The impact of the global recession over the last two years has left virtually no industry untouched. It may be surprising to know that the world of commercial debt recovery has also felt the impact, which has led to changes in the way these companies need to operate.
Over this time there has been an increasing focus on credit control departments needing to tighten up their credit management to ensure maximisation of revenue and mitigation of potential losses through bad debt. This has led to a significant increase in the amount of debt passed out to external debt collection agencies (DCA) in the commercial collections sector.
There are two main reasons for this. Firstly, for those businesses that are committed to using DCA, we are seeing debt being passed out earlier in their chase cycle in an effort to maximise the returns of outstanding debt much faster than before; this is as a direct result of the ongoing cash crisis in the UK economy.
Secondly there are an increasing number of organisations exploring this route for the first time, seeking to talk to a DCA where they previously would not have done so. In the past, organisations would have looked to chase the debt using their inhouse resources rather than outsourcing to an external agency, either through perceptions of success or due to the historic negative perception of the collections industry and its practices. There has certainly been a concern by organisations to ensure that their brand image is maintained.
Growing roles
This year saw a growth in the acceptance of the work that a DCA can do and the value they can add to an organisation, including utilising collection agencies to provided ‘white label' services to corporate businesses. The work of the Credit Services Association and its members has led to this improvement in reputation and acceptability. It is a fact that companies are looking at ways to potentially reduce headcount and accelerate cash collections cycles. It is also a fact that outsourcing to a debt collection agency can potentially help reduce headcount and accelerate the cash collections cycle.
To ensure an organisation survives through this tough economic time they will need to look to becoming even more efficient in their cash collections processes and therefore will look to have a clear focus on generating and freeing up more cashflow to ensure ongoing business continuity. Late payment fees 2009 also saw more companies look to utilise the Late Payments of Commercial Debts Act 1998, as amended and supplemented by the Late Payments of Commercial Debts Regulations 2002, as a means of both enhancing the collections process and passing the potential costs of DCA recovery back on to the debtor. As a result of the global nature of the credit crisis, there have also been further demands from clients for agencies to be able to deliver more pan-European and worldwide collections from a single point of contact. Ongoing investment in systems, processes, procedures and recruiting collectors with a second or third language capabilities will be required to support the client's needs.
Outsourcing
In a move for creative solutions, debt collection agencies are being asked to stretch the boundaries of their original remit to help organisations overcome other challenges that they face and to provide outsourcing solutions in addition to the core activity of debt collections, such as converting client payment methods to direct debit and other customer service propositions. Organisations have been heavily affected by the changes with credit insurance and restriction of cover. The restrictions on credit insurance means that there is a greater need to collect outstanding debt much faster so organisations have the cash available to sustain growth and mitigate potential bad debts.
The future
What does the future hold for the commercial collections industry in 2010? In 2010 and beyond, organisations will undoubtedly continue to look to identify what their objectives are for the future in respect of credit management and cash control. A segmented focus for their sales ledger in terms of the processes they have in place at each stage of the chase cycle, including credit vetting and credit scoring of new clients, is often a favoured solution.
Processes and procedures must be in place to ensure time and money is not being wasted in the wrong areas of the business. Has a business got the right skill sets within its organisation to manage the sales ledger effectively? Is this something they even want to dilute their skills into? Or is the use of a specialist DCA in this area more desirable and cost-effective? Organisations must look at when is an appropriate time to refocus the internal organisation on the day-to-day job and to pass on the debt to an external agency. There is no right or wrong answer for this, as the decision will vary depending on the business and the industry they operate within, and this decision should be made in close consultation with the DCA.
For 2010, system investments will be a key element in the commercial collections industry. DCAs must have a system that allows them to keep track of the entire payment process and cycle, with more part payments now being offered on a more frequent basis. With the investment in new systems, the financial reporting elements must be effective and bespoke to enable the DCA to comply with, typically, varied client requirements and the changing regulations we all face. As the market has changed over the past 12 months, compliance has become a major issue with regulations becoming tighter and more restrictive. This will continue to be a key focus for agencies in 2010 including, but not limited too, PCI compliance. The tightening of compliance regulations to create a more selfregulated environment will give increased comfort to organisations to continue with the growth in use of external commercial collections agencies. The work of the Credit Services Association has been invaluable here to ensure regulation has been accepted where it is needed and defended where it adds no value.
In addition, in 2010 it is likely that we will see more consideration of commercial debt sales as companies again look to maximise value against underperforming assets. This will enable them to release immediate cash which may fit in with corporate needs at specific times within the reporting cycle for businesses as a way of repairing balance sheets and demonstrating cash flow availability.
Conclusion
In summary, 2010 will continue to see increased focus on utilisation of commercial collections agencies at earlier stages in the collections cycle.
It is therefore vital that the DCA industry continues to lead the way in selfregulation and adherence to best practices to maintain, and build upon, the successes gained in 2009.
Trevor Deacon is group sales and marketing director of Oriel E-mail: trevor.deacon@orielgroup.co.uk
