Lessons from a national debt collection agency

If a group of fisherman regularly fish at a pond, the best judge of their fishing techniques and effectiveness would be the canny fish which have managed to survive.

They would learn the techniques of each of the fisherman and would be able to assess them.

In the same vein, a debt collection agency which has worked with literally thousands of credit managers over a 40 year period, is in an excellent position to assess the techniques which work and those which don't.

The brief article provides practical feedback to credit managers ('CM'), based on Prushka's 40 year history.

Get good data
So many CMs are hampered by the fact that good customer data is not obtained and is not easily accessible, in the first place.

This is more than simply an IT problem. The role of the CM is to ensure that information, defined by him, is obtained, at the time credit is granted. At the minimum, you require a full name and preferably date of birth. For businesses, always obtain an ABN.

In our high tech era, obtaining mobile numbers and email addresses is crucial.

Use of technology
Australian businesses above a certain size have embraced technology and this has clearly led to far greater efficiency and reduction in wage costs.

However, many platforms are clunky to use and seem almost designed to frustrate the users.
There is no excuse for this. Keep testing and refining your payment gateways and debtor follow-ups to keep them as simple as possible.

At least one phone call
Don't be 100% reliant on technology. Many customers have become adept at finding ways around the various systems. Accordingly, there must always be a role within your collections system for at least one outbound phone call to your debtors and also, a willingness to set up installment arrangements.

Trading terms
There is no excuse for any business to not incorporate basic trading terms in their contract with their customers.
With technology as it now is, it is a simple matter to incorporate properly prepared trading terms and to require a customer to "read and accept" before they are accepted as a customer.

A crucial trading term to incorporate is that the customer will become liable for all collection costs in the event of the account being in default.

Whilst there are some restrictions in consumer legislation on "debt collectors" claiming collection costs on consumer debts, there is no restriction on the supplier incorporating such clauses in their trading terms. The clause must be properly drafted to provide that in the event of default, the additional costs are added to and form part of the debt itself.

Outsource early
The days of sending out statements have largely come to an end.

Your internal collection process must provide for follow up actions to occur through tight time frames, so that the account is outsourced in, preferably, no more than 60 days from payment date.

Split the ledger
This is a no brainer. A good CM will split the ledger into two equal tranches or, if it is very large, into three tranches. The tranches must be equal in all respects, so that they can be compared on an apples for apples basis.

Refer the different tranches to collection agencies, which must be acting on exactly the same terms and provided with the same support.

This way, you will introduce competition between the agencies and will have an inbuilt quality control system, in that you can compare results, together with levels of complaint etc.

The results should be openly compared between the agencies and if there is a significant gap between the two (as is often the case), the poorer performer should be mentored and encouraged to lift its performance. If the gap continues, this is a sign to the CM to scrap that agency and replace it with another.

The written-off accounts for each tranche, after a predetermined period, should then be assigned to the other agency, to work them as tier 2 accounts, at a significantly higher commission rate.

Look at net recoveries
Appointing an agency because it offers the lowest commission rate is invariably a mistake. Debt collection is a skillful, high resource, labor intensive service. In order for an agency to remain viable and to carry out a high level service, it cannot afford to reduce rates below a certain level. Accordingly, the agency which gets the business will usually do so by cutting corners.
The test of an agency should not be the commission rate charged but the "net recovery achieved".

I see this mistake being made all the time and yet if the CM is to achieve the best results possible, this is the measure he should use.

Highly successful businesses are known to be loyal to their suppliers.

The best example is MacDonald's. It does not put supply contracts out to tender and go for the lowest price. Good and reliable suppliers are rewarded with ongoing orders and they know that if they fail to deliver, their supply arrangement will be at risk.

For this reason, I believe that a good CM will develop excellent working relationships with the agencies he uses and will work collegially with them in order to lift the ultimate net recovery rate.

The steps outlined above are simple to implement, involve almost no cost and are absolutely proven. Follow them and you will be delighted with the results.

*Roger Mendelson is CEO of Prushka Fast Debt Recovery Pty Ltd and is Principal of Mendelsons National Debt Collection Lawyers Pty Ltd. Prushka acts for in excess of 54,000 small to medium size businesses across Australia and operates on the basis of NO RECOVERY – NO CHARGE. www.prushka.com.au. Free call 1800 641 617. The writer is also author of The Ten Mistakes Businesses Make and How to Avoid Them and Business Survival, both published by New Holland Publishers.
By Roger Mendelson*

'In our high tech era, obtaining mobile numbers and email addresses is crucial'
Roger Mendelson