Modernizing Collections Risk – A Revolutionary Twist on Productivity Measures
January 09, 2019
While reviewing the most recent FIS Market Study, “Modernization of Credit and Collections – From Legacy to Revolutionary”, an interesting thought popped into my mind. It seems that every company uses percent current as one of the key measurements to measure the success of their collectors. While this is certainly one of the easiest methods to measure results, is it the most effective? Some organizations are still using value (36 percent) and aging (35 percent) to prioritize their collection efforts. Most of these organizations are experiencing a very cyclical return in terms of performance. As collectors chase the large dollar invoices they neglect the smaller value invoices. Over time these add up. Some months, typically at a quarter end, the collectors catch up the neglected invoices, only to fall back into the same routine the following month. This leads to the spikes and troughs in the trend chart when showing the results over time.
Why not measure collectors in a different way? Drop the percent current target, or at least make it less significant month to month. Instead, begin to utilize a risk score to prioritize your collection efforts and leverage that score to calculate the cash-at-risk (probability of delinquency times the outstanding account balance) for each collector at the end of the month. It is well known and documented that it is human nature to do what you are incented to do. If you incent your collectors to reduce cash-at-risk doesn’t it seem to follow that results will improve? Moreover, the peaks and valleys will smooth out into a steadily improving trend. As you proactively address the risky accounts, thereby preventing them from becoming delinquent, over time you drive down the risk in your portfolios.
It is really an interesting concept. When you think about it, percent current is really a by-product of the ultimate goal of improving cash flow. So, why do corporations put such an emphasis on the symptom rather than addressing the illness? The initial transition to measuring on the reduction of risk in a portfolio will be bumpy. Once the idea is institutionalized however, results will consistently improve. Certainly, other factors play into creating a viable measurement. Each portfolio will contain its own unique risk profile. Therefore, comparing individuals against each other becomes difficult. Of course, in a perfect world, individuals should not be measured against each other, but rather against their own body of work.
Measuring results as a percentage reduction of each individual portfolio seems to be the most practical approach. One argument against this approach would be the fact that collectors have no control over which customers sales does business with. A counterpoint to that is the fact that this is what keeps collectors from “managing” their numbers. There are ways to measure around new business that may appear during a month with risky customers that ensures a fair approach.
Simply stated, we have been doing the same thing for a long time. Technology is changing all around us, so why are we not adjusting the way we measure our team members? Instituting a risk score to prioritize collection efforts is the first step in ensuring a continuous improvement environment. The ultimate step is to begin measuring collectors on their ability to reduce risk in their portfolio.