In-house or outsourced debt collection – successful blueprint

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When is the time to work with a debt collection agency?

It is not a “one size fits all” approach. Most of the companies make the first collection actions in-house. The definition of the “first collection steps” can be different from one company to another – these can be seen as sending SMS, e-mail or letter, making a phone call or scheduling a discussion with the debtor. Depending on the size, business specifics, existing knowledge and the available resources, the internal actions can be extended or not to the next collection stages.

Generally, once the internal effort is almost exhausted and the payment still doesn’t come back, companies start thinking on externalizing the debt collection services.

The correct timing for outsourcing depends on many factors, like industry type, company strengths and weaknesses, strategic direction, case volumes to be managed, customer portfolio quality and its structure, etc.

Is it appropriate to outsource or not?

Mainly, there are 3 options to deal with debt collection activity:

  • In-house
  • Outsourced
  • A mix of internal and externalized efforts.

Each option has its own set of pros and cons which will be addressed below.

In-house collection process means to manage all stages of collection with internal resources. A debt collection management system is necessary for operational activities automation in order to increase the efficiency and productivity. Using the appropriate collection software can help reduce operational costs, increase recovered amounts and improve customer engagement. Some of the advantages of in-house collection are the control of the entire process, better customer interactions throughout the collection process and faster solutions finding on delinquent accounts and customer requests.

Building and maintaining internal collection operations is not so simple. Effective debt collection management requires a good leadership and specialized collector abilities, dedicated training sessions, efficient policies and procedures, technology and security measures and legal compliance. The potential fallout of inadequate planning, operations and compliance could be quite a burden for both management and employees.

Focusing on all these aspects, a company could obtain less from its core business as investment and longer time are required to perform a good recovery process.

Another option is to outsource the debt collection process. An important question arises in this scenario: how many external collection agencies should be involved when a company decides to externalize? It is easier to manage one agency, but working with many agencies can bring better results if the company has the right tools to evaluate their effectiveness. A dedicated tool for 3rd parties monitoring helps better manage and measure their operational performance.

Having a good tool in place, companies can control:

  • the structure of case batches sent to collection agencies;
  • the case management during the servicing period;
  • centralized data history for comprehensive reports and audit purposes;
  • the qualitative and quantitative performance of collection agencies.

Collaborating with external debt collection agencies might be more cost-effective. On a long term, the overhead of staffing and running costs can be reduced if hiring top-performing agencies, while the companies get the freedom to focus on their core business operations.

Some benefits of outsourcing come from: diversity of communication channels with debtors, decrease in DSO (days sales outstanding), overhead costs reduction, cash-flow increase, operational costs decrease.

Considering the advantages of each option mentioned above, a mix of in-house actions and outsourced debt collection management could be a successful approach.

What kind of cases can be sent to a collection agency and when?

Some companies decide to outsource their pre - delinquent stage due to high volume of cases and lack of internal resources, as they see the value of contacting customers before invoice due date. In this case, it might be a good option to outsource this activity.

An alternative to manage high volumes internally can be performed using automated actions, such as: e-mails, SMSs and IVR.

Usually, in the early collection stage, companies tend to retain their high value customers from outsourcing in order to better manage customer relationship and faster address possible complaints or specific needs.

The most common scenario refers to externalize cases from late collection stage. In this phase, the success of the activity requires skillful collectors, legal and business expertise, special techniques and good monitoring tools.

When selecting eligible cases for outsourcing, companies evaluate several indicators, such as: payment history of the accounts, customer risk segment, customer value, product type, collection actions costs vs. recovered amounts, etc. These indicators can vary and should be analyzed correlated with the business specifics and industry.

As you can see, there are several options to choose from, showing that the “one size fits all” approach is not the best strategy.

When deciding your own path, there are some elements to be considered:

  • customize the collection direction to own business specifics;
  • rely on a flexible debt collection system that covers end-to-end operational flows, ensures high automation and complete performance monitoring;
  • define proper criteria to select the most suitable collection agencies to work with;
  • focus on collection strategy in order to obtain a favorable return of investment;
  • use customers behavior in risk assessment to secure future sustainable growth.

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