When it comes to money, size does matter. More is better, biggest is best.
It's important to keep this in mind when comparing alternative methods for collecting past due accounts. While cost efficiency is good, at the end of the day whichever approach yields the tallest stash of cash should win.
Some collections executives focus on driving the highest ratio of dollars collected per dollar spent on the collections effort, sometimes called "collections efficiency". This is an attractive metric for comparing two different approaches in that it considers both parts of the collections equation in a single number. Unfortunately, it often leads to spurious conclusions.
Consider this simplified scenario:
- In a head to head trial for a credit card issuer, outsource Vendor A treated 1000 randomly assigned accounts with an average payment due of $200. They collected $100,000 in payments at a cost of $10,000. This is a collections efficiency of 10:1 ($100,000 ÷ $10,000).
- Working the same number of randomly assigned accounts with the same average due, Vendor B collected $60,000 in payments at a cost of $5,000. That's a 12:1 collections efficiency.
- Vendor B was therefore 20% more "efficient" than Vendor A. (12:1 ÷ 10:1 = 20%). Using collections efficiency as the arbiter of success, Vendor B would win the contract award.
- But wait a minute! After you subtract Vendor A's $10K cost from the $100K they collected, their net collections was $90K. Vendor B’s net was only $55K ($60K collected minus $5K in costs).
- So while Vendor B was 20% more efficient, Vendor A collected 64% more in payments net of costs (($90,000-$55,000)/$55,000 = 64%). If the issuer uses net collections instead of collections efficiency as the deciding factor, their stash of cash will be more than half again as tall.
With the basic math understood, let's now apply this "net collections" evaluation to a real-world example. Vendor A and Vendor B have been competing head to head on early stage collections at a telecommunications service provider. The telco shares their monthly collections scorecard with both vendors. This is a great way to keep the vendors focused on improving performance and it also gives them an objective basis for assigning account volumes to the best solution.
This table shows how the two solutions would have compared if each vendor had treated 100% of the accounts available and achieved the collections results they had on their actual account allocations:
We’ve highlighted two numbers from the table in the color of money. The first is the more than $1.8 million advantage in net collections Vendor A would have given the client. Even after subtracting the $66,868 more Vendor A’s treatment would have cost than Vendor B, the client would have seen a 7.2% better net.
The second green number is perhaps even more important. Since some of this additional cash would have been collected downstream by subsequent treatments applied as the accounts aged, some might consider it inappropriate for Vendor A to lay claim to all of the difference. After all, until it’s written off as bad debt the accounts receivable is considered revenue even though the customer has not actually paid the bill yet.
As an alternative to comparing payment collection rates, suppose the telco considers only the bad debt they avoided by collecting the accounts at this early stage. To assess this impact, they applied their expected bad debt rate of 9% on the balances that the vendors did not collect and compared these two amounts net of costs. The $102,431 difference is the additional amount the client would avoid writing off had they assigned all the accounts to Vendor A, net of treatment costs. That's over $1.2 million in hard dollar benefit per year from the improved collections performance Vendor A would provide versus Vendor B.
In case you were wondering, Vendor B was 282% more "efficient" than Vendor A. But just try taking that 282% to the bank.
- Collections agencies turn to SMS messaging for proactive customer communications
- Cloud computing implementation increasing among large firms
- Companies increasing investment in mobile, social and collaboration technologies to improve customer relationships
- Collection firm practices zero-tolerance to ensure contact center satisfaction
- SMS messages as a response to winter storms