The ABCs of Debt Collection | Article

abcs on screen1929 was not a good year for investments. That was a good year for The ABC Companies, Inc. to begin its commercial collection business.

In 1989 the company, located in Buffalo, New York, entered the outsourcing fray by handling 150,000 accounts for Motorola. Tim Smith, vice president of outsourcing for the Buffalo, New York supplier, says the No. 1 reason companies outsource to ABC is because the company can handle the entire collection process from A to Z, or, more specifically, from risk management to cash collection. And the business is scalable, letting its customers know it can handle their volumes if bad debt grows.

While some customers worry about handing over debt collection to an outsider, Smith says the reality is they gain great control of the sensitive process. He maintains a customer can “never watch their debts as closely” as ABC can. Since debt collection is its core competency, it has computer applications that in-house companies wouldn’t choose since ABC is geared for outsourcing.

This technology allows for more extensive reporting, giving clients a look at their numbers at a micro level. “We can be more granular,” he says, using the industry argot. Buyers can dial into the system to check their numbers at their convenience.

ABC says debt collection falls into three stages; its customers can outsource one or all, depending on their needs. The first offering is risk management, which includes credit scoring and credit management. The second stage is invoice and cash payment processing. ABC generates invoices and maintains the accounts receivable ledgers.

Finding the Root Causes of Bad Debt

The final piece is portfolio management. ABC will act as a first party collection agency and try to retrieve the debt in the name of the customer. This area allows ABC to study the debt and report to the buyer any systemic causes that might be contributing to the delinquency rate. One common cause is a product defect.

Smith says the best way to ensure an outsourcing relationship is successful is “to have everyone buy in up front.” Sometimes the buyer’s employees try to undermine the relationship because they worry they will be out of a job. That is never the outsourcer’s goal. Instead, ABC urges its buyers to “do an effective job of change management.”

The IS department also must buy into the solution. These folks have to ensure that the interface between the buyer’s system and ABC’s works so they can seamlessly share information. “We can’t report if the systems can’t talk,” says Smith.

A well-defined scope is another ingredient for a successful outsourcing relationship. The ABC team likes to sit down with the client and map out the solution. Smith says it is crucial that the client invite key players from every department that will have a speaking role in the outsourcing drama. “If they have all their personnel resources available, things fall into place. It’s a beautiful process,” he reports.

At the outset, ABC assigns a dedicated project manager to the client. This person has tunnel vision and lives, sleeps and breathes this client’s company until the system is up and running. The project manager is required to discover everything ABC needs to know about the operations of its new buyer. “We want to learn their internal nuances,” Smith explains.

The Importance of Performance Incentives

ABC likes to have performance incentives embedded in its service level agreements (SLA). This move instills confidence in a new client. “They see we are willing to put a large portion of our compensation on the line based on our performance,” he continues.

Typically, the supplier sets aside a portion of its compensation which it only earns if it meets or exceeds the SLAs. These could be updating the general ledger within 24 or at business close. The client always defines the SLAs so what’s important to the client gets emphasized. ABC receives the incentives every quarter.

If the supplier misses an SLA payment, the powers that be sit down and find out why. In one case, the buyer’s Web site was down, making it impossible for its system to access the client’s billing engine. “It was an intelligence, not a performance thing,” reports the executive.

Some clients have a difficult time deciding to outsource because they can’t determine if handing over the collection process will really save money. Some customers use internal labor costs to decide if outsourcing is the way to go. But “that’s not looking deep enough,” he posits.

Instead, Smith says the prospect should compare apples with applies by determining the cost of carrying the receivable on the books themselves. This is the number they must compare with the outsourcer’s figures. “The companies that don’t outsource don’t understand their internal costs,” he explains. When this happens, the company typically is forced to increase its head count, which then decreases profitability.

Migrating to the Internet

Currently the company is using the Internet to make its data more available to its clients. Every invoice that currently goes out in the mail is also available on the Net. Companies can see a copy of the invoice on-line if they choose.

Lessons from the Outsourcing Journal:

  • Companies like outsourcing suppliers that can handle the entire process. Sometimes a buyer will test the outsourcing waters by sampling one part of the process, knowing it can add the other pieces later when it has reached a comfort level.
  • At the outset, the buyer’s management should have all players in the meeting so they are invested in the solution.
  • Make sure the IS department supports the outsourcing decision because they must make the two computer systems talk to each other.
  • The buyer’s top management must insure that all levels of the organization support the decision to outsource to ensure the success of the relationship.

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