Receivable/Accounts - Information for Credit and Collection Issues

Monday, April 30, 2012

Collection Agencies - Competitive Strategies

Often, creditors with a large, stable volume of files use more than one collection agency or vendor to collect their funds. By doing so, they can create a sense of competition between vendors, and increase the overall effectiveness and efficiency of the liquidation of their bad debt portfolio.

There are multiple schools of thought to this process, and many options that a creditor can use to create a competitive strategy. Some are very basic concepts that many credit managers are familiar with, others are more complex.

Parallel Assignments

When a creditor has numerous files to assign on a monthly basis, they may retain two or more agencies, and divide the assignments (or market share) between these companies. Often a control will be in place to ensure roughly equal assignment totals are given to each of the agencies, so performance can be measured equally between them.

Other creditors may adjust market share on an annual, quarterly, or even monthly basis, assigning the majority of assignments to the most effective collection vendor. This division of assignments may be automated, or discussed with the collection vendors before implementation.


Creditors have often chosen to take files from an existing collection vendor, and reassign them to another after wrapping up a business relationship, or as a scheduled task that gives the first agency a limited amount of time to liquidate the accounts – often six months to one year. The second agency’s assignments are often referred to as a secondary assignment, or second assigns. Third and fourth assigns are not unknown to larger creditors. Often, as the liquidation returns are slimmer and slimmer on later assignments, the commission or contingency rate increases, often as high as 65%.

The benefit of a reassignment is to catch what the previous agency has missed – either through ineffective trace work, a lack of follow-up on debtor contacts, a different strategy or approach to collections, or simply revisiting an account where the debtor’s circumstances have changed, and they are now able to resolve the account.

In broad terms, if the secondary agency is liquidating in excess of 10%, something significant has been overlooked or missed by the primary agency.

Challenging Vendor Assignments

Another strategy often used when a creditor has used a collection vendor exclusively is to bring in a new collection vendor to challenge for the business – they will often receive a sampling of the business, or the exclusive assignments for a month or two, and the results of that challenging vendor will be measured against the established collection agency.

The advantage to this strategy is to evaluate an entrenched agency – perhaps they have become lax, or have never really been measured for their effectiveness, or their capability to liquidate accounts. Or a challenging vendor offers a lower contingency rate or more robust client support, and the creditor wishes to evaluate their abilities on a trial basis without a wholesale change. A sampling of 200 to 1,000 accounts often can provide a strong picture for what the challenging agency is capable of.

Rewards and Penalties

If more than one agency is used by a creditor, often built into their performance reviews are incentives or penalties applied to each of the agencies.

Market Share – As discussed above, market share changes can galvanize under-performing agencies into greater results. As well, the agency with a smaller market share can put greater effort into their assignments, tipping the balance back, while minimizing risk to the creditor against a loss of revenue from the failing agency by reducing their ongoing assignments.

I recall one creditor had the policy of adjusting market share by 2% to the leading agency each month, to a maximum market share of 70%.

Goal-Based Rewards – Many creditors will set goals for their collection vendors. These goals are usually liquidation targets to be achieved after four to nine months, or they may be incremental liquidation targets to be set after each month of assignment. For example, a Canadian-based hospital with outstanding patient accounts should expect 30% liquidation after six months of assignments. If the creditor chooses an incentive for meeting the goal, it may be a flat increase in commissions (for example, 1-2%), or a complex stepped bonus structure based on the level the goal is exceeded.

Assignment Period Changes -- Another circumstance I have seen is a variable assignment period.  If the outperforming agency meets a predetermined liquidation goal, the normally static assignment period from the creditor can be extended, where an underperforming agency must relinquish the files after a limited time (for example, six months).

Loss or Suspension of Contract – For creditors, locking themselves into a contract with a collection vendor can be a losing scenario, especially if the agency fails to meet the creditors expectations. Savvy creditors will establish goals for their agencies, and allow themselves the ability to suspend or cancel a contract if an agency fails to meet minimum performance levels.

Audit or Review Procedures for Shortfalls – If a collection vendor fails to meet expectations, often a creditor can demand an action plan to correct the loss of performance, or will be subject to aspects of their portfolio being audited – copies of telephone recordings being sent to the client for review, a more comprehensive report on files worked during the assignment period, and so on.

Penalties for Loss – Often, agencies measured for shortfall (or gross dollars not collected in comparison to the leading agency) may be penalized a portion of their commissions, or be subject to a penalty.

One of the most aggressive competitive contracts I have seen in my time was a creditor who demanded a penalty of one dollar for each gross dollar in shortfall to the leading agency – this strategy was harsh, but it demanded performance, and often the penalty offset the commissions charged by all agencies combined!

Guarantee on Returns -- Another aggressive strategy for creditors is having their agency guarantee a level of return on their files assigned.  If the agency fails to liquidate the guaranteed amount, they will contribute whatever shortfall exists between the goal and their performance level, assuring the creditor of a minimum return on their accounts assigned.

Reports & Measurement

Of course, if there is more than one collection agency being held to a competitive service agreement, it is important that all agencies have the ability to see where they stand in comparison to their competition – this can be done by batch tracks, stair step liquidation reports, or a third party data platform, such as DRN Commerce’s Collectlink, to manage collection data and produce a blended report.

It is imperative that the credit manager does not take on the burden of providing these reports – it can be time consuming, and reduces a sense of responsibility by the management team of the collection agency. The creditor should lay out a structure for reporting, and then expect these reports to be generated on a regular basis by the agency.


For larger creditors, the difference of a few percentage points on liquidation of collection assignments can mean thousands, if not tens of thousands of dollars every month. It behooves a credit manager to try to find the best possible collection vendor(s), and establish a structure in which they are measured, rewarded, or replaced.

If you are a creditor and would like some objective advice on how to measure your existing agencies, our office would be pleased to offer our advice and experience. I have worked in competitive service agreements with well-known national clients in the US and Canada, and have seen some very clever methods of measuring and maintaining agency performance. If you would like to review your existing strategy, we would be pleased to speak with you or meet with you to review your internal process – feel free to contact myself.

Blair Wettlaufer
Kingston Data and Credit
Cambridge, Ontario

As with the penalties for loss, these aggresive tactics ensure that the agency stays focused on performance levels, but this can have a negative side if not carefully implemented -- either the agency may withdraw from the client and return their business, or they may engage in abusive or aggressive collection tactics to ensure the goals are met.  When using a strategy such as this, ensure the goals you set are reasonable, and that controls are in place to work transparently with your agencies.