of services. In this way, first party work can be used to develop relationships with creditors, leading to contingency work at higher fees and performance-based incentives.

First party collection services offer a number of important benefits to creditors. First, first party collections take place earlier in the receivable's life cycle, when collections efforts can be most successful; the likelihood of collecting an outstanding debt decreases as accounts age. Second, first party collection efforts can be less expensive to a creditor over time than other collection services, given the lower fees associated with first party collections. Finally, first party collections are more likely to enable creditors to maintain constructive relationships with debtors who may become repeat customers, as the collection activity can reinforce brand loyalty if handled correctly.

Price is frequently the primary criteria when creditors choose between first party providers, and this benefits companies with offshore presences. Large creditors in particular look for the best value and have demonstrated flexibility over where services are provided. As a result, first party collection services are increasingly provided by large, multinational companies.

Collection Law Firms
Collection law firms constitute the smallest but fastest growing market in the accounts receivable management industry. While these firms typically seek judgments against debtors in court, they also strive to settle accounts before scheduled court actions take place. The pursuit of delinquent debt through legal channels has led to high recovery rates in recent years, contributing to this market's heightened visibility as well as its increased growth.

Whatever the many differences among the many collection law firms in the U.S., one characteristic best illustrates the competitive positioning of collection law firms in this industry: the ability to sue and exact payments from debtors through legal channels.

Collection law firms have adopted a number of revenue models as they have utilized this resource. Since collection law firms generally compete with contingency agencies for contracts with creditors, these firms typically charge creditors a contingency fee that ties the contract's revenues to the law firm's collection performance. Like contingency agencies collecting paper that has already been worked a number of times, collection law firms tend to collect debts later in the receivable's life cycle, after debts have been charged off.

However, many law firms that specialize in serving clients in the ARM industry also provide traditional legal representation to creditors, billing on an hourly basis for legal services. These law firms represent creditors on bankruptcy filings, sales of bad debt portfolios, legal actions to recover cash from debtors, litigation related to collection efforts, and a number of other legal matters that are specific to the ARM industry.

After pursuing an account using methods that are similar to those employed by collection agencies, collection law firms utilize their expertise within the legal system to collect debt on behalf of clients. Generally, these agencies first contact debtors through phone calls and written correspondence in hopes of collecting debts without involving the courts. As a contingency agency would place a debtor on a payment schedule and collect payments over time, a collection law firm would similarly work with debtors to collect delinquent accounts. When these efforts prove unsuccessful, these law firms file cases with court systems, obtain judgments in favor of creditors and enforce these judgments through ongoing asset searches and reclamations.

It Depends
Creditors considering new approaches to receivables management must weigh a number of variables, such as the industry in which the creditor is doing business, the age of its receivables, its history working with providers of receivable management services, and its balancing of risk and return. So, which of these services should creditors be considering? – at risk of stating the obvious, it depends.

Still, the sophistication and diversity of today's account receivable management industry suggests that creditors and their service providers are finding increasingly effective ways to convert receivables into cash.

As Director at Kaulkin Ginsberg, Paul oversees custom research projects and publications focusing on the ARM industry. Contact Paul at 301-907-0840 ext. 104, or at plegrady@kaulkin.com.