'Tis the Season To Take a Hard Look at Your P&L
"More Inventory That is Less Collectible."
This is the common theme we are hearing from agencies across practically every consumer market. As a result of worsening economic conditions, many agency owners and executives are contemplating some tough decisions going into the New Year to profitably manage increases in inventory.
Many of the tough decisions center on the following topics:
Collectors – Staffing continues to be an agency’s biggest cost and throwing more collectors at increased inventories that are less collectible is a recipe for disaster. To offset potential losses, some agencies are utilizing near-shore/offshore locations to take advantage of a cheaper cost structure and a surplus of personnel.
Cutting Clients That are Not Profitable – It is important to continually evaluate whether your clients are profitable by looking at the contribution margin by each of your clients. Get rid of or renegotiate fee rates with clients that are costing you more to service.
Management and Sales Staff – I know it is sometimes hard but try to objectively evaluate each of your managers as well as your sales people and determine if they are contributing to the success of your business and whether they are needed to fulfill your business goals in 2009.
Satellite Offices – If you have a satellite office that is underperforming but you have a long-term lease obligation, it is quite possible to find another collection agency or a service business (telemarketing, business process outsourcer, etc.) that is looking for that geographic coverage and experienced personnel. They may have an interest in taking over the lease and assuming the payroll expense.
Technology – The IT infrastructure is the backbone of agency. Do a review with your IT team by year-end to understand how you can trim costs associated with software, hardware, phone support and staff.
Marketing and Advertising – Year-end is a great time to take a look at what worked and what didn’t in 2008 and figure out the most cost effective plan to keep in front of your clients and prospects. A common strategy in a down market is to rein in spending on new client development, evaluate which conferences are really productive for you and your staff, and focus on building business from existing clients, which may include offering expanded or new services. Be careful not to cut marketing costs for the sake of simply cutting costs!
What are you seeing in the market? What are your plans for returning to profitability in 2009?
Michael Lamm manages M&A transactions for Kaulkin Ginsberg’s Strategic Advisory Group. Michael can be reached at 240-499-3808 or by email.
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Comments
Comment from Mark Edwards on December 18, 2008 at 12:10PM EST
Michael: We concur with each point in the blog and wondered if you were looking at our company when you compiled your list of 6 strategies for 2009.
Regarding your suggestion to cut clients that are not profitable, we use a three point plan for this process that we refer to as... "Educate, Negotiate, and Terminate"
First, the client needs to truly understand why their business is not profitable. Most clients assume that the agency is simply not trying but the fact is that balance, age, and rate are all important factors, just to name a few.
Once the client understands the effects of aging or that his average balance does not allow the agency to work accounts repeatedly, the client is much more likely to be willing to negotiate a higher rate on small balances or on older accounts and structure pricing commensurate with key recovery factors.
If the client assumes a position of ..."That's your problem. If you want my accounts you accept them as they are"...the solution is obvoius and termination is imminent. But alas, we don't simply tell them that they are fired. We courteously and diplomatically recommend that they begin using our toughest competitor for all of their collection needs. ( We figure that if our competitor will accept the business under our client's terms, then our competitor is one more client away from no longer being our competitor.
Most clients respond to "Educate and Negotiate" but the act of terminating a really bad client is one of the most refreshing and liberating experiences an agency manager can have. I highly recommend that you do it at least once per year. Please don't send them our way!
On a another subject, we are apparently seeing a phenomonon in our region of healthcare collections. We represent about 90 hospitals on a nationwide basis and have a pretty good cross section of hospital types from for-profit to non-profit, community owned to faith based.
We hear all of the talk about huge increases in the number of patient accounts and the volume of dollars that are being sent to agencies in 2008 but we simply are not seeing this trend from the vast majority of the hospitals we represent. True, we are seeing constant increases in the average balance and we are seeing a significant shift and increase in the number and dollars that are now true self-pay, but the actual volume is not exploding as some might think or suggest.
Is demand decreasing? Is hospital census declining? Are hospitals identifying and bypassing agencies on more "uncompensated care" in the name of charity?
And finally, we would share that most of our clients and even our bankers assume that the collection industry must be making a killing in this economy. Would you please inform them that when the economy catches a cold, the collection industry eventually contracts pneumonia. To the point of your article, we have more work to do, we are collecting less per account, and we are no more in a position to reduce our rates than our clients are to increase them.
Best regards,
Mark Edwards Credit Bureau Systems, Inc.
Comment from Brian Flynn/CollectionSalesAdvisor.com on December 19, 2008 at 1:48PM EST
Mike, well done.