Recovery Management: Best Practices for Managing Collection Agencies

Recovery managers inside companies that issue consumer credit are faced with exceptionally challenging conditions today. When much more attention is being paid to receivables management, recovery managers should train a careful eye on the effectiveness of the agencies in their recovery network. Likewise, agencies need to understand, anticipate, and adapt to their clients’ needs in order to position themselves to deliver on their part of the equation.

With this in mind, Kaulkin Ginsberg presents some best practices that recovery managers should consider when managing collection agencies.

Know your pipeline
Post-chargeoff recoveries within credit issuing companies should be informed by knowledge of collection performance on delinquent receivables prior to chargeoff.  In this way, recovery managers can prepare for additional demands on their recovery network and on specific service providers as well.  Issuers that have little knowledge of chargeoffs coming through their pipeline, including roll rates between delinquency buckets, can not assure that their collection agencies will absorb the additional demand. Capacity utilization rates and expected placement levels should be tracked carefully.

Know your timeframes
When credit issuing companies are struggling to meet financial performance, contracts with service providers can be structured to realize more cash in the short-term, rather than more patient collections in the long-term.  For example, a credit issuer can increase the incentives given to early stage, first party service providers as a way of increasing performance earlier in the recovery process; this should impact the amount and quality of accounts that are subsequently placed with contingency agencies. In this sense, recovery strategy for contingency agencies should be developed as part of broader recovery strategy, which in turn should be developed as part of a broader corporate financial strategy, contributing effectively to the whole.

Contract with the right agencies
If a collection agency tells you it can do everything, it’s probably overstating its case. Collection agencies specialize in types of paper, as well as stages of delinquency, so you’re probably going to see lift routing private student loan accounts to private student loan agencies, for example, or 36 month-old accounts to agencies that specialize in later stage collections. One size rarely fits all.

Continually measure agency performance
How frequently do you compare the performance of your collection agencies? Do you share the results of these comparisons with the agencies in your network so they see how they compare with their competition? What information are you collecting from them to make these comparisons? Can you evaluate the performance of specific collectors working accounts inside your collection agencies? Ongoing and detailed assessment of agency performance is essential for a properly functioning recovery network.

Incent performance in creative ways
The best performing collection agencies are seeing a great deal of demand for their services in this recession. In this sense, credit issuers compete for the best performance of a collection agency in each of their recovery networks, seeking an agency’s top collectors for work on their accounts. The best recovery managers know how to incent this performance with creative approaches to fees, bonuses, prizes, etc.

Fire the bottom performers
Recovery managers should have an active “bullpen” of collection agencies available to receive placements at any given time. Bottom performers should be replaced continually, to guarantee that competition for placements remains active over time. Most contracts with collection agencies are guaranteed for a period of only 30 days. Canceling these contracts under certain situations is, without question, in an issuer’s best interest.

Recall and replace accounts
It is surprising how many credit issuers place accounts with a collection agency and then leave those accounts with the agency indefinitely, glad to receive payments from debtors whenever they happen to arrive. The best recovery managers actively recall accounts from agencies after a certain period of time if they have not been collected upon, place those accounts with competing agencies, and then repeat the process. An active recall strategy such as this also helps incentivize agency performance keeps competition for your accounts fresh.

Have an end strategy
Some credit issuers sell accounts after they have been received a certain number of agency placements. Others place accounts through repeated collection agencies until the accounts can no longer be collected on legally. The choice of end strategies influences how contracts with agencies are structured earlier in the recovery cycle. A contingency collection strategy should be informed by an issuer’s plans for treating accounts once the contingency collection strategy has run out.

The collection agency market is highly competitive, with companies constantly being evaluated on the basis of their performance. Credit issuers that know how to harness this competition for their own benefit stand the greatest chances of maximizing the performance of their recovery operation in this challenging economic environment.

Paul Legrady provides management consulting services to creditors and receivables management companies. To confidentially discuss your interests, or to learn more about Kaulkin Ginsberg’s Recovery Review program, contact Paul at 240-499-3818, or by email.