Collecting hard debts in Asia
Here's a problem faced by a credit controller from a recent seminar. 'Steve' has come into a credit management job for a company with a lot of old debts to collect. Many are up to 4 years old. The amounts involved vary, but they are generally less than $10,000. The debt is in Asia and debt collection via the courts is potentially very expensive, if indeed he can find reliable collection agencies or law firms. His company has been sold since the debts were incurred and the new overseas owners want the cash in now.
The companies involved are generally reputable but are no longer customers of Steve's company. They claim to have already paid them, or claim that the service was unsatisfactory. Neither is likely to be true, but disproving these claims, four years later, is a challenge. For example, Steve spoke to the financial controller of a substantial Singapore business recently. The original debt was $6000. They paid half, 3 years ago. The financial controller claims that they paid it all, but hasn't given any evidence. The time difference makes it difficult to talk by phone anyway, so much of the communication is by email. What does he do?
Steve has several problems. First, there's a problem of powerlessness. If his customer refuses to pay, he has no 'next step'. He needs to have some way to 'up the ante.'
Ultimately he has to find some collection agencies/law firms in the countries concerned. In New Zealand using a collection agency ups the ante in three ways. First, passing a company debt to an agency is often (though not necessarily) linked to the debt going onto a credit reporting database, which makes the debt more public and embarrassing and is therefore something to avoid. Second, the fact that a third party makes the collection call is in itself enough to make many debtors pay. It says, "this is now more serious!" And finally, a third party is usually geared up to sue if other collection methods fail. For all these reasons, a debt collector may succeed where Steve has failed. All or some of these benefits will also apply in other countries.
The second part of Steve's problem is the cost of collection when the debts are relatively small and the collection agency or law firm is far away and hard to control. If the matter doesn't require legal action, collection can presumably be on a commission basis, so these costs should be controllable. However, legal fees can quickly exceed the value of a small debt. Steve needs to assess the likely costs of legal action, assess the probability of success, do some maths, and then decide whether to sue or not.
For example, say Steve has a $5000 debt in Malaysia. He finds that the cost of the initial summons, including service and including his time and effort will be (say) $1000. He estimates that for a reputable business which knows it has no genuine defence there is a 60% chance that they will pay at this point.
60% of $5000 = $3000 (expected benefit)
The expected benefit ($3000) is greater than the expected cost ($1000) therefore the rational economic decision is to sue. If the expected benefit is less than the expected cost, he should write the debt off.
A 60% probability means that there's not a guarantee that legal action will work. What it's saying is that it's a risk worth taking. Over a series of cases where the odds are in Steve's favour, he should come out in front. Anyway, in a situation like this, he probably has to pick a good case or two and give them a go, if only as experiments. He won't collect much money unless he has a Plan B to use when the customer refuses to pay.
Steve's last problem is the issue of "saving face", which is perhaps more of an issue in Asia, but which is really an issue everywhere. If he threatens debtors with legal action, the fear of losing face (i.e. ego and pride) may prevent them from backing down at this point. The matter becomes a contest between Steve and the debtor company's manager to see who will back down - a lose-lose situation except for the lawyers.
All cultures in Asia are not the same, however, here are some general thoughts. I would suggest that he tries to take the attitude that the main issue is confusion over whether the bill has been paid or not. Once it is shown that it has not been paid and has not been disputed, the customer will do the honest thing and pay immediately. That's the attitude to project.
He also needs to talk about consequences without actually making any threats. An email in which Steve can craft his communication carefully is probably better than a phone call.
It goes without saying that Steve needs to be apologetic for the four years delay in following up and very polite.
So Steve might email the financial controller in his example, "Our head office in New York is insisting [or suggesting] that I send unresolved accounts to a law firm. [Here, the head office is the "bad cop" and Steve remains the "good cop".] I know that this is the last thing either of us would want and I am continuing to resist this. [Telling him that he's on the same side and trying to help.] Could you please do me the favour of having someone check this again? [Politeness and asking for this as a favour in return.] If you find a payment that relates to this, please let me know immediately so that I can investigate from our end. If you don't find a payment, could you please take care of the balance immediately? [Once it is shown that it has not been paid and has not been disputed, he naturally assumes that the customer will do the honest thing and pay immediately.] If I haven't heard from you, I will call you before the end of next week before I have to discuss this again with our head office.
Steve has a hard challenge ahead of him but with a feasible game plan and a willingness to take legal action if there is no alternative and if it makes economic sense, it's not a completely hopeless task.
Peter Hattaway - www.hattaways.com - is a director of Hattaways, specialists in credit management training and consulting.