[Collections & Credit Risk - Table of Contents] November 2001

Moving Upstream

As outsourcing grows, what are successful accounts receivable management firms doing to ensure a win-win relationship with clients?

By Tania Panczyk

When Dennis M. Cunningham was a branch representative at Household Finance in New York several decades ago, he, like many bank executives, would shy away from having a collections agency call customers in his company's name.

But today as president and chief executive of Risk Management Alternatives Inc., one of the largest accounts receivable management firms in the nation, Cunningham is on the opposite side of the fence. A respectable portion of his company's revenue comes from creditors doing just that. In fact, the Duluth, Ga.-based agency specializes in providing a plethora of outsourcing services from billing and payment monitoring to pre-chargeoff work. The demand is so great that RMA has been searching for work - and resources - outside the country and plans to open an outsourcing center in Mumbai, India.

His company is not alone. As outsourcing becomes old hat to credit and collections professionals, relationships are solidifying. Creditors are outsourcing more services as they become increasingly savvy about the benefits and more confidant about the agencies to whom they entrust their customers.

One trend is the move to a customer-care service approach, with creditors looking to agencies for loss and fraud prevention, marketing, and customer-retention offerings.

Outsourcing is also being driven by developments in call center technology and the bad debt market. It has become such a part of the credit management tool kit worldwide that agencies like RMA are looking at setting up global operations for outsourcing. Still, for some services, outsourcing is a gray area, given the requirements of the Fair Debt Collection Practices Act and other federal laws governing third-party collections in particular. "It's becoming more of a customer-care center than a traditional collections center," Cunningham says of more recent developments in outsourcing.

The influx of distressed debt is prompting creditors to focus on their core competencies in both the consumer and commercial arena. Many firms are looking to reduce payrolls or shift resources to improve the bottom line. So outsourcing some accounts receivable functions is appealing. While there's no hard data tracking the increased use of outsourcing by companies streamlining their credit and collections operations, industry observers estimate there has been a 25% to 35% increase in the past two years.

Volume Spikes
However, the real question remains: Are agencies ready to manage the volume spikes that come with the territory? Some think not. Collections agencies unaccustomed to handling sales calls in this new customer-care center environment may suddenly have to manage accounts in that fashion - and quickly. "Some agencies are simply not equipped with the management teams you need in place to handle volume spikes," says consultant Roger L. Willis, principal at La Jolla, Calif.-based Willis Associates. "You also must have management teams exceed the roll rates."

More agencies are using a similar arrangement, having healthcare paper, for example, handled by one division and credit card debt by a different unit, with fraud and loss prevention worked by yet another division. Regardless, the fact remains that providing outsourcing services is becoming an ever-growing portion of the revenue pie.

Outsourcing has taken hold on the commercial side of the business as well, thanks to a new mind set for the commercial credit manager. "He knows his needs and doesn't see it as a threat to his empire anymore," says Emil Hartleb, executive director of the Commercial Law League of America's Commercial Collection Agency Association, based in Cedar Grove, N.J.

The way agencies manage outsourcing offerings is dictated by the credit department's changing landscape. Relevant factors influencing client needs are fast growth, acquisitions and mergers, variable costs for highly seasonal businesses, the desire to cut investments in assets, and the need to enhance performance - to name a few, says Gary L. Praznik, chief operating officer and executive vice president, FirstContact Inc., a unit of IntelliRisk Management Corp., Columbus, Ohio. "Outsourcing a niche portion of their receivables or unique debt-resolution call types, allows companies to re-deploy resources to core competencies. That's where we have seen the most growth," Praznik says.

In retrospect, it seems almost inevitable that collections agencies would become more like customer-care representatives, says Richard E. Arko principal, Debt Recovery Group, Portage, Ind. The boom in debt sales that began a few years ago significantly reduced the amount of business available to agencies focused on post-chargeoff collections, particularly those agencies specializing in later stage collections. While there has been a fluctuation in the sale of fresh chargeoffs more recently, most creditors with debt sales strategies do not want to build up inventories of warehoused debt.

To survive in that environment, many agencies began expanding into more specialty services. The proliferation of computer telephony and dialer technologies is making it easier for agencies to move into customer-care services. "It's a natural progression for pre-chargeoff collections firms working in a call center environment," Arko says.

Fort Washington, Pa.-based NCO Group, for example, now offers fraud prevention services. "It's gone beyond early delinquencies," says Paul J. Morrow, NCO's senior vice president, corporate sales. The agency has several dozen offices to handle volume spikes and increased services. Morrow also says NCO, through its network, acts more as a partner with clients these days than as a traditional outsource provider.

Outsourcing Solutions Inc., St. Louis, employs more staff to handle the "tide of this new stage of outsourcing," says Michael B. Staed, OSI's senior vice president, consumer business-sales/chief marketing officer.

Most agencies have a strategic plan to deal with volume spikes., says RMA's Cunningham. "With today's economic conditions I don't know of anyone who can afford to have personnel sitting on their payrolls waiting for work," Praznik says. "So a carefully designed strategic plan will determine any agency's ability to handle volume spikes," he adds.

The rise in outsourcing allows creditors to devise new cost-effective ways to judge performance and pricing. As the trust and acceptance grows, clients are contracting for outsourcing services at various stages of the account life cycle. IntelliRisk has creditors who outsource a percentage of their customer-care calls, a portion of their inbound/outbound early intervention debt-resolution calls, while still placing bad debt with one of IntelliRisk's affiliate divisions abroad.

For creditors there are many ways to price the various outsourcing services - typically based on performance. One is netback recovery, which most agencies advocate so clients will look at what they recover after subtracting the agency's fee, instead of just the quoted fees. "But netback is not as heavy a pressure as it was a year ago," says David B. Kreiss, president and chief executive of Convergent Resources Inc. in Atlanta. More common pricing methods, Kreiss says, are based on roll rates, days sales outstanding, and quality and dollars collected - the latter is graded using scoring tools.

Global Movement
The global move by U.S. agencies is also seen as a cost-effective way to serve creditors with worldwide operations. "India is a huge base for major corporations where you can hire highly educated staff," says Cunningham, citing why RMA is opening an office in India.

OSI's Staed agrees India is becoming an attractive base for major U.S. corporations. "We also see other North American locations as areas of opportunity," Staed says.

IntelliRisk used its acquisition strategy to break into overseas markets. "Our largest acquisition in the U.K. had already developed a best-in-class outsourcing division," says Praznik. "This division not only provides unique services for clients like the BBC but also helps us service our domestic clients that have expanded into the global economy." It established its U.K. presence in 1998 through a partnership with Legal & Trade Financial Services Ltd.

As outsourcing continues to evolve, it's clear that many creditors have a greater propensity for establishing partnerships with longer contractual commitments rather than relying on the old client-vendor relationship. To thrive, agencies that haven't already done so will need to change their philosophy and management style, and make the expenditures needed to meet those demands.

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