Collections - Good money after bad?

We have all heard this expression many times when the cost of doing something SEEMS to outweigh the benefits. Very often it is based on gut feel with no real P&L at strategy level. It’s not that hard and worth spending some time on.

You could go right down to ABC level and hold an event cost in a table in your system for each action taken. This could be for a letter, SMS, call etc and an overhead cost for all accounts. Each time that event happened you could accrue costs thus far and measure against expected recovery. Where they both meet is where strategy should stop or be non-outbound.

To start off I recommend going to unit cost level split between Collections and Recoveries. The unit cost per month is arrived at by taking your annual spend budget, divide it by the number of live accounts and again by 12. Simple! OK it’s an average and some accounts will have more activity than others and some none, but it is very helpful to use it in strategy, and, you can hold a P & L account level. Rather than have risk or cost based strategies you could deploy strategy based on simple economics as well.

Typically, Collections unit costs are 3 times that of Recoveries as there is more interaction with customers and regulatory communication. This cost is being driven down by A.I. and up by regulations. Collections is typically ￡3 per month and Recovery just under ￡1 or lower. Big factors here are the average balance of the account (a letter or call costs the same if the balance is ￡50 or ￡5,000!)

This becomes even more important in the DCA/Purchaser business. For DCAs, revenue is commission on what is collected and with commission rates being driven down they really are more than ever have to balance costs versus income.

So what this does is paints a picture (see graph below) of a diminishing chance of recovery month by month matched by an increasing cost of recovery. Trick is to build a time element in your strategy to reflect just prior to both items match and review or do no more!!

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Balances will vary, recovery rates will vary, recovery time will vary, you might need to, as this graph suggests, take stock at 2 months and redraw strategy for the portfolio

This is a very simple method and based on averages but better that than based on gut feel!