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Best Net Return

When looking at net return, dont fall for the trap of the lowest commission equates to the best net return.  In fact, it is usually the exact opposite.  I have been involved with tender processes and had procurement people advise that the commission rate quoted is too high.  They in their wisdom come back with “well why would we pay 20% when we want to pay 10%”?

Basic common sense would say that they are correct.  If you have $100 and you have to give away commission, you would certainly prefer to pay 10% ($10) than 20% ($20).

In debt collection this is not the only factor that needs to be considered.  You have to work out what the value is in the pricing, what it includes and then how that will impact on your best net return.

Let’s say the figure quoted by an agent is 10%.  That 10% is made up of several components.  Analyse the data and work out what recovery rate they believe they can get.  Then break down the number of files and how many FTE (agents/people) they will need to work the files to get that recovery rate.  They then have to build in their profit margin and look at other expenditure in the process.

So to break it down in a simpler way, 1% of that may be made up in compliance costs, 1% in technology/telephony, 1% for compliance and the balance of 7% covers people and profit.

How do they get the recovery rate?  An example then is:

A client refers 2,000 files at average balance $500 per month.  Historically, 40% of these are collected at 20% commission.  The numbers are then:

  • $1 million referred
  • Collected 40% = $400,000
  • Commission 20% = $80,000
  • Net return = $320,000

To achieve this, the collection agency then has to work back the $80,000 into their cost structure.  If desk cost for an agent is $10,000 then they in effect can put 8 agents on this book.  Thus, by this rule, each agent would have 250 accounts to look after and collect $50,000.

If the client tells them to cut the commission to 10%, then using the same numbers, the commission (if the recovery rate was kept) would be $40,000 and a better net return for the client – $360,000.

HOWEVER, at $40,000, the collection agency cannot drop the reporting, compliance or technology off.  So the only variable they can look at is collectors.  At $40,000 commission and desk costs of $10,000, they can only have 4 collectors on.

Only have 250 files each, half of the book is not going to get worked on.  So halving also the recovery rate, this then makes a dramatic change in the scenario.

  • $1 million referred
  • Collected 20% = $200,000
  • Commission 10% = $20,000
  • Net return = $180,000

The net return is massively different!  Commission costs are lower as well so procurement achieved a good result!  Operations may not agree!!

But to not be as drastic as the example above, let us say that by cutting the rate from 20% to 10% only slightly effects’ the recovery rate.  Instead of a 40% recovery rate, the agency take off one collector and the rate comes back to 35%.

  • $1 million referred
  • Collected 35% = $350,000
  • Commission 10% = $35,000
  • Net return = $315,000

Not only is the net return less than the original figure paying 20% but the amount collected has also slumped.  The real fact here though is while it is only $5,000 worse off as a net return, the amount collected is significantly down.  AND the real thing in this example is that the agency would be losing money having 7 collectors on for a $35,000 return.

Refer the chart below: Best Net Return

CLIENT    # REFERRALS    Ave $ AMT  REC RATE  COLL  COMM  COM AMT NET RETURN

  1. ABCXYZ PTY LTD    2000    $500    $1,000,000   40%   $400,000   20%   $80,000 $320,000
  2. ABCXYZ PTY LTD    2000    $500    $1,000,000   35%   $350,000 10%   $35,000 $315,000
  3. ABCXYZ PTY LTD    2000    $500    $1,000,000   30%   $300,000 10%   $30,000 $270,000
  4. ABCXYZ PTY LTD    2000    $500    $1,000,000   25%   $250,000 10%   $25,000 $225,000
  5. ABCXYZ PTY LTD    2000    $500    $1,000,000   45%   $450,000 25%   $112,500 $337,500

 

The top line is the original – highest amount collected and best net return.  20% does beat 10%.

Interestingly, by paying an extra 5%- thus 25%, the recovery rate goes to 45% and the net return on any even higher rate of 25% beats paying 20%!!  **Note there is a point in the book that you will not get past.  You will never for example achieve a 100% recovery rate so putting more staff on may increase to a point but at some point the book will be saturated and those who were never going to pay or can’t pay will not change.

The moral of the exercise is to look at all possibilities and see what the variables mean – and what consequences may happen from changing them.  A good agency should be able to tell you how many collectors they need on the book (and how many files is workable per agent).  Also what rate they need to make money and what their work flow is for the process.

If they do not have enough collectors on, the work will not get done and the recovery rates will not be met.  When the commission rate is low, ask how many staff will be on to collect.  A trick in the past to go in low, under achieve and then re-negotiate the rate later.  It is too hard to completely change agencies once the systems have started.

If the rate seems too high, question it.  However, if you know what recovery rate you want or expect, the rest of the exercise then becomes very clear and the rate point will also.  Just do not fall for lower commission rate means a best net return unless you have done all of your calculations correctly.

#debtcollection #termsoftrade #CCA #netreturn

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