Surviving the stormCurrent trends and future strategies in debt management

By Martin Kochman, Global Strategy Director, Transcom

A study by Transcom based on research conducted in partnership with Credit, Collections & Risk magazine

Contents

Introduction Page 1 Section one Research findings Page 3

Current trends 1.1 Dramatic escalation in early stage debt 1.2 Value of post charge off debt rising 1.3 Debt getting harder and costlier to collect Future strategy Page 11 1.4 Desires and intentions 1.5 Looking outside for offshore 1.6 Consolidation, a relentless trend Section two The way forward Page 14 2.1 Investigate offshore opportunities to reduce cost 2.2 Increase use of outsourcing 2.3 Pursue consolidation and a risk based approach 2.4 Final thoughts

Appendices Page 16

This research confirms: •Levelsofdebt,plustimeandmoneyspenttorecoverit,

have sky rocketed in last 12 months •Similarincreasesareexpectedintheyearahead •Welfarecutsexpectedtohavebiggestnegativeimpacton

companies’ ability to collect •Increasedregulationismakingdebtharderandmore

expensivetocollect •Companiesseemovingoperationsoffshoreandincreased

use of outsourcing as best hope for cost reduction •Companiesfailtotakeactiontheysaywillbenefitthemmost •Consolidationisincreasinginmanagementofpreandpost

charge off debt

Introduction

Welcometothis,ourfirstsurveyoftheUKdebtcollection and recovery industry. It could hardly arrive at a more timely moment, revealing, as it does, the collective thoughts and opinions of our industry’s professionals at a time of unprecedentedfinancialchallenge.Itrevealsanindustrystruggling to cope while both the nation and so many of its people are in chronic debt. Britain’s national debt topped £903 billion (65% of GDP) in March this year, while personal debt, which overtook GDP way back in 2007, remains high, making UK consumers the second most indebted in the world.

According to research by First Direct, UK adults cite not paying off their debts as their biggest regret of 2010. They are right to be concerned. Recovery from the 2008/09 recession (the longest and deepest since records began) hasbeenpedestrian,tosaytheleast.Inthefirstquarterof 2011 GDP has grown by a miserly 0.5%. As the Government’sausteritymeasures,taxincreasesandwelfare cuts take hold, the pressure on UK households can only increase.

Nor are consumers the only ones in trouble. Company insolvencies, which reached a peak in 2009, but have fallen slightly since, are rising again in 2011: up 3.7% in thefirstquarterof2011accordingtotheOfficeofNational Statistics.

All of this means that, at a time when companies and institutions are under pressure to shore up their flagging finances,theircustomersandclientsareburdeningthemwithevergreaterlevelsofdebt.Ourresearchverifieswithoutquestionthattherateofdebt,andthetimeandmoney spent to recover it, are sky rocketing.

And, while debt soars, increased regulation is making it harderandmoreexpensivetocollect.Companiesarestriving to keep pace with the additional management and technology infrastructure needed to support the increasingly rigorousprocessesrequiredtoensurecompliance.Whileitis entirely appropriate that the regulator should act to protect debtors, the cost of maintaining compliance is clearly adding to the burden.

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Inthefinalanalysistwoclearmessagesemergefrom thisresearch:first,thatthesituationforcollectionsandrecoverydepartments–alreadybad–isexpectedtodeteriorate further over the coming year as indebtedness increases, costs soar and regulation bears down. Secondly, that although companies have strong (and perhaps surprising) views on what they might do to counter the challenges they face, they appear reluctant to act on them.

The courses of action companies intend to pursue simply don’tcorrelatewiththeactionstheyhaveidentifiedasbeingthe most effective. In particular, though moving collections operations to low cost offshore locations tops their wish list, comparatively few plan to do it. Their reluctance may lie in a lackofconfidence,concernaboutconsumerbacklash,orinthedifficultyofbuildingarobustbusinesscaseforthemigration of relatively small operations. This is an area, our respondents tell us, where they would like more help from their providers. Certainly an outsourced option has the potential to provide a more amenable cost model and to reduce business risk. It may be that the only thing holding them back is a perceived shortage of outsourced options.

Our respondents’ willingness to at least consider new options is encouraging and suggests an open mindedness fromwhichtheindustrycanonlybenefit.Iftherewaseveranyneedforevidencethatradicalfreshthinkingisrequired,this research certainly provides it.

For the past 13 years Transcom has been providing outsourced customer and credit management services on a global basis. Every day we handle over 600,000 customer contacts in 33 languages for more than 350 clients from operations in twenty seven countries.

Ourexperience,supplementedbyabodyoforiginalresearch, informs this report.

Martin Kochman,Global Strategy Director, Transcom

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Ourexperience,supplemented by a body of original research, informs this report.

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Section one – research findings

Our research has been conducted among almost 400 collections and recovery specialists working in consumer and commercial environments across the UK. It reveals boththecurrenttrendstheyareexperiencingandthefuturestrategies they plan to adopt.

Current trends

1.1 Dramatic escalation in early stage debt

Individuals and companies are falling into debt, or findingthemselvesunabletoservicetheirexistingdebt,in increasing numbers. Though recession is technically over,thesituationisnotexpectedtoimproveanytimesoon. More than half (55.3%) of our respondents tell us that, over the past year, they have seen a rise in the number of accounts falling overdue by between one andthreemonths.Foralmostaquarter(24.9%)thatrise has been dramatic at more than 10%.

Furthermore,thesituationisexpectedtoworsen. Lookingaheadtothenexttwelvemonths,overhalf

(56.4%)expectthoserisestocontinueand,again,almostaquarter(24.6%)expectthoserisestobegreaterthan10%.Thosewhodoforecastdecreasesexpectthemtobemodest,andasignificantgroup(14.6%)expectnochange.

Clearly, though the recession is technically over, the sluggish pace of economic recovery and the impact of austerity measures introduced to tackle the national debt will ensure that companies and consumers alike continue to feel the pinch.

Early stage debt is not only rising, it is also taking longer to clear. Roll rates, too, are on the up, with almost two thirds (60.1%) of respondents reporting rises in roll rates for early stage debt over the past year. For almost a third(30.5%)thoseriseshavebeeninexcessof10%.

More than 30%

Between 11- 30%

10% or less

No Change

Increased by Decreased by

6.6%

18.3%

30.4%

22.7%

11.0%

3.9%7.1%

9.5%

15.1%

31.8%

22.3%

5.1%

1.6%14.6%

More than 30%

Between 11- 30%

10% or less

No Change

Increase by Decrease by

“ Over the last 12 months in my organisation, the number of accounts overdue by between 1 and 3 months has...”

“ Over the next 12 months in my organisation, I expect the number of accounts overdue by between 1 and 3 months to…”

3

Again,littleisexpectedtoimproveinthecomingyear.Welloverhalf(56.8%)expectrisestocontinue.Once in debt people are falling further and further behind. This demonstrates that, in many cases, it is the debtor’s ability (rather than the will) to settle early that is severely compromised.

1.2 Value of post charge off debt rising

The problems encountered in the early stages of the debt lifecycle bear even more sinister fruit later on.

Welloverhalf(57.2%)ofrespondentshaveseentheaggregate value of accounts going into a post charge off debt recovery process rise in the past twelve months. It is at charge off, of course, that the real commercial pain kicks in, and it does so in two ways.

First, note that it is not necessarily the number of accounts being charged off that is growing (though that is inferred) but their actual monetary value. In the cold harsh light of day this simply means that companies are seeingtheirexposuretofinancialriskanduncertaintyrise as a result of debt they cannot clear.

“ Over the last 12 months in my organisation, roll rates for debt between 1 and 3 months old have…”

More than 30%

Between 11 - 30%

10% or less

No Change

13.4%

17.1%

29.6%

13.1%

10.2%

1.2%15.4%

Increased by Decreased byMore than 30%

Between 11 - 30%

10% or less

No Change

12.8%

13.2%

30.8%

23.6%

1.9%

16.2%

1.5%

Increase by Decrease by

“ Over the next 12 months in my organisation, I expect roll rates for debt between 1 and 3 months old to…”

4

Second, charge off is not only the point at which debt becomes tougher to recover, but when customer relationships (and their future revenue potential) are lost. Withmoredebtfallingintothiscategory,thethreattolong term revenue security is very real.

Again,wecanseethat,overthenext12months,thesituationisexpectedtoworsen,withanevenlargernumberofrespondents(66.9%)expectingpostchargeoff debt levels to increase.

In view of these dramatic increases it is interesting to note that half (50.3%) of our respondents have seen an increase in the percentage of debt recovered within 12monthsoffirstplacement,thoughalmostaquarter(22.1%)haveseennochange.Wheretheyarenoted,the increases are generally modest and represent only a fraction of companies’ elevated debt levels. Perhaps the rises indicate that those who we term ‘reluctant debtors’ – individuals who would typically be ‘good payers’ but have been forced by circumstances they can’t control into situations they can’t remedy –

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“ Over the last 12 months in my organisation, the aggregate value of accounts going into a post charge off recovery process has…”

“ Over the next 12 months in my organisation, I expect the aggregate value of accounts going into a post charge off recovery process to…”

More than 20%

Between 11 - 20%

10% or less

No Change

9.6%

16.8%

30.8%11.4%

8.7%

19.9%

2.8%

Increased by Decreased by

More than 20%

Between 11 - 20%

10% or less

No Change

15.6%

15.2%

36.1%

13.0%

2.3%

15.6%

2.2%

Increase by Decrease by

aremakingextraordinaryeffortstopayoncetheyfindthemselvesfaced,possiblyforthefirsttime,byafull-blown recoveries process. Their situation is unstable andunsustainable,however.Unlesstheirtruefinancialdifficultieshavebeenremedied,theyarelikelyborrowing from Peter to pay Paul; an approach which may work once but doesn’t bear repetition.

More than 1%

Between 0.5 - 1%

0.5% or less

No Change

20.6%

12%

17.7%9.6%

7.1%

22.1%

10.9%

Increased by Decreased by

More than 1%

Between 0.5 - 1%

0.5% or less

No Change

22.8%

8.6%

17.7%

7.1%5.8%

29.6%

8.4%

Increase by Decrease by

Thesemodestgainsareexpectedtocontinueoverthenext12months,thoughagreaternumber(29.6%)expectstability.

“ Over the last 12 months in my organisation, the percentage of debt recovered within 12 months of first placement has…”

“ Over the next 12 months in my organisation, I expect the percentage of debt recovered within 12 months of first placement to…”

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3.816 Less generous welfare benefits

3.699 Increased debt collection regulation

3.26 Increased tax burden on UK population

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

2.622 Increased fuel and energy prices

2.5 Increasing unemployment

2.347 Significant rise in interest rates

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1.3 Debt getting harder and costlier to collect

It’sclearthattheUK’sprofessionalsexpectthedebtcollection environment to get a lot worse before it gets better. There are several factors that give rise to our respondents’ pessimism and chief among them, are government actions that will either drive debt up or increasethedifficultyofcollectingit.

Weaskedourrespondentstorankinpriorityorderthefactorstheyexpecttohavethebiggestnegativeimpacton their ability to collect debt. It may come as a surprise to many that it isn’t rising unemployment that keeps our respondents awake at night. Rather, it is the erosion ofthefinancialsafetynetthatprotectstheunemployedand others at the lower end of the income scale. Less generouswelfarebenefitstopthelistofconcerns.Thecoalition government is standing by its commitment to cut the country’s welfare bill by £11.5 billion during its firstfouryearsinofficeandtheeffectislikelytobefelt,not only by the unemployed and low wage earners, but bymiddleincomefamiliestoo.TheTUC,forexample,has recently warned that a family with two children, with both parents in minimum-wage jobs, could lose up £2,756 a year by April 2013 as a result of cuts to benefitsandtaxcredits.

Afterwelfarecuts,thenextbiggestconcernsareincreaseddebtregulationandrisingtaxwhich,withtheexceptionofVATperhaps,tendstohitmiddle-earners,spreading the chronic debt burden more widely.

The strength of concern about welfare and regulation is reflectedinthefactthataroundaquarterofrespondents (25.7% and 23.2% respectively) placed these issues number one on their list of concerns when asked to list the following items in priority order.

The pressure imposed by regulation is considerable. 72.7% of respondents tell us that increased regulation is forcing their debt collection costs up. The majority ofthose(53.7%)estimatetheyhaveexperiencedrisesofupto15%,butforasignificantgroup(19%)therises have been even greater.

“ The following factors will have the biggest negative impact on our ability to recover debt over the next 12 months…” (ranked in order of priority)

The biggest regulatory headache seems to come from therequirementforincreasedcapitaladequacyprovision (named as the number one priority by 16.7% of respondents), followed by the cost of complaints management and necessary technology spend. It is, perhaps, indicative that almost half (47.9%) of our respondentsworkinfinancialservices.InDecemberlast year the Financial Times caused a stir when it reported that, between April and December, the FSA hadordered90financialservicescompanies(arecordnumber) to commission and pay for ‘skilled persons’ reportsintoareasincludingcapitaladequacy,governance and complaint handling. It also reported

data,acquiredthroughafreedomofinformationrequest,whichshowedthattheaveragecostofproducing these reports had risen by more than 50% (to £128,000) between 2008 and 2010. In the same timeframethecostofthemostexpensiveprobequadrupledfrom£1.1mto£4.4m.

Based on those reporting that increased regulation is adding to their debt collection costs

Certainly the overall debt collection cost increases our respondentsreportaresignificant.Morethanhalf(54%)of our respondents have seen the cost of collecting early debt rise within the last twelve months. A similar number(46.1%)expectrisestocontinueintheyear to come.

Whenitcomestopostchargeoffdebttheincreases,thoughlower,arestillsignificant,with46.1%seeinganincrease and an even greater number (51.3%) expectingmoreinthecomingyear.

Is increased regulation adding to your debt collection costs?

Yes by

More than 50%

Yes: 26 - 50%

Yes: 16 - 25%

Yes: 11 - 15%

Yes: 10% or less

No

1.1%1.7%

16.2%

20.1%

33.6%

27.3%

1.561 Requirement for increased capital adequacy Provision

1.357 Complaints management

1.321 Requirement for increased technology spend

1.296 Audit of external suppliers

1.168 Internal audit requirements

“ Increased regulation is adding to our debt collection costs in the following ways…” (ranked in order of priority)

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3.1%

8.9%

34.1%

15.4%

6.9%

31.0%

0.6%

More than 30%

Between 11 - 30%

10% or less

No Change

Increase by Decrease by More than 30%

Between 11 - 30%

10% or less

No Change

15.7%

35.6%

8.5%

1.1%

35.7%

3.4%

Increase by Decrease by

0.0%

9.1%

10.8%

34.1%16.0%

7.5%

20.8%

1.7%

More than 30%

Between 11 - 30%

10% or less

No Change

Increased by Decreased byMore than 30%

Between 11 - 30%

10% or less

No Change

5.2%6.8%

34.1%

10.8%

6.3%

31.7%

5.1%

Increased by Decreased by

“ Over the last 12 months in my organisation, the cost to collect debt aged between 1 and 3 months has…”

“ Over the next 12 months in my organisation, I expect the cost to collect debt aged between 1 and 3 months to…”

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“ Over the last 12 months in my organisation, the cost to recover post charge off debt has…”

“Over the next 12 months in my organisation, I expect the cost to recover post charge off debt to…”

Future strategy

1.4 Desires and intentions

Withdebtanditsrelatedcostsrisinginexorably,whatactions are companies taking to protect themselves andfightback?Itisinterestingtonotethatthereisacleardiscrepancybetweenwhattheysaywouldbenefitthem most and what they actually are doing and plan to do.

Whenweaskedourrespondentstotelluswhatactionsthey thought would do most to reduce their costs, the migration of debt collection operations to lower cost offshorelocationstoppedthelistbyquiteameasure.Over a third (39.7%) said it would be the biggest winner and almost two thirds (71.1%) placed it in their top three.Nextonthelistwasanincreaseduseofoutsourcing followed by a rationalisation of their debt collection panels.

However, when we look at what actions companies actuallyhavetaken,orplantotakeoverthenexttwelvemonths, we can see that there is a direct inverse relationship between perceived value and actual intent. In a nutshell, companies are pursuing actions they expecttohavelimitedvalue,whileignoringthosethatwould deliver most.

“ The following actions would do most to reduce my cost to collect…” (ranked in order of priority)

3.408 Migrate debt collection operations to lower cost offshore locations

2.321 Rationalise or challenge debt collection panel

2.883 Increase use of outsourcing

2.194 Improve debt segmentation

1.929 Increase technology investment

61.9% Increased technology investment

56.1% Improved debt segmentation

43.9% Rationalised or challenged debt collection panel

24.5% Increased use of outsourcingIncreased use of outsourcing

10.3% Migrated debt collection operations to lowercost offshore locationsMigrated debt collection operations to lowercost offshore locations

“We have already taken the following action…”

“Over the next 12 months we plan to…”

45.4% Increased technology investment

41.1% Improved debt segmentation

19.6% Increase use of outsourcing

20.9% Rationalise or challenge debt collection panel

9.2% Migrate debt collection operations to lowercost offshore locations

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1.5 Looking outside for offshore

The apparent reluctance to move offshore – despite confidenceinitsefficacy–isevenhardertoexplain given that an early mover minority (15.6%) have already placed work offshore and achieved real business benefitfromdoingso.Overathird(37.9%)haven’tdonesoyet,butareconfidentitwouldbenefitthem.

Therearemanyreasonsthatmightexplainrespondents’ reluctance to move offshore. They may fear a consumer or employee backlash against the UK redundancies that would be likely to result, especially at a time of high unemployment. Or they may simply feel that migrating and managing a far flung offshore operation is a step too far beyond their own comfort zones.Equallytheymayhavefounditdifficulttobuilda business case for migration that makes economic sense. Though many companies have adopted offshore as a model for a number of business processes (including customer management and a host of other non-customer focused administrative activities), they have been most likely to do so where the volumes of transactions (and, therefore, people) arehigh,givingmaximumeconomiesofscale.Thereverse can, perhaps, be said to be true in collections and recoveries. The typical inhouse collections and recoveries team has somewhere between 50 and 250 people. Building a business case to establish an offshore operation for teams of this comparatively

small size is challenging, given the upfront costs of migration which must be set against the longer term financialbenefits.

In light of this it is enlightening that, when asked what their debt collection agencies could do to help them keep pace with rising debt and costs, the provision of access to offshore locations topped our respondents’ wishlists.Infact,almostaquarter(22.5%)nameitastheir number one desire and 63.7% place it among their top three. They clearly recognise that what they cannot achieve alone may well be achieved with the economies of scale an outsourcer can offer.

A few short years ago, when high levels of debt were compensated by a booming economy, it seemed unlikely that collections and recoveries departments would consider offshore as a real option. Today, with cost and performance under pressure as never before, they are clearly prepared to ‘think the unthinkable’. But they appear unprepared to go it alone. The door is open for outsourcers and debt collection agencies with imagination, resource and territorial reach to offer the UK industry what it says it most needs.

“ The following actions by my debt collection agencies would do most to help me keep pace (ranked in order of priority):”

“ Has your organisation placed any of its debt collection activity in a lower cost offshore location?”

37.9% No but believe it could deliver business benefit

35.0% No and believe it could deliver no business benefit

15.6% Yes and achieved business benefitYes and achieved business benefit

11.5% Yes but achieved no business benefit

4.847 Provide access to offshore locations

3.872 Provide more flexible commercial models

3.342 Increase use of analytics to support segmentation

3.122 Provide more proactive account management

2.929 Provide access to leading edge technologies

2.694 Advise on new or alternative debt strategies

1.6 Consolidation, a relentless trend

The approach taken for early collections and post charge off recoveries have, typically, varied dramatically, with most organisations choosing to manage early collections (where the customer relationship is still viable) inhouse and then move cases on to debt collection agencies post-charge off, when the customer relationship is severed. However, though these approaches differ, most organisations (69.7%) tell us that they now manage early, contingent and legal collections under a single reporting line with a consolidated approach.

Based on those reporting that they do not take a consolidated approach at present

69.8%

12.8%

17.4%

Yes

No

Don’t Know

52.1%

17.9%

29.9%

Yes

No

Don’t Know

“ I believe a consolidated approach to early, contingent and legal collections would improve ourdebt collection performance…”

“ In my organisation early, contingent and legal collections are managed under a single reporting line with a consolidated approach…”

12

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Based on those reporting that they do not take a consolidated approach at present

Basedonthesefindingsonemustassumethatgreaterconsolidation is a trend set to continue, as more and more companies learn to take a holistic and progressive approach to debt management, using analytics and segmentationtorefinetheirdebtcollectionstrategiesatevery stage of the debt lifecycle.

52.1%

17.9%

29.9%

Yes

No

Don’t Know

“ I believe a consolidated approach to early, contingent and legal collections would deliver cost savings…”

2.1 Investigate offshore opportunities to reduce cost

This research makes it clear that companies are willing to consider dramatic new options to manage their escalating costs. They believe moving operations offshore is their best hope for cost reduction and are looking to outsourced service providers to help them.

In the past eight to ten years, outsourcing telephone based customer service operations to offshore locationshasbecomemainstream.Whereithasworked well it has delivered dramatic cost savings. Far sighted individuals in collections departments are asking whether it can do the same for them.

Thechallengeliesinfindinganoutsourcingpartnerwithcollectionsexpertiseintherightlocations.Itisworthnoting that while many offshore customer service deployments have delivered good results, there are probablyanequalmeasurethathaveearnedconsumercensure due to poor service and a failure to understand the nuances of UK culture and mores.

In the past, location choices have been limited; today they are rich. Choose a location with a strong service ethicandaclearaffinitywithUKbusinesspractice,especiallyintermsoffinance.Perhapsthemostpromising among these new location opportunities is The Philippines, which recently achieved the accolade of Offshoring Destination of the Year in the UK’s National Outsourcing Awards.

The Philippines’ telecommunications infrastructure and connectivitywithEuropeareexcellent,whileitslabourpool is diverse, educated and, vitally, fluent in English. SeventyfivepercentofthepopulationspeaksfluentEnglish(comparedtoonly4%inIndia,forexample).Plus, the close economic ties that the Philippines enjoys with western economies mean that its consumer and business environment is truly ‘simpatico’ with our own.

The trend is already well underway. In April 2010 we began service from Manila to support one of the UK’s leading telecommunications businesses. On its behalf we’re handling in and outbound collection calls with early stage debtors. Already Manila’s performance has matched or bettered our client’s UK operations, and the

service has been delivered for one third of the cost.

It seems certain more will follow. The Philippines’ business process outsourcing industry, dominated by voice-based customer and credit management centre services, is growing at 18% per annum.

2.2 I ncrease use of outsourcing

It is typically the case that early collections activity is carried out inhouse, while post charge of recoveries are outsourced to debt collection agencies. It is easy to understand the psychologically that underpins this. Whilethecustomerrelationshipremainsopenand‘recoverable’, companies have chosen to manage the situation themselves. In post charge off, when the customer relationship is closed, the company has less concerns about passing the case on to a third party who then deals with the debtor in their own name.

Weurgecompaniestoconsidertheuseofoutsourcingin the early collections arena. This clearly calls for a different breed of outsourcer; one that you will trust to operate in your own name and respect your brand values; to understand the nuances of your customer relationships and work as hard to rehabilitate the customer as to collect the debt.

Typically, the providers who work best in this environment are those that also work in customer management environments, and there’s good reason for this. In the old days collections teams were typically charged with a single overwhelming objective: to maximisedebtrecovery.Todaytheyjuggleamorecomplexsetofobjectiveswhichincludetreatingcustomers fairly and rehabilitating them wherever possible. In truth, managing debt, especially in the early collectionsstage,issimplyalogicalextensionofmanaging customers.

An outsourcer that combines customer and credit management capability will have the service skills and orientation to take these issues onboard. They will typicallyhavefinelytunedabilitiestoinfluencecustomerbehaviour using diplomacy and personal empathy. The sameskillsarerequiredwhenmanagingdebtors–especially ‘reluctant debtors’, whose ‘ability’ rather than

Section 2 – the way forward

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‘willingness’topayisinquestion.Anditisimportanttonote that, in today’s economy, the number of reluctant debtors, individuals or organisations who have hit hard times but will likely become good customers (and revenue sources) again, once their immediate crisis is over, is higher than normal.

It would appear that the trend towards outsourcing early collections is already underway. This year the internationalanalystfirm,Ovum,predicteda52%increaseinearlycollectionsoutsourcingoverthenextfiveyears.Asdrivingfactorsbehindthistrendtheyquote,notonlyadesiretoreducecost,buttofast-trackthe adoption of new approaches.

Workingwithanoutsourcerthathascustomermanagementskillscanbringanadditionalbenefitrelatedtotheoffshorequestion.Wereferredearliertothecomparativedifficultyofbuildingasolidbusinesscase for the transfer of credit management operations (typically much smaller than customer management operations)offshore.Outsourcerswithexpertiseinbothfieldscanoffercombinedservices,therebycreatinggreatereconomiesofscaleandmaximisingtheirclient’soverallcostbenefit.Thisclearlydemandsacoordinatedprocurement approach between credit and customer managementcolleagues,butthepotentialbenefits are substantial.

2.3 Pursue consolidation and a risk based approach

Our research shows that a holistic approach to all three stages of debt management – early collections, contingent collections and legal recovery – is a dominanttrend.Weurgedebtmanagementprofessionals to pursue it urgently in order to garner the performanceandcostbenefitsitoffers.Wealsoencourage them to take this one step further, and move towards closer working relationships with customer management colleagues.

In truth, customer and debt management operations shareacommonobjective–toacquireandbuildaloyalcustomer base that represents a minimal credit risk. Managing relationships – both with customers and debtors – using a risk based approach will unquestionablysupportitsachievement.Thisapproach

is more likely to be successful if your analysis of risk is based on complete understanding and applied across the customer lifecycle.

It’s a process that begins the minute customers come onboard. An analysis of your company’s historical customer data will reveal the commonly shared characteristics of those that have defaulted on payment. This, coupled with established geo-demographicprofilingstandards,makesitpossibletoforecast an individual’s likelihood to default or encounter financialdifficulty.Anappropriateriskscorecanthenbeapplied that will govern the way that customer is managed. In turn, this will feed into your own segmented strategies for managing that customer should they become a debtor.

It is also the case that the dividing line between customer service and early collections is becoming increasinglyblurred.Forexample,issendingafriendlymessage to remind a customer that a payment is due (before they go into default) a customer service or an earlycollectionsaction?Whichever,itiscertainlyapertinent action to take with any customer who falls into a higher than average risk category. Typically the earlier in the debt lifecycle you intervene, the earlier you are likely to achieve payment.

A consistent approach that matches organisational response to customer risk across the whole customer and debt management lifecycle improves effectiveness and reduces cost by focusing resources where they are most needed and will have the greatest impact.

2.4 Final thoughts

In conclusion, at a time when collections and recoveries professionals are facing unprecedented challenge, it is timetoadoptradicalthinking:toquestiontime-honouredpracticesandchallengethestatusquo.WhetherthatmeansoutsourcingwithintheUK’sborders or beyond them, or recognising debt management as simply one step in the management of the customer lifecycle, the future will favour the brave.

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Appendix 1: Research methodology

The research was conducted among readers of Credit Collections & Risk magazine. The 400 respondents covered the full spectrum of collections organisations within a wide range of industry sectors. 40.8% are responsible for consumer debt, 41.1% for commercial and 18.1% for both. The research was completed using an online survey tool during April 2011.

Appendix 2: About the author Martin Kochman, Global Strategy Director

Martin is responsible for the development of Transcom’s global strategy and heads up its worldwide credit management division. Before joining Transcom he served as Vice President and Head of BPO in Europe for the offshore technology and outsourcing market leader, Cognizant. Before Cognizant, he capped a successful 20 year stint with the management consultancy, Accenture, with his role as Managing Partner of the consultancy’s BPO operation in India.

MartinhasafirstclasshonoursdegreeinbusinessfromCambridge University.

Appendices

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Transcom is a global outsourced service provider entirely focusedoncustomers,theservicetheyexperienceand the revenue they generate. Our customer and credit management services are designed to strengthen our clients’ customer relationships and secure their revenue streams.

Our broad service portfolio supports every stage of the customerlifecycle,fromacquisition,throughservice,retention, cross and upsell, then on through early and contingentcollectionstolegalrecovery.Expertatmanagingboth customers and debt, we make a positive contribution toourclients’profitabilitybyhelpingthemwincustomers,grow business and secure their payments.

And,whileourservicesaredesignedtomaximiserevenue,ourdeliveryoperationsarebuilttodriveefficiency.Throughour global network we can provide service in any country where our clients have customers, accessing the most appropriate skills and deploying the best communication channels in the most cost-effective locations.

Every day we handle over 600,000 customer contacts in 33 languages for more than 350 clients, including brand leaders in some of today’s most challenging and competitiveindustrysectors.Theexperiencewegainisusedtoconstantlyrefineourserviceportfolio,processesanddelivery,allowingustorespondquicklytochangingmarketconditionsandclientrequirements.

Find out how working with Transcom could transform your customer and credit management performance. In the UKT: 0845 330 4800E: debbie.nolan@transcom.com

Outside the UKContactus@transcom.com

www.transcom.com

About Transcom

Find out how working with Transcom could transform your customer and credit management performance. In the UKT: 0845 330 4800E: debbie.nolan@transcom.com

Outside the UKContactus@transcom.com

www.transcom.com