Debt collections. A best practice guide

Debt collections

Key points

Reducing outstanding debt is a priority and a challenge facing both

government and private enterprise. Debt collections are a delicate

and sensitive process that can be completed effectively with a good

strategy in place, followed with meticulous execution. There are two

elements to effective debt management:

1 Portfolio management

2 Operational execution.

This whitepaper sets out a best practice guide for improving your

debt collections strategy.

Scott has been instrumental in growing Serco’s presence in Australia by guiding the company through a period of significant

transformation.

Scott has extensive expertise in change management, business restructuring and driving business growth.

Scott’s key achievements at Serco include leading negotiations to secure a five year contract with a large government body,

successfully delivering multi-million dollar software and technology projects and major renegotiations to expand existing private and government relationships.

Prior to working at Serco, Scott was the Chief Executive Officer at NetMap Analytics where he established new market and product strategies for major clients including Centrelink, Medicare Australia, Defence, ISO Inc and Booz Allen.

Before this, as General Manager of Melbourne IT, Scott established new market strategies that were successful in capturing a significant share of the Japanese market in 12 months from the launch of domain name offering.

Scott Arbuthnot

Chief Operating Officer

Serco Citizen Services

Debt Collections

1. Portfolio Management

Profiling/Segmentation

To ensure you are effective in your collection operation you must start by understanding why a customer/citizen has not paid their debt. A scientific modelling approach is

generally used to profile debtors. Once a debtor has been profiled, an operational campaign is run to manage them accordingly.

At a high level, a simple 2 x 2 quadrant can segment your debtors.

Further work is then required on each quadrant, (especially quadrant 2) to determine the most appropriate campaigns for each. Propensity modelling will help to build out the campaigns. Variables that are critical to understanding propensity to pay the debt include: • Date of birth • Address • Amount overdue • Days overdue

Reminder Service

Use of TXT/SMS

No Action

Collections

Campaign

Development

Debt Sale/

Mercantile Agency/

No Action

Hardship

INTENTION

A

B

ILITY



Will Pay

Can’t Pay

Won’t Pay



Can Pay

Aged Debt

No matter how much collections effort is expended in some cases the debt remains outstanding. This can be a for a number of reasons

• Debtor not locatable (skip/trace)

• Collections activity not effective

• Debtor not willing to pay.

Within your collections operation, you must understand effort versus reward and therefore how much money and time you can spend collecting and for what outcome. If your return on effort is no longer positive you must have a strategy to handle ageing debt.

There are three options available:

1 Passive – no longer actively collect and allow the debt to age. Over-time payments may be received as the debtor’s situation improves

2 Debt sale – sell the aged portfolio (or a segment) to an organisation that is willing to purchase. The ownership of this debt can then be transferred with the Taxation Office or commercial enterprise having received a specific upfront cash amount (ie. x cents in the dollar)

3 Contingency collections – issue the debt to a Mercantile Agency to collect on your behalf. A more robust approach is then taken by the Agency to locate and collect, earning them a percentage of what they recover.

Skip/Trace and Hardship Strategy

Being unable to locate the debtor and having a debtor in a financial situation that does not allow them to make payments are the two biggest obstacles in collecting bad debts.

• Skip/Trace – ensure you have effective tools to trace debtors

• Hardship – ensure you can quickly and easily identify hardship cases and

manage them accordingly through robust policies and procedures. The use of third party financial counsellors is also

preferred.

2. Operational Execution

Channel Utilisation

Customers/Citizens will respond differently to contact channels. Many collection strategies rely heavily on letters and outbound phone calls, however letters are costly and phone calls can cause the debtor unwarranted embarrassment. A good collections process should use a range of contact channels:

• SMS/Text – An effective and cheap reminder service will prompt those who genuinely have forgotten to pay (ie. the “Will and Can” pay quadrant)

• Inbound phone call – not a genuine collections channel, but rather a customer service function. You should also consider a phone-based automated payment service, including the possibility of entering a promise to pay (PTP)

• Outbound phone call (automated) – a cheap and effective service using a speech based IVR service (can be generic or targeted depending on the collections CRM in use). Customers can save “face”, while real time transfers to agents can occur if required

• Outbound phone Call (agent) – the most effective collections channel, but not the cheapest. When used in a coordinated campaign, can have the most effective results in reducing bad debt

• Letter – the most expensive

communication channel, that is slow and can be ineffective when a Skip/ Trace service is needed (ie. the letter is not received by the intended recipient). A received letter is generally effective and can increase the debtor’s urgency to pay. From a regulatory perspective, letters are often required as you move to the ‘Legal’ stage.

Agent Training/Processes

Transactional collections (ie. not relationship based) need to be conducted in a robust manner with complete adherence to a policy/framework. This “collections” model should be taught to new agents and measured through the quality process. This is required not only for compliance purposes, but also to ensure the best collections outcome.

This high level framework is a waterfall as the agent seeks the best possible mutually acceptable outcome:

Open Call

1 Agent provides a statement of the situation/debt

a A request is made for Paid in Full (PIF), if not successful

b Request for immediate instalment, if not successful

c A request for a payment arrangement

2 Gain an understanding of why the debt exists

3 Explain consequences for non-adherence to arrangement

Campaign Management

Once the propensity models have been built each customer (or customer segment) should be treated differently. This involves the timing of the collections activity, the channel used and the severity deployed. Three example campaigns are:

Campaign 1

(high propensity to pay)

• Day 3 – Reminder text message sent

• Day 15 – Automated outbound IVR used over 3 days

• Day 30 – Outbound agent phone call, used every 3 days until

• Day 45 – First written letter

Campaign 2

(medium propensity to pay)

• Day 3 – Reminder text message sent

• Day 10 – Outbound agent phone call, used every 3 days until

• Day 20 – First written letter

• Day 25 – Outbound agent phone call, used every 3 days until

• Day 30 – Second stronger written letter

Campaign 3

(low propensity to pay)

• Day 3 – Outbound agent phone call

• Day 5 – First written letter

• Day 20 – Second written letter

Key Metrics

Metric Calculation Responsibility

Penetration Attempts/File Size Dialler Management Saturation Percentage of Debtors attempted Dialler Management Right Party Contact (RPC) RPC/File Dialler Management PTP Efficiency PTP/RPC Agent/ Team Leader PTP Effectiveness (Kept Rate) Payments/PTP Agent/ Team Leader AHT Total Handle Time/Calls Agent/Team Leader Quality As per the Quality Scorecard Agent/Team Leader Collected Efficiency $ Collected/$ Available Agent/Team Leader

Other considerations

• Best time to call – for dialler management it is important to use historical dialling information to better target current debtors. Ideally, any past dialler information at a debtor level should be used to determine when that debtor should be called (assuming it was a successful contact). By doing this you will improve agent utilisation and reduce unnecessary telephony costs.

• Right agent routing – while remaining efficient the collections team should use right agent routing to find a balance between transactional and relationship collections. In deploying the methodology you can:

• Route a previously called debtor back to the same collections agent

• Ensure a more difficult collections call is sent to a suitably

experienced agent.

Payment/Commercial models

A good collections operation will be a mix of strong productivity and excellent effectiveness. The payment model for the collections service provider should be aligned with both their productivity and effectiveness, as an example:

• At risk productivity (90%) – on call time (payment is not made for off-phone shrinkage)

• At risk effectiveness (10%) – PTP/RPC, PTP kept, % collected to entitlement. Any effectiveness measure on which payment is made should be made available to the outsourcer at regular intervals so they can manage appropriately. Any change to the upfront propensity models or campaigns should be considered when setting

effectiveness measures.