This month's mini-benchmarking survey by Credit Today investigated collection agency usage. We had 89 participants from a wide range of industries and company types. Nine out of ten respondents place claims with third-party collection agencies as a regular part of their recovery efforts.
Credit Pros Show Great Loyalty to Their Agencies
Since the client/agency relationship is held in high regard by many credit pros, it is not surprising that most participants reported a limited number of agency relationships. Over 70 percent of our respondents use only one or two agencies (the split is almost even between one and two). Less than 10 percent use more than three agencies and those tended to be larger enterprises with a sizeable customer base or multiple locations.
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Moreover, 94 percent indicated they had no intention of changing agencies within the next year, which is not surprising since the average tenure for our participants' primary agency is 10.5 years. The average length of the relationship for all agencies was not far behind at 8.9 years. However, 61 percent will also send claims directly to an attorney. Comments by a number of respondents indicated that they prefer to send their largest claims directly to an attorney.
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Another reason for sticking with just one or two agencies is if you do not place many claims. Nearly two-thirds of our survey participants placed, on average, two or fewer claims each month. Another 17 percent place three to five claims per month, but only six percent file more than ten claims in any given month.
Broken promises and the failure to return calls are the most common events that trigger a collection claim. Past-due balances, disconnected phones and bounced checks round out the top five. The average dollar value of claims placed ranged from under $100 to $25,000. The median claim size was $4,500 ($1,500 for the 1st Quartile and $7,000 for the 3rd Quartile). When it comes to filing a law suit, the median is $5,000 for the minimum amount that will be considered for legal action ($1,500 for the 1st Quartile and $10,000 for the 3rd Quartile).
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Contingency Rates Related to Claim Size
The contingency rates that collection agencies charged our sample ranged from 3 percent to 50 percent, but as expected showed a definite downward trend as the claim size increased. Not surprisingly there were also indications that, as one's volume of claims with a particular agency increases, better contingency rates may be negotiable - another reason to limit the number of agencies you utilize. The chart below provides an overview of the range in contingency rates that our participants reported paying, based on specified claim amounts. You should note that we found no significant variance in the contingency rates for claims in the $500 to $5,000 range.
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While the contingency rate charged is a factor in assessing agency performance, the percentage of claims collected within a specified time can be an even more important factor. An agency with a higher contingency rate can still deliver a greater net return if the percentage of claims they recover is higher than that of a low-fee agency. Recoveries net of contingency fees and other collection expenses is the benchmark of agency performance. We found that on average, 47 percent of claims placed by our participants are collected within one year.
There are of course other factors that affect agency performance. A number of our respondents pointed out the percent of claims collected in-house by the agency as opposed to being forwarded to an attorney can have a significant impact on agency performance.
Attornies Cost More
Claims forwarded to an attorney typically incur additional fees, have higher contingency rates, and take longer to collect than claims settled by the agency. A good agency will also be able to negotiate better contingency rates with their attorney network and monitor claims being handled by attorneys to try to avoid potential delays in the recovery process.
Selecting a New Agency: What's Most Important?
When selecting a new agency, our survey participants closely ranked reputation, recommendations and rates as their top criteria. Relationships followed closely behind, but only placed fourth because, though it got the second highest number of first place votes, it also tied for the second highest number of 5th place votes. References were only considered marginally important and size ranked last, not even garnering any 1st or 2nd place votes.
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There were other factors that survey participants found important for evaluating collection agency performance.
- Ability to handle special needs
- Availability of advice on a wide range of collection and recovery topics
- Commitment to the collection of the balance regardless of the size
- Effective communications in regard to claims and status
- Online access to account status
- Personal service
- Professionalism
- Responsiveness
- Time it takes to collect claims (recovery cycle)
- Treatment of customers
- Willingness to negotiate rates on larger placements
These factors, of course, will either directly or indirectly affect net recoveries. Even so, they are sometimes hard to quantify when comparing different agencies.
One participant solved that problem by using an internally prepared scorecard to rate their agencies. This has the advantage of providing a common standard for comparisons as well as, over time, providing trend information regarding an individual agency's performance.
Another innovative approach to agency performance measurement comes from Dale Gerschutz, who is with Haldex Credit Service Corporation. He recommends that measurement be "based on the percentage of collections against the number of days placed; a sort of DSO calculation based on collection of accounts placed for collection."
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