How to set up an in-house debt collection operation
This article first appeared in the NBR in May 2009
And why this has been a cash machine for some businesses
Back in the 1980s, I was sent in to manage a debt collection business that the company I worked for had bought. The vendors hadn't spent much money on office equipment for some time. The staff worked on manual typewriters. Each debt had a paper file. They had a franking machine which was so old that it only went up to 8 cents; to frank a 40 cent envelope you had to turn the handle 5 times.
It wasn't hard to revolutionise the office. We installed a computerised system. Standard letters and legal documents were produced at the touch of a key, details of actions and conversations were entered into a notes field for each customer, and the computer remembered when a set amount of time and passed and brought the matter up for the appropriate person to attend to. (There are still lots of businesses using accounts receivable software which lacks these basic features. Even some very large businesses still have credit staff writing notes on a printout of an aged trial balance.)
We didn't have a good way of measuring increased productivity, but my feeling was that, as a collector, I was at least 200% more productive. I was sold on the value of good collection software.
In fact I was so sold that for a time in the 1990s, my business briefly took on the New Zealand agency for an Australian debt collection agency software package. In that period, we had a significant influence on one particular industry - insurance.
If, driving home tonight, your car is written off by a negligent and uninsured or drunk driver, your insurance company will pay out on your policy, but then pursue the other driver for the money. The other driver will often be on a low income and has probably just destroyed his or her major asset. We sold our software to an insurance company which had some tens of millions of dollars of these very challenging debts to collect. Rather than using dozens of collection agencies around the country, they thought they might do better with an in-house team. The collection operation was in profit after about 10 minutes and has been a cash machine ever since. After I stepped aside, the Australian software house sold the idea to many of the other New Zealand insurance companies. In that industry, each collector can bring in many hundreds of thousands of dollars of difficult debt, every year.
In the current environment, there are lots of new debt collection agencies setting up. Many are based diversifying finance companies. They have teams of people who are used to collecting debts; why not get them earning some income? Other large businesses - councils, government departments, utility companies, etc - may just want to set up an operation to collect their own debts efficiently, assuming they have sufficient volumes. If nothing else, an in-house collection operation helps keep your external collectors up to the mark.
Debt collectors used to make a lot of money out of legal fees, but I think, for most, those days have passed. If indeed they now make most of their money from commission, you need to understand how that affects what they can do. If they charge 25% commission, they would be foolish to spend $1001 of time and other resources to collect your $4000 debt on which they make $1000? The economics of an in-house operation which owns the debt itself and isn't constrained in this way are very different.
Peter Hattaway - www.hattaways.com - is a director of Hattaways, specialists in credit management training and consulting. This article is not legal advice.