EXUS Collections & Recovery Blog

The Top 5 Ways Debt Collections Departments Lose Money

Posted by Chris Maranis on Thu, May 05, 2016 @ 11:00 AM

Lose-Money.jpgIn a perfect world, debtors would pay what they owe and collectors would have better results. But in many debt scenarios and environments, the only element you can control is how your collections department works.

Even a gain of just a few percentage points in collections performance delivers serious results. In some situations, organizations starting from a low base may even see double or triple digit gains.

That statistic cuts both ways: a drop of even a few percentage points can significantly damage your bottom line.   

Here are the top five ways that debt collections departments lose money and how to avoid them.

1. Poor Personnel Management

In the collections industry, the largest expense is personnel. Collector productivity is the key metric to watch here: often, collections success is a function of how many times you contact customers. But poorly managing personnel is one major way collections departments sink into the red.

If too many collectors are hired to work accounts, you’ll lose money. If you understaff, you’ll leave collections revenue on the table. Use regression modeling to link forecasting with capacity planning for the best results.

Additionally, staff should always be organized for efficiency: for instance, one supervisor for every 15 collectors or one dedicated trainer for every group of 75 or 100 collectors. Decisions around whether to organize around a pool or ownership approach also matter here. 

Lastly, collectors must be motivated by smart incentives, both financial and non-financial. If strengths aren’t rewarded and weaknesses not corrected, you’ll start losing money fast as underperforming collectors run the show and rock stars leave the organization.

Don’t hesitate to define simple, appealing incentive schemes that stress continuous improvement.

2. Lack of a Centralized System

A collector’s main goal is to reach an agreement with a customer to pay an overdue bill. All agreements are different and need to be managed in one place. Collectors who use ad hoc systems risk losing customer communications and going against compliance guidelines. 

A single authority helps manage the collections process through recovery or abandonment, and is crucial to house communications visible to all collectors. This way, collectors can vary their approach and avoid being repetitive when contacting someone. With knowledge of how a customer has been approached in the past, the collector doesn’t waste time or hurt the relationship your department has with customers. 

Collections departments need a centralized system to:

  • Ensure accuracy
  • Hold collectors accountable
  • Remain compliant
  • Stay efficient and productive
  • Automate processes
  • Manage documents such as communications scripts

3. Managing Third-Party Debt Collectors

A collections department may find it economical to hire third-party collectors. But it’s crucial to hire the right people for the job. If you don’t, you may lose more money than leaving accounts unworked.

If a third-party collector doesn’t perform, breaks the law or harms the customer relationship, it’s your name on the line. And they must be monitored closely to ensure performance. Your department could face charges (both legal and financial) when someone you don’t know is improperly managing collections. 

Third-party collectors must be selected based on their reputation and experience, then managed closely throughout their contract if you want to avoid losing money.

4. Lack of Self-Service Debt Collection Software

People want to help themselves. Especially in sensitive situations involving personal debt, it’s easier for people to pay off debt without having to face another person. High-pressure tactics are outdated and contradict consumer preferences. A self-service debt collection software solution responds to consumer demands and behavior, while reducing personnel cost.

Without one, you’ll find yourself losing money fast. Lack of a self-service option means leaving potential revenue on the table. It also increases kept-promise ratios, since consumers often prefer to resolve debts on their own.

5. Failure to Manage Collections by Phase

Customers have different behaviors and expectations during each phase of the credit lifecycle. What works in pre-delinquency might not work in the litigation process. That’s why dividing the lifecycle into phases is important. By taking a different approach to each phase, collectors maximize their chances of producing settlements and outcomes.

Management must define an approach for each phase so collectors have the knowledge to offer debtors the right offer at the right time. Profitable collections departments use static and behavioral metrics to segment portfolios. This allows them to approach them as efficiently as possible.

But without phased management, it’s easy for collectors to miss delinquency prevention opportunities. Failure to manage by phase also harms self-cure rates and increases costs, since more effort is expended for less optimal results.

Without phases, collectors use tone-deaf or ineffective approaches for certain debt scenarios. This can be avoided, but potentially alienates customers in the long-term.

The collections industry has many costs, but there are ways to prevent your department from being wasteful. For the best collections results and ways to prevent lost money, start implementing best practices. Download our best practices manual for free.

Chris Maranis

Written by Chris Maranis

Topics: Collection and Recovery Operations