Collection Fees Should Be Based on Work Requirements

Decades ago, the commonly accepted fee for contingency collection services was in the neighborhood of 33 percent.  Over the years, various pressures have pushed that average closer to 16-18 percent.  One might think that the reduction in fees would be compensated for by improvements in technology.  In some ways, this is true.  However the reality is more complex.

At the Debt Connection Symposium last week in Las Vegas, Steve Leckerman (EVP and COO of NCO Group), Warren Rosenfeld, Esq. (former CEO of You’ve Got Claims), John Rousseau (Portsider Group), and Troy Withers (operations manager of Ally Financial — formerly GMAC) participated in a panel discussion titled “When is ‘Enough’ Enough?”  The core issue at hand was whether collection agencies and law firms feel that they have the leverage to negotiate price with their creditor clients, or whether they feel compelled to take business regardless of  profitability.  In fact, Rousseau contended that many — on both sides of the equation — don’t even know for sure whether any particular client business is (emphasis added) profitable.

Rosenfeld explained that as technology became a new reality for collectors, the early tendency was to believe “Okay, we’ve bought computers, we’ve invested in a dialer, etc… that’s done.”  As time went on, they began to understand that these investments would be recurring and that there will always be a need to upgrade to the latest technology.  So while fees have decreased, some costs have actually increased.  Leckerman also added that the cost of entry into the industry has changed substantially due to the numerous and inconsistent security requirements imposed by clients.  Withers noted that as lenders, they are continually asked for tighter and tighter security by regulators.

Rousseau indicated that creditors dictate work standards for their debt collection agencies and law firms without understanding the costs. As a result, the fees they establish are arbitrary.  He contends that this is a one-way street to an unproductive relationship with poor financial results for all involved.

To combat this paradigm, Rousseau proposed a Dynamic Accounts Receivable Expense Strategy (DARE), which evidently he originally dubbed the Full Utilization of Collection Knowledge program (you create the acronym).  This involves full understanding of the true cost of each of the components of the work standards.

Some examples: How much does it cost to pull a collection score? How much to report to one credit bureau — how about two? How much for a manager review?  What does a contact or no contact cost? How much to leave a message on an answering machine?  How much for a letter?  How much to allow client monitoring/auditing?  All of these and more are frequently listed by creditors as required meaning that often, the sum of the cost of the work standards may well exceed the potential yield of the account. 

Rousseau says that contingency collection fees need to be based on the actual costs of the components in the work standards.  This will help to ensure profitability for agencies and law firms, and better net back to the client.  A clear understanding of individual activity cost — and client priorities — will also provide a clearer road map for process improvement and efficiency gains. 

Additionally, both creditors and their service providers should be willing to entertain creative approaches such as work standards by score yield or balance, or fees based on account score range or balance.  But this is only possible if each side truly understands the cost dynamics of the others’ business.

What are you seeing from your creditor clients in fee negotiations? Or are there any negotiations at all? Are clients requiring more work for the same rate?

Stephanie Eidelman is the President and Publisher of Kaulkin Media and insideARM.com. She can be reached by email.