While the collections industry has its own unique set of challenges and characteristics, in the end, it’s a business like any other. An agency is either profitable or unprofitable and may or may not be as profitable as it could and should be. Understanding where your own agency stands on that spectrum, in turn, is a matter of monitoring an essential handful of key performance indicators (KPIs).
One crucial KPI within the industry is collection efficiency. Simply put, it measures how successful you’ve been, within a designated time frame, at the fundamental task of recovering debt. Here’s how it’s calculated, along with a handful of suggestions for how to increase collection efficiency within your own organization.
What is Collection Efficiency?
Some KPIs are analogous to the sort of “advanced statistics” that sports fans obsess over. They address aspects of the collections process that contribute to efficiency or effectiveness and unquestionably have a bearing on the end result. Collection efficiency is not that type of performance indicator. To extend the sports metaphor, collection efficiency is the scoreboard. Just as a team may play well but still lose, your agency may be doing many things right, but collection efficiency may still reveal that the end result is unsatisfactory.
Collection efficiency is a straightforward calculation, requiring just three figures:
- The dollar value of debt on your books at the beginning of the reporting period;
- The dollar value of any additional debt you’ve purchased during the reporting period (for first-person creditors, this would be new credit sales that come due during the reporting period);
- The dollar value of debt on your books at the end of the reporting period.
You can divide the ending value by the total of beginning and newly acquired debt, then multiply by 100 to get your collection efficiency (as a percentage). That percentage is often referred to as your collection efficiency index, or CEI.
Suppose for the sake of simple math that:
- Your starting value for a month was $2 million in debt;
- Your agency acquired another $1 million in debt during the course of that month; and
- The amount still outstanding at the end of the month is $1 million.
If we divide your $1 million ending value by $3 million (the total value of your original debts and the new debt you acquired during the month), we arrive at a figure of 33.33% for your remaining debt. Subtract that from 100 to arrive at your CEI, which, in this example, is 66.67%. You have, then, collected two-thirds of the debt that appeared on your books during the operating period.
According to accounts receivable platform Versapay, a CEI above 80% is considered good (though we’d all love that number to be closer to 100%). Anything below that, like the 66.67% in the example above, may indicate that a collections process has some roadblocks and challenges in need of a closer look.
How to Increase Collection Efficiency
A number of factors can increase your collection efficiency, but they can broadly be characterized as “anything that accelerates the collection and recovery process” or “anything that increases the dollar value of our recoveries.” Collection efficiency is defined by success in collecting debt within a specified period of time, therefore, anything that expedites the process – by definition – improves efficiency.
A few highly productive strategies for improving collection efficiency include:
1. Utilize Effective, High-Speed Communications Channels
As we’ve discussed previously on this blog, there is a powerful case to be made for prioritizing digital communications methods, such as email and text messaging, over more traditional options like telephone calls and physical mail. Mail and phone calls (even automated calls) take time, and there is no guarantee that they’re read or heard.
Emails and text messages are nearly instantaneous, scale well for high-volume usage, and in some cases can provide read receipts. Also, in a secondary boost for collection efficiency, digital communications are proven to increase recovery rates. It’s worth noting that there are no hard costs associated with this switch, and any reduction in the use of physical mail cuts operating expenses, boosting ROI.
2. Invest in Better Debtor Contact Information
Time spent pursuing debtors whose contact information is dated or incorrect is, by definition, time not spent on actual collections (and a drag on your collection efficiency). This is in part due to the relatively static nature of debtor data from legacy providers, which is increasingly out of sync with today’s highly online, highly mobile, and frequently un- or under-banked consumers. Agile and cost-effective modern data tools for skip tracing, such as Spokeo for Business, can reduce these dead ends. Any initial outreach that fails due to bad contact data can be flagged and then searched in Spokeo, usually resulting in a range of up-to-date contact information. Spokeo for Business also provides contact information not captured in the credit headers used by legacy providers, including email addresses, alternative phone numbers, and even social media handles, which in turn are vital for redirecting your communications into digital channels.
3. Automate Routine Tasks Wherever Possible
Staffing is often a bottleneck in collections, with too few staff members tasked with too many duties. Using technology to free them, wherever possible, from tasks that take them away from direct interaction with debtors maximizes their productivity. It can also help reduce their levels of stress and overwork, which in turn can slow staffing churn and reduce training costs. Not all of those factors bear directly on collection efficiency, but having your staff spend the greatest possible portion of their day on their primary task certainly does.
Functions that lend themselves to automation include the creation of collection emails and text messages (from predefined templates), personalization of those messages, fielding routine debtor inquiries (through online or telephone chatbots), and many similar tasks. Providing debtors with a range of self-serve options through your website (or an app) is another form of automation that can yield additional payments without requiring the active participation of your personnel.
4. Prioritize Large-Dollar Collections
When securing the maximum dollar value of recoveries is a priority, it is straightforward common sense to prioritize accounts that can give those disproportionate returns. Triaging the accounts on your books to target debtors owing the highest-dollar debts can bring about an immediate improvement in collection efficiency and help offset lower-dollar, higher-effort accounts.
5. Incentivize Payment and Make it Easier
Contemporary consumers are acculturated to high levels of personalization and convenience in their interactions with companies. Meeting those expectations by making payment easier and incentivizing prompt payments can have a significant impact on your collection efficiency.
Increasing your range of accepted payment methods is a powerful starting point. Accepting payment via digital wallets or through PayPal and other payment-processing apps (to choose just a pair of obvious examples) provides a secure and streamlined process that’s convenient for both debtor and creditor. Every payment method your agency accepts will be the preferred option for a different group of debtors, and increase the likelihood of them responding in a timely fashion.
Incentivizing or “gamifying” payments can also be a useful strategy. Offering discounts (modest write-downs) for prompt payment or simple recognition and score-keeping for on-time payments through your app or website are two psychologically powerful examples. Finally, identifying points of friction in your payment process, through user feedback or outside consultants, can help eliminate previously unnoticed inefficiencies in your system. Debtors who find few or no impediments to payment are more likely to make them consistently.
Tools, Tactics, and ROI
Of the five tips we’ve discussed for improving efficiency, most can be implemented straightforwardly with minimal investment or administrative overhead. They represent tactical shifts in focus rather than a radical makeover of your entire collections process (though there is a case to be made for that, too, especially when talking about the shift to digital-first debt collections).
That said, having the correct tools for the job can make any such initiative more effective. Spokeo for Business is one of those tools, offering best-in-class skip tracing through its seamless combination of regulated and open-source data, as well as usage-based subscription tiers that make sense for agencies of any size. To learn more about the product, see a demonstration, or arrange a free trial, reach out to our team through the contact information found on our Skip Tracing and Collections page.
Sources
South District Group: Understanding Collection Efficiency and How to Calculate It
McKinsey Company: Holistic Customer Assistance Through Digital-First Collections
US Federal Deposit Insurance Corporation: 2023 FDIC National Survey of Unbanked and Underbanked Households
Forbes: Gamification Shaping Financial Engagement In the Digital Era