Understanding the value of collections

From former tenant arrears (FTAs) to council tax, commercial rates to unpaid rental fees, sundry debts potentially add up to millions of pounds of lost revenue to local authorities. And at a time when budgets are being further constricted, and public sector workers are under increased pressure to demonstrate value, the need to focus on debt has never been more crucial.

Of course the traditional argument has been to keep the collection of debts in-house; the thought of employing an external debt collection agency (DCA) to recover council money is an anathema to some who still need to be persuaded that the popular portrayal of debt collectors in the media isn’t true.

Out of your comfort zone
Whilst many councils are still comfortable using bailiffs, and a similar number will think nothing of engaging a solicitor, the use of an external DCA is considered by some to be a step too far, with an inherent threat of losing control of the recovery process.   

Indeed this idea of what is comfortable or not to local or central government is an important theme. Local authorities familiar with outsourcing are perhaps better able to manage external relationships, and therefore have a better idea of how success should be measured. Some central government departments, however, that have not shared the same experiences, may take a different view. They will not have the experience of procuring debt collection, nor understanding how a debt collection agency works, how they should be managed, or how targets should be set. The skills required in-house to manage external collections are not something that can be learned overnight, and results – if not carefully managed – can fall short of expectations.  

The Child Support Agency, for example, used external collections for a period but decided the trial had not met expectations and withdrew from the market. It is unclear whether they were genuinely disappointed with the results – which given the complexity were really rather impressive – or whether they felt that with the public gaze upon them they needed to be seen to be handling the debt ‘in-house’.

Successful use of private agencies
Fortunately, not everyone thinks the same way, and indeed a good number of public sector bodies are using private collection agencies very successfully widely for all manner of collections from mainstream to sundry debts. There are those within central government that are managing outsourced relationships well: the Department of Work & Pensions (DWP), for example, has been using private collection agencies to recover overpaid benefits since 2003. Others within the public sector such as the Driver & Vehicle Licensing Agency (DVLA) and the National Health Service have similarly issued external tender documents for the collection of penalties and unpaid fees respectively. The examples are there for those who choose to look.   

The role of the credit department in keeping the cash flowing is becoming more critical than ever, especially in the context of the credit squeeze that shows little sign of easing. Whilst the commercial sector and the public sector are different in many ways, they are similar in the sense that cash is king; without it, they cannot deliver the services on time and on budget promised to their respective customers.

Improving cash flow means having a sound credit management strategy; a sound credit management strategy includes an informed policy on collections, and the possibility of engaging with external debt collection agencies. So for those that have yet to be convinced of the benefits of employing an external agency, what are their concerns?

Maintaining control

The fear of losing control appears to be the most frequently quoted concern, alongside the need to protect one’s reputation. More than half of those questioned (55 per cent) in a previous survey conducted by the CSA state the key reason for not employing an external debt collection agency is the fear of losing control when employing a third party, and not having control on what is done and said on their behalf.    

Many have enjoyed long relationships with their customers, are familiar with them, and do not want that familiarity to be compromised. They are also familiar with their own processes and procedures, and resent any disruption.         Interestingly, membership of the Credit Services Association extends to local authority credit teams, and much work is being done to learn from each other in adopting best practice in how customers should be treated.   

Cost is also a concern. Senior management employ credit controllers or departments to stop debts occurring in the first place. To employ an agency therefore, in their minds at least, is doubling up on costs – creating additional expense. It is in effect paying for the same service twice – and would mean admitting that their own collections team has failed. It seems strange that some appear to be comfortable with the concept of writing off a debt and losing money as a result, but most uncomfortable with the prospect of paying to recover it. At a time when every penny counts, perhaps the industry needs to do more to demonstrate how the cost is netted off against the collections and is not an additional expense.    

All of these concerns can be easily addressed and indeed overcome. Employing a third party to collect debts – and specifically a member of the Credit Services Association – does not mean losing control, or putting ones reputation at stake. Nothing could be further from the truth. Members of the CSA adhere to a strict Code of Practice (the same Code that was used as the basis for the OFT’s recent ‘Guide’), and for the most part appoint a board director responsible for compliance. There are specific procedures and rules that these members follow with teams dedicated to a specific task – and that is recovering debt.

A professional approach
CSA members are professionals. Their business, their training, and their motivation is all about achieving results for their customers. It is their focus. It is their raison d’etre. They pride themselves on their ethics, adhering to the very latest TCF (treating customers fairly) policies, and indeed promote compliance as a competitive advantage. Unlike solicitors, for example, collections is not a bolt-on service to other services that they may undertake. It is core.     

They will deploy a series of skills in consultation with their client, rather than one size fits all. Their methodology is one of engaging the debtor, not confronting them, separating those that cannot pay from those that will not pay. It is this collaborative approach that reaps better results, and maintains the creditor/debtor relationship for the future.   

Agencies are only paid on results. Yes that means that they have to be efficient, but often the very fact that a debt had been referred to an external agency makes it more serious in the eyes of the debtor who has previously avoided or ignored several attempts by the local authority to collect what is rightfully theirs to collect. Whilst certain legal firms may operate a no win no fee service in specific cases, in the debt collection industry, no win no fee is pretty much accepted as the industry standard. Clients, therefore, have quite literally nothing to lose and everything to gain.

Credit teams are increasingly measured on reducing the volumes of debt and increasing the amounts collected and their performance – and often their reward – is based on achieving set targets. Far from indicating failure, the market for debt collection continues to grow because organisations are increasingly recognising how agencies should be utilised as an integral part of a credit management strategy.

Necessity, so the saying goes, is the mother of invention. Perhaps innovation would be a better word, and to this end local authorities should be prepared to innovate – to think and act differently in how they can keep the cash flowing.

And that means actively looking at what the private collections agency have to offer.

For more information:
Web: www.csa-uk.com