Outsourcing Accounts Receivable
Could you trust an outside servicer to handle your receivables? Many credit professionals are wrestling with this question today. But maybe it's the wrong question. Maybe what they should be asking if "Can we afford not to outsource our receivables?" If your workload is on the increase, you may find that outsourcing offers better performance at lower cost. Staffers in the contract service department of Med Resorts International, Inc. (Clearwater, FL ) ran monthly statements, mailed them to customer members, called them to remind them payments were overdue, posted the payments to their accounts, and updated their account records to keep them current. As the business grew, so did the staff.
"At one point we had 12 people in the department," reports Kathleen Cormier, vice president--finance and accounting. "While the increased number of employees was of concern to management, timeliness of collections was even more worrisome. It was a cumbersome and expensive process." To solve the problem, the company initially considered the following three-part strategy: upgrade the computer system, arrange for better management of the department, and improve the training program for employees. As they began investigating these opportunities, they happened to look at some service companies that performed A/R processing on an outsourcing basis. "Initially, we only looked at these service providers for some cost comparisons," notes Cormier. "However, the closer we looked, the more we realized it made sense to just go ahead and outsource our accounts receivable." Multiple Sources
Starting with one servicer, Med Resorts now does business with four. There were several reasons for this expansion to multiple sourcing: As the company continued to grow, it wanted to be able to assure itself that there would be sufficient capacity among the servicers to meet its expanding requirements. "We also have a company-wide policy of not doing business with just a single source," adds Cormier. "If that source had a business interruption, it could cause problems for us." In the case of an A/R service provider, that interruption would equate to billing being delayed and cash flow drying up for the company. A third reason was that, as the company continued to grow, cash became even more important. By working with new servicer providers, it found it could link up with professional investors who were willing to either purchase certain accounts outright or lend Med Resorts money using segments of the A/R portfolio as collateral. "Many of these investors would only make these arrangements through certain A/R outsourcing firms," she explains. "Finally, working with more than one firm gives us the opportunity to monitor and compare their performance over time," she says. This builds healthy competition and helps in negotiating future contract prices and performance requirements. Selecting a Servicer
Cormier offers three recommendations in selecting a servicer:
- Look for one that is specifically familiar with your industry. "For example, we're a unique vacation package company," she says. "Our notes are unsecured, and we want to keep doing business with our members. If collection calls need to be made, they need to be customer-friendly and service-oriented. The service firms we select must be able to do this for us."
- Be sure the firm is technologically advanced. "The firms we do business with have the latest computer technology, electronic funds transfer capabilities, and so on," she reports. This helps improve cash flow significantly.
- Make a site visit. "Providers will make presentations to you at your site, provide you with sample reports, and discuss pricing," she explains. "However, to really see how they operate, you need to visit them." During visits, Cormier recommends meeting with the staff to see how professional and well-trained they are, whether they are stressed-out and backlogged, and how they communicate with debtors. "View their computer screens, and listen in on actual phone calls," she adds. "Also take the time to visit the information services department and talk with the computer and other technical professionals to get a sense for how advanced their technical services are."
Setting Up the Contract
Cormier also offers some recommendations when setting up contracts. Overall, her advice is not just to accept a firm's standard contract. Some key points to negotiate: Fees:
In the past, it was common for most firms to charge their clients a "set-up fee" (usually between $2.50 and $5) for each new account to cover the manual labor involved in entering the account into the system. "These days, you can give them discs with all the data on it," she notes. "Yet, some firms may still try to charge set-up fees, even though there is no set-up to be done. There should be no set-up fees if you provide them with disks." Also study "exit fees" or "cancellation fees." If an account pays off completely before the firm works it, if the account cancels, or if you elect to move the account to another firm after it has been set up, the firm may want to charge an exit or cancellation fee. Why would you want to move accounts? "For example, if you find an investor that works with a certain firm and who wants to purchase some of your accounts, you will have to move them from the one firm to the other one with which the investor is affiliated," replies Cormier. "If you are moving hundreds of accounts and being charged five dollars an account as an exit fee, it can get very expensive." Be sure there are appropriate "out" clauses in the contract, in the event you are not satisfied with the service you receive. "Firms want anywhere from 30 to 90 days," she explains. "Negotiate what you think is fair." Payment arrangements:
Many firms, according to Cormier, like to net their fees out of the cash proceeds they remit to you. That is, before they cut your check, they retain their percentage. "We prefer that the firms remit all of the proceeds to us and then bill us," she says. In this way, Med Resorts can verify accuracy and make any corrections before paying the servicer. "If they net their fees first and there end up being errors, it can be more time-consuming to get the money back." Performance reviews:
Med Resorts conducts mid-month reviews with services to focus attention on accounts that are getting close to the "over 30" column. "By catching them at mid-month, we can make sure they are worked during the second half of the month before they go into the 'over 30' column," she says. It also conducts end-of-month reviews to review balances, make sure all accounts reconcile, and review agings. "We also do quarterly service report cards," she adds. "They measure performance in a number of areas, including: number of member complaints (to Med Resorts about a service provider's employees), report timeliness and accuracy, and special need responsiveness. By sharing our concerns with the providers, we can alert them to any internal problems they might have that need addressing." Savings
The first year Med Resorts shifted from internal to external A/R management it saved $75,000. "We've grown so much since then that, if we were to make the switch today, we would probably save about double that," she reports. Having A/R handled by a third party improves member responsiveness, too. When the company did its own collection, for example, members who might be dissatisfied with the service would occasionally use this as an excuse for not paying, rather than cooperating with Med Resorts personnel, who were (and are) more than willing to resolve all customer concerns. Now, when a third-party firm handles billing and collections with members, there is more of a realization that these are legal, binding documents that are not directly related to service satisfaction. "If a member has a problem, we will resolve it for them," says Cormier. "But this is now completely separate from their obligation to pay." Finally, given the company's continued growth pattern, the opportunity to work with investors through the A/R service providers has helped the company keep a strong and active cash flow. Along the same lines, although she cannot prove it with any statistics, Cormier feels that investors tend to pay slightly more for the accounts they purchase, knowing that they are being serviced and worked by professional A/R firms whose core competency is in collections. Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.
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