Finally, a Viable Small Balance Collection Solution

For companies with subscription or annuity-based business models, low balance collections have traditionally occupied the lowest position on the accounts payable totem pole.

That is, until now.

With the credit crisis driving companies to improve cash flow and revenues, Nashville, Tenn.-based Sitel Corp., a global Business Process Outsourcing (BPO) leader, recently demonstrated an innovative new service that substantially reduces small balance collection costs while increasing low balance collections overall.

The year-long demonstration at one of Sitel’s largest retail clients focused on collecting an average outstanding customer balance of only $33.07. Upon completion, the client cut average collection costs per customer by nearly 50 percent and increased the company’s annual collections by nearly $7 million.

“In this economy cash is king, and small balance collections in the $25 to $200 range represent a huge opportunity for retailers and other annuity-based companies,” says John Farinacci, COO of Sitel’s Accounts Receivable Division. “High balance collection is a very agent rich environment. But you can’t afford agents or a third party for small balances. You need a more affordable and effective way to collect, and that’s exactly what we’ve developed.”

New approach

Sitel’s Low Balance Collection Solution targets retail, financial services, utilities, communications, and media and entertainment companies with subscription, periodic payments, and/or repetitive payment business models.

By blending its global collections expertise with advanced interactive voice response (IVR) technologies, the service replaces the traditional series of small balance mailings — letters, post cards or email — with more affordable and effective interactive voice messaging. The solution provides a consistent, non-threatening customer care experience that allows the client to retain important customers while collecting a greater number of low balance payments early in the process.

“Studies have shown that most customers are comfortable with automated interactions,” Farinacci says. “That’s important because these are ongoing customer relationships and customer retention is obviously huge to a retailer. With this solution, we keep the customer experience high by allowing them to interact in a non-pressured environment.”

After providing a friendly reminder that a balance is due, the IVR technology allows the customer to pay all or part of the balance immediately, either through a touch-tone phone, connecting to a live agent, or the company Web site.

“Letters, post cards, email or SMS are fine for a basic notification, but IVR allows you to collect during the interaction and early in the collection process,” Farinacci explains. “The call might inform the customer that a bill has been sent and they have 20 days to pay it, or it might call attention that a balance is due or beyond due, or that a product hasn’t been returned. All they have to do is push a couple of buttons to pay the balance, opt out to an agent, or promise to pay on-line.”

Lower costs, improved collections

The demonstration project, which took place in 2008-2009, involved a large consumer facing organization with literally millions of subscription-based customers. Collection notification, agent interaction and balance delinquency costs were all significantly reduced, while cash flow and revenues got a lift.

First, Sitel transitioned the company away from its traditional post card and passive interactive voice strategy to the more effective automated, hosted and managed IVR system. That alone decreased the cost and number of transactions and saved the client roughly $400,000.

“Companies traditionally send their letters or post cards at specific intervals, but candidly, that is not very effective. At 5 to 8 cents a minute, the IVR call is not only more productive, but very inexpensive in comparison to a static post card, which translates to 35 to 45 cents per item, probably more,” Farinacci explains. “For the demonstration, we sent a letter at the outset, and then followed up with a series of IVR calls. We can make five calls at an average cost of 30 cents, while five mailings cost on average roughly $1.75.”

At the same time the solution generated some $2.9 million in additional collections, increasing the client’s overall liquidation rate by 4 percent. Since the IVR calls were so much more effective in generating early payments, the solution also decreased the number delinquencies that ended up in third party collection, with approximately $1.3 million in savings. Finally, the solution decreased the client’s roll rate by 3 percent as well as its days sales outstanding (DSO) and delinquency rates, resulting in a $2.1 million improvement in bad debt.

In summary, the company reduced its annual collection costs by $1.7 million and increased cash flow by $5 million, resulting in an overall return on investment of 8.5 percent, or $6.7 million.

With the current economic environment both creating an increase in low balance delinquencies and making it difficult (if not impossible) for companies to tap the capital markets, this new approach offers subscription or annuity-based businesses a viable way to boost cash flow and revenues.

“The small balance market has always been neglected because the balance threshold does not work under traditional methods,” Farinacci concludes. “This solution helps a company collect, collect early and collect effectively.”