CREDIT CORNER

 

Making the Best Match

 

By William Atkinson, Credit & Collections, February 2005

 

Selecting a commercial collections agency is easy. Selecting a good one is not. While many credit executives have a formal and objective process for selecting agencies, the very best executives add something else to the mix – their intuition.

 

Several years ago, Marion Lake, group credit manager for Engelhard Corp., insulin, N.J., began receiving calls from representatives of a large national, but restively new, collections agency. The calls were coming in at the rate of five or six a week, which sent up some “red flags” for Lake. Another concern was that the representatives were calling from different locations around the country. Of even greater concern: Lake found the approach the representatives were using to be very unprofessional. “My thought was, if this is the approach they’re taking with me, what kind of approach would their collectors take with our customers?” she says.  Lake elected not to do business with the company. It was a good decision. The company ended up filing Chapter 11 and subsequent investigations uncovered fraud and embezzlement. The agency had kept quite a bit of money collected on behalf of its clients. “This was money they had never forwarded on,” she recalls.

 

When Steven Kozack, a former credit/collections consultant, became manager of financial services for Lennox Hearth Products in Orange, CA. a couple of years ago, the company was using a small collections agency with which he was not familiar. He attempted to do some research on them, but he couldn’t find anything, even on the Internet. While many credit executives might quickly dismiss a company and bring in a better-known one, Kozack followed his intuition and decided to continue working with the agency. That was two years ago. Today, he is no longer using the company. The reason? “The owners recently decided to retire, so they’re no longer in the business, but I wish they were,” he replies. “They turned out to be absolutely phenomenal. In fact, they were one of the best agencies I’d ever worked with.”

 

For both Lake and Kozack, following their well honed instincts paid off.

 

While most credit professionals see a need for collection agencies as a part of their overall collections strategy, they aren’t a necessity for everyone. Angela Collins, accounting manager for Mail Dispatching Company in San Diego has used an agency only once, and it turned out to be futile. “The reason I don’t use agencies is that I almost never let anything get old and never let anything roll over,” she reports. “I always keep in constant contact with customers. The squeaky wheel gets the grease.” On occasion, Collins does bring collections to small claims court, and she even handles those claims herself. She reports that she has yet to lose a small claims judgment. “On one occasion, I did try a collections agency in order to collect a judgment, but it led to nothing,” she recalls. “I referred it to them, and that’s as far as it went.” In retrospect, she admits that she should have expected that result. “Once you get to this point in an account, you’ve exhausted all your options, so you can’t expect anyone else to have success,” she explains.

 

“Credit grantors should use collection agencies as an integral part of their ongoing accounts receivable management process” says Emil Hartleb, executive director of the Commercial Collection Agency Association, Cedar Grove, N.J. “A collections agency is not a place to dump your bankrupt accounts or accounts you haven’t heard from for a year and a half.” On the other hand, he continues, it makes no sense to place accounts for collections that are-or should be-easy to collect on your own. The agency’s purpose is to work with accounts that are delinquent and challenging.

 

“The rule of thumb I like to use is that, if you haven’t been able to collect on an account on your own within four months, it’s time to turn it over to an agency,” states Hartleb. Of course, he adds that there may be exceptions when it makes sense to place and account earlier.  Say, for example, after receiving and NSF check from a customer, you begin to see other problems, or unfavorable rumors begin to circulate in the industry about that client. It may be time to turn that account over to an agency.

 

Before beginning the selection process, decide how many agencies you want to use. Some companies prefer one; others prefer many. Most credit professionals, however, prefer the middle ground-more than one, fewer than five. “We clear and qualify three agencies a tear and try to keep it to that number total,” says Englehard’s Lake. “Some companies scatter their business across a number of agencies. I have found that this makes it difficult to track performance and monitor collection trends over time.”

 

Lennox’s Kozack agrees. “I only use two or three agencies,” he reports. “The reason is that I want to make sure that we can be profitable for them, so they will do a good job for us.”

 

In most cases, Kozack prefers working with agencies with witch he is personally familiar of that have been recommended to him by colleagues he trysts. “There are a lot of agencies, and they are always calling me for business,” he explains. I’m not going to turn accounts over to someone based on a cold call.”

 

Another thing to consider before selecting an agency: “Be wary of an agency that asks for money up front.” Cautions Meridith Hill, president and founder of A.R.M. Consulting in La Mesa, CA. “A good agency won’t ask for any money up front.”

 

“Overall, you need to be very careful who you select,” states Lake. “You need to select your collections agencies as carefully as you would conduct credit analysis on customers.”

 

Agency Selection

 

Some criteria to consider about agencies contending for business:

 

1.      Are they a member of the collection agency section of the Commercial Law League of America? “This is crucial in this day and age,” emphasizes Lake.

Richard Deocampo, collections manager for CMA Business Credit Services in Burbank, CA. finds that a lot of credit managers agree with Lake’s assessment. “Most of them want to know how long we have been in business and what affiliations we have, such as being a member of the Commercial Law League of America,” he states. 

“This is a particularly important concern in California because collection agencies in this state are unregulated. Customers want to make sure there is some sort pf watchdog organization in place that will regulate how you operate.”  As a result, the agency highlights the fact that it is a member of the Commercial Law League on its literature.

 

2.      Are they fully licensed and bonded? “In this day and age, not only can a collections agency be sued for wrongful action, but the company that initiated the request can also be sued,” explains Lake.

 

3.      What is their network within the U.S. and internationally? “This includes correspondent attorneys and other agencies with which they deal,” says Lake.

 

4.      “When we are considering an agency, we ask for their financials,” continues Lake. She considers this step to be similar to a credit analysis.  “If a company doesn’t want us to have visibility into their financials,” she says, “then we don’t want to do business with them.”

 

5.      What is their collection procedure? Do they simply make three calls and then turn the account over to an attorney? Lake looks for a more comprehensive approach.

 

6.      What is their in-house staff like? How experienced are they? What type of training have they received?  “ I actually sit and observe collectors while they are collecting,” says Lake. “Then I ask myself if this is the type of company I want to represent us going forward.” 

 

7.      Find out if the firm uses attorneys, and make sure that they are willing to contact you before they turn over an account to an attorney so you can discuss options with them.

 

8.      Do they have regional sales representation?

 

9.      When selecting an agency, make sure you have the right to withdraw an account any time you want. “However,” notes Right A.R.M.’s Hill, “it is important to remember that you still may owe the agency or attorney for the work they have done on that account to date.”

 

10.  How often do they communicate with you? Do they keep you posted regularly?

 

11.  Do they use electronic communication tools, so they can accept data electronically? What kinds of data do they keep on the accounts they collect? Are they active on the Internet?  “I want the opportunity for our people to be able to go online and see the status of each of the accounts we have turned over to the agency,” states Lake. “Most agencies do offer this service these days, but you often have to ask for it.”

Hill also emphasizes the importance of electronics. “Find out how they deliver information to you,” she states Do they use e-mail or a website? Can they keep you up-to-date electronically so you are aware on a regular basis what is going on?

 

12.  Make sure you can have direct contact with their collectors. The reason: “More often than not,” explains Hill, “you are trying to save accounts, and you want to make sure the collectors are not alienating them.”

 

13.  Look for an agency that is willing to take the time to understand your needs and expectations. If the agency feels tour expectations are unrealistic, they should be open enough to bring this up. “For example,” notes Hill “a creditor may expect an 80% collection rate, but the average collection rate for that industry may only be 22%.” That needs to be discussed.

 

14.  Look for additional services, such as consulting services. For example, will they train your own personnel in collections strategies and techniques?  “ I have worked out an arrangement with a couple of great agencies to have them train our personnel in collections,” says Lake.

She also arranges for the agencies to provide seminars on how to look at accounts from the credit perspective. “These are agencies that help my department enhance its overall performance in terms of credit and collections efforts,” she adds.

 

15.  After you’ve done your preliminary research, ask for references. “Call and find out what kind of work they are doing for these clients,” suggests Hill.

 

The Rate Issue

 

            Interestingly, few of the most experienced credit managers consider rates to be among the most important selection criteria. And there is a reason for this. “Many credit grantors, when they use an RFP process, use rates as the sole determinant in selecting an agency,” notes CCAA’s Hartleb. “However, rates should be only part of the decision.”

 

            Last year, for example, Hartleb received a call from a fortune 100 company credit executive who had used the RFP process to select a new agency. The agency he had been using was charging 25%. The executive had just put out the new RFP and ended up with a bid of 9% from another agency. The executive asked Hartleb what he should do.

 

            “I explained that there was a probably a big difference in the service labels these two agencies were providing,” reports Hartleb. The executive then said that the current agency had reduced its bid to 22%. Hartleb’s recommendation: Sit down with both agencies and identify the specific services that were being offered.

 

            The executive did so, and Hartleb received a call a couple of weeks later. “He told me that, after explaining to the second agency the services that the current agency was providing, the second increased its rate 18% to provide the same services,” said Hartleb. “At that point, the company decided it made more sense to stay with their existing agency, since it was a ‘known quantity.’”

 

            In sum, when it comes to rates, in most cases, you get what you pay for. The most important question to address when selecting an agency, then, may well be: What level of quality do I want and am willing to pay for?