white paper

Five Keys to Successful Agency Placement and Management

February 2010

»» Summary Creditors’ collections departments have traditionally needed to rely on external debt collection agencies for recovery activities, but increasingly, they are now outsourcing accounts prior to charge-off. In good economic times or bad, as delinquency rates fluctuate, creditors must—or should—find answers to the same agency placement questions: “What percentage of accounts should be placed at agencies? Which accounts? Which agencies are best suited for collecting specific profiles of accounts? And how can we improve agencies’ results after we place accounts?” This paper discusses the technology and methodology that collectors can employ to strengthen five key areas of agency placement functionality: Visibility and Control; Segmentation; Reporting; Automation; and Exception Handling.

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Five Keys to Successful Agency Placement and Management

»» Introduction

Perhaps never before has the placement of delinquent accounts to outside agencies been more important to creditors’ collections operations. In these difficult economic times, the success of a creditor’s agency placement—ensuring maximum returns from agencies’ efforts—is critical to its fight against unprecedented levels of bad debt. Issuers and lenders of all portfolios simply do not have the internal capacity to keep pace with collecting today’s outstanding debt. With, for example, US credit card charge-offs up nearly 100% and residential mortgage charge-offs up four-fold since the start of the recession1, staff can’t keep up with volume. In addition, many creditors have reduced internal budgets and resources, thereby increasing reliance on outside agencies. Outsourcing to debt collection agencies provides hope. But it can’t be considered a solution unless it is performed with a level of prudence and supervision equal to today’s challenges. Even in a good economy, there is no reason creditors shouldn’t realize greater success from their agency placements. The collections and recovery professionals at FICO advocate reaching a new level of agency placement through the right combination of technology and methodology. Creditors are able to develop better agency placement decisions and strategies—for recovery and pre-charge-off accounts— through greater data access, data analysis, sophisticated processing and real-time communications. FICO has found that creditors worldwide who concentrate on strengthening five key areas of agency placement functionality will most quickly develop and implement winning data-driven strategies:

• Increased visibility and control • Better segmentation • Improved management reporting • Increased automation • Enhanced exception handling Creditors will also find they are able to build these areas of functionality to scale with their collections needs and constraints. With the ability to scale, creditors would be able to get started immediately without concern over cost, implementation time, and training.

1Source: Federal Reserve Board figures, presented by Mercator Advisory Group, “Consumer Lending Collections and Recovery Solutions, 2009.”



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Five Keys to Successful Agency Placement and Management

»» Increased Visibility and Control

The degree of visibility and control that a creditor has over an agency’s day-to-day actions strongly correlates to the success of the agency’s performance and to the success of the creditor’s total agency placement management. Collections and recovery business leaders and operation managers know this from experience—through the presence, but all too often through the absence, of technology and methods that provide immediate monitoring of, and communication with, agencies. Outsourcing delinquency to collection agencies is a risky and profit-depleting business when management is:

• Unaware of the activities agencies are taking on accounts. • Missing accurate and consistent data on agency activities. • Trusting the vendor to assign a high priority on their portfolio, when the agency is trying to balance all its clients’ expectations.

• Lacking the experience required to effectively manage collection agencies. Management should consider two measures in developing greater agency visibility and control: speed and scope. Real-time Insight and Action: Attaining visibility and control—across all aspects of agency performance and the creditor/agency business relationship—is not just a matter of reviewing “what happened” in aggregate over the last week or month. That’s what reports deliver (discussed later), and they provide valuable information. Instead, visibility and control adds something more: It provides immediate insight and information—to both the creditor and agency—so that each can quickly make necessary, ongoing modifications to improve performance. Creditors looking to realize more successful agency management should consider developing systems that provide near real-time views into a variety of data sources—external data sources, as well as data generated by in-house staff, and the actions and results of agencies. In-house staff and agencies should have shared access to data generated as recently as the previous day. A Broad Spectrum of Visibility: A creditor wants to ideally have visibility into all its agency’s actions and non-actions. Profit can be lost or gained not just in an agency’s collections practices, but also in the agency’s handling of administrative processes (related to contractual compliance, billing, exceptions, legal matters, etc.). In terms of agency performance, creditors can gain more control over their placed portfolios by knowing the status of each account and how much and what kind of effort the agency is applying. With better data quality, delivered in a timely manner, the creditor can direct the agency to modify strategies or actions, or it can re-assign accounts across agencies. The creditor can also instruct the agency to test new strategies. The creditor can then monitor the effectiveness of new “challenger” collection strategies against established “champion” strategies used at agencies. In addition, insight into agencies’ results using various strategies can, and perhaps should, be used for internal/external comparative purposes. That is, agency performance insight helps a creditor improve agency management; but it can also serve as a benchmark to gauge the effectiveness of internal collections efforts. Creditors can also help agencies improve collections performance by providing broader information on accounts. For example, creditors can link the collection of multiple accounts for a single customer. This ensures that the agency working the account has full visibility into the total indebtedness of the



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Five Keys to Successful Agency Placement and Management

customer and can effectively collect on the totality of the debt, not just a single line. It also improves efficiency: One agency can contact and work with the customer instead of several agencies working the customer’s multiple accounts. In terms of the business relationship, greater visibility and control means more oversight over such things as initial placements and replacements, commissions review and disbursals, and compliance to established service-level agreements.

»» Better Segmentation

Especially in today’s economy it is important for collection organizations to design optimal account segmentation strategies, for initial agency placement as well as for ongoing replacement of accounts. Equally important, collectors must take an empirical, data-driven approach to segmenting accounts. With the proliferation of credit and lending products, and today’s unprecedented debt levels, oldschool rudimentary segmentation practices will only result in steadily declining recovery results and increased collection roll rates. By contrast, data-driven segmentation—coupled with basic or more sophisticated business rules, or with analytic modeling—will provide continuous insight into account behaviors, as well as the collection agency placements and actions that yield the best results. Consider the pitfalls collectors face today in making profitable placement decisions without this type of approach. First, account behaviors are continuously transforming, and, particularly today, are highly sensitive to economic triggers. In no way can “gut-feeling” or intuitive practices for placement decisions keep up with this moving target. Second, in addition to learning more about account behaviors via data and analysis of actions on accounts, creditors can learn more about agencies’ strengths and weaknesses. They can then better match account profiles to certain agencies for specific treatments. Finally, the balance between external and internal collections is critical to ensure profit maximization. Organizations that utilize a data-driven segmentation approach create the optimal segmentation strategy—between internal and external collectors—to maximize returns.

Segmentation examples To illustrate the range of segmentation practices agencies can take, and the effectiveness of each, consider the following example. It shows three creditors’ segmentation strategies based on the same accounts. Creditor A acts as the baseline, taking only a theoretical approach. Creditors B and C, following data-driven segmentation practices, show how empirical placement methods can generate greater returns—from 5% to 15% improvement over the baseline. 1. Creditor A: Routes 33% of accounts flagged for treatment to three agencies for collection activity. It does so without regard to any behavioral characteristics of the accounts, or of the past performance of agencies (in terms of their success rates with types of accounts). Instead, it simply divides the accounts evenly across the three agencies. The management team believes that the process has been successful for a number of years and the agencies will continue to perform at the same level on the new placements. RESULT: Because rising unemployment has caused an increase in defaults nationwide, all three agencies fail to recover even as much return as their historical averages with the creditor.



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Five Keys to Successful Agency Placement and Management

2. Creditor B: Based on segmentation driven by basic business rules, it decides to send out 33% of accounts flagged for treatment to three agencies. Its rules-based segmentation method is based on the results of sending accounts with various characteristics to certain agencies. In this case, it decides to place accounts to agencies based primarily on loan type and amount owed. It selects three agencies based on former success collecting on these profiles of accounts. RESULT: Month to month, the agencies realize between 5% and 10% improvement in liquidation rates over the rates realized by Creditor A. 3. Creditor C: Distributes 33% of accounts flagged for treatment to three agencies in accordance to highly refined collection strategies identified to resolve each account in the portfolio. It utilizes many characteristics drawn from agency performance information, business data and analytic tools to gain the insight required to determine which account should go to agency 1, 2 or 3 for treatment. RESULT: Creditor C realizes better results than Creditors A and B. Month to month, Creditor C’s agencies realize between 10% and 15% improvement in liquidation rates over the rates realized by Creditor A, which equates to a 5% and 10% improvement over the rates realized by Creditor B.

»» Improved Management Reporting

Agency reporting is a necessity for creditors throughout all industry segments. Why? Because reporting—which pulls together the right data at the right time— enables the creditor to study all aspects of the agency relationship, gain insight, and make modifications as necessary. Either on a regular schedule (for example, weekly or monthly reports) or on-demand, creditors depend on standard and user-defined reports to shape placement strategies, set goals and forecast results. Reports can also help the creditor measure results of internal collectors against agency performance. At a broad level, reports fall into three main categories: Portfolio Management; Third-Party Service Levels; and Agency or Supplier Review Pack. In developing a reporting structure, creditors should strive to eventually take advantage of a full suite of reports for analyzing agency and portfolio performance, including the ability to generate batch-track reports on summary and comparative levels, agency collection activity, inventory, benchmarks and financials. This will help the creditor realize more sophisticated management of agency placements.

Other Reporting Uses and Advantages A sophisticated reporting system also adds a strong dimension of consistency to a creditor’s placement management. In a turnkey format, it provides a framework for consistent data gathering and storage, which yields consistency in reporting. Data capture and reporting formats remain uniform over time from individual agencies and across agencies. In addition to gaining meaningful insight into agency performance, creditors can use reports to prevent losses and build profit in other ways. For example:

• Reconciliation reports can be used to ensure the accuracy of agency commissions and payments. With regular reconciliation reporting—generated weekly or even more frequently—errors are addressed promptly, drastically reducing the aggravation associated with month-end agency commission settlement.

• Reports also help reconcile closures and placement balances to ensure that accounts are being worked at the right balances by the right agencies.



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Five Keys to Successful Agency Placement and Management

• Advanced reporting based on agency and other third-party data can help the creditor improve its internal collections strategies and results by using the reports to measure internal vs. external results. Insight into successful activity at agencies can be applied to improve in-house efforts.

• Reports on champion/challenger strategy testing can support creditors’ agency placement strategies by guiding a creditor in its initial agency assignment. These reports direct the creditor to assign certain types of debt to certain agencies. This is important since agencies often follow their own strategies and are reluctant to take strategic direction from the creditor. Therefore, a creditor’s champion/challenger testing, especially if it employs analytics, can be used to target and place accounts that are more suited to a strategy followed by a particular agency.

»» Increased Automation

By its very nature, collections is a race—a race against time. Losses and collections costs accrue as months-past-due pile up. To keep pace, every collection and recovery action must be fast. It must be automatic—without any need for manual intervention or maintenance. This is particularly true for agency placement and management, where the agency is an outside thirdparty. It’s important for creditors to use systems that automatically connect and communicate with their agencies in real time. This automated, interactive placement and management makes it easy for creditors to quickly modify strategies at any time during the placement lifecycle; without time delays or maintenance, they can add and remove agencies, change volumes, track and measure performance, and quickly implement more profitable agency decisions. Automation works profitably behind the scenes in virtually every aspect of agency placement:

• Moving data between agencies and creditors, ensuring the accuracy of data through automated functions such as scrubbing of bankrupt and deceased accounts.

• Employing automated checks and balances over communications channels to ensure compliance to service level agreements, and to catch and address reconciliations.

• Quickly generating standardized and customized reports. • Transferring necessary documents, authorizations and direction to agencies. • Making and sharing automated decisions through business rules technology and analytic models. As the industry’s leading automated tools become more popular, collection agency placements are no longer an environment where agencies advise clients of performance, activities and errors. Instead, it’s a sophisticated channel of communication where creditors and agencies work together in a multi-directional flow of communication and data and where automation gives the creditor greater control.

»» Enhanced Exception Handling



Successful creditor/agency relationships are best established at the beginning of the relationship— within legal contracts developed via constructive face-to-face meetings. In this process, creditors must ensure that their legal council’s direction facilitates contractual language and structure to account for various exceptions which will undoubtedly take place in the business relationship. However, contracts alone don’t guarantee exceptions success: While legal contracts anticipate and legitimize exceptions, they don’t manage them.

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Five Keys to Successful Agency Placement and Management

As exceptions occur, however legally binding, an agency may or may not comply, or comply in a timely manner. Delayed or neglected exception compliance costs the creditor money. Therefore, in addition to relying on contracts, it’s up to the creditor to manage exception execution and agency exception compliance. Creditors with the right technology and methodology in place more easily transform exceptions agreements into workflow practices.

How technology improves exceptions management Exceptions occur most often in the following areas: 1) short-term changing business processes, 2) exceptions to SLA, 3) exceptions for the treatment of individual accounts, and 4) long-term evolving business processes. Consider how the right technology helps creditors implement and control agencies’ quick adoption and ongoing compliance to these exceptions.

Short-term changing business processes—resulting from a natural disaster, regional economic swings, or initiation of special programs, for example—requires that creditors immediately direct the agency to perform “specialty handling” of certain accounts, such as increasing, decreasing or stopping contact with customers. Automation and sophisticated communications channels and data sharing make it possible to put new policies into action automatically, and, “at a glance,” ensure that the agency is complying with the process change. In addition, segmentation tools can help shape short-term strategies—in debtor treatment and agency selection.



Vision and control over agency actions—real-time data-based insight and ongoing reporting—is also critical in monitoring compliance to Service Level Agreements (SLA)—initial SLAs and exceptions. Creditors need real-time SLA oversight to see that the agency is working accounts, and working with the agency, as agreed. How many days after receiving the accounts is the agency working them? Are a certain number of staff working the account? Is staff returning debtors’ calls within the specified time?



Technology supporting exceptions for the treatment of individual accounts helps creditors quickly retract accounts from agencies and compensate agencies accurately (not overpay them). For example, an account goes into bankruptcy, or is determined to be fraudulent or settles directly with the creditor to pay off debt. In all these cases, automated systems and communications supports immediate agency notification and compliance.



For the longer-term, creditors should plan and contract for exceptions due to their evolving business strategies. First, with analytic technology supporting champion/champion strategy testing, creditors can constantly test new treatments internally, and compare resulting internal collections efforts against agency performance. When the creditor then wants to implement a new strategy at an agency—an exception—it needs technological support to quickly direct the agency, and then track agency compliance. Or it may want to retract and re-deploy accounts across agencies. Automated systems and communications can help make this process fast and seamless.

Evaluating exceptions for better macro-insight, micro-management Comprehensively, exceptions should be evaluated for two reasons. First, creditors can gain an understanding of exceptions at the summary level: which are easy or difficult to implement and realize agency compliance; which take more time and why; what practices created more difficult exceptions or mollified agency attitudes. Second, from that summary view and insight, creditors would be able to jump-start change management to reduce problems and efforts with individual agencies.



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Five Keys to Successful Agency Placement and Management

Successful exception handling therefore requires a technology system that supports both views, but can also quickly take corrective action at the account-level. Insight and data collection at the account-level—if agencies are working accounts in compliance with the exception—can be rolled up to the summary level via reports. Once evaluated and with the right technology, automated communications and corrective actions can be directed and enforced immediately.

»» Conclusion

As a creditor either institutes or modifies an agency placement system or approach, it’s critical that the management team considers implementation of certain technology and methodology. Perhaps most importantly, the right tools for improving the effectiveness of agency management should enable the creditor to:

• Manage reporting and exception pro- cessing of accounts per credit grantor criteria.

Other elements of a comprehensive strategy Predictive analytics are an essential component of an effective collections and recovery strategy. A comprehensive strategy also encompasses: Automating workflows—How automation can help prioritize accounts, track costs and maintain flexibility to respond to changing circumstances. Monitoring resource performance—How to determine whether the collection tactics you employ are producing results relative to their costs. Collections & Recovery Analytics—How to prioritize collections and recovery accounts for treatment—focusing collection efforts where they are most likely to produce results Download the FICO White Paper Five Ways to Improve Your Collections and Recovery Rates. Learn the proven strategies for achieving significant cost savings, reduced roll rates, lower charge-offs and increased recoveries. www.fico.com/5ways

• Allow the creditor to easily change busi- ness logic to respond to market condi- tions or company objectives. • Report on agency activity and perfor- mance, file processing, account status, agency activity, reconciliation and compliance.

• Provide the ability to configure reports to specific business needs. •

Provide a centralized communication channel between account owners and their agents via application work queue tool functionality.

• Manage all outsourced agencies and portfolios through a single interface.

• Allow for deployment of scientific agency assignment and recall strategies. • Provide web portal for online/real-time Debt Sale activities.

The overarching goal, of course, is to collect more dollars from debtors. This is achieved through greater visibility and control over agencies’ performance, more refined placement decision and strategy development, and by streamlining processes and communications with agencies. By applying the right tools and methodologies across the five key areas of functionality discussed in this paper, creditors: gain insight into accounts and agencies; match accounts to agencies for best results; increase contact and communications with agencies while reducing workflow maintenance; and continually increase insight and knowledge for ongoing improvements in account treatments. The information provided in this paper has led to effective agency placement and management for organizations worldwide. The techniques discussed can support a creditor’s ability to have precise control over agency data and performance. Begin today by assessing your organization’s agency management process in terms of the five key areas of functionality covered in this paper. Your initial assessment could quickly lead to increasing your agency placement recoveries and operational efficiencies.



© 2011 Fair Isaac Corporation. All rights reserved.

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Five Keys to Successful Agency Placement and Management

about FICO FICO (NYSE:FICO) delivers superior predictive analytics solutions that drive smarter decisions. The company’s groundbreaking use of mathematics to predict consumer behavior has transformed entire industries and revolutionized the way risk is managed and products are marketed. FICO’s innovative solutions include the FICO® Score—the standard measure of consumer credit risk in the United States—along with industry-leading solutions for managing credit accounts, identifying and minimizing the impact of fraud, and customizing consumer offers with pinpoint accuracy. Most of the world’s top banks, as well as leading insurers, retailers, pharmaceutical companies and government agencies, rely on FICO solutions to accelerate growth, control risk, boost profits and meet regulatory and competitive demands. FICO also helps millions of individuals manage their personal credit health through www.myFICO.com. Learn more at www.fico.com. FICO: Make every decision count™.

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