white paper
Eight Steps to Collection and Recovery Excellence
for First and Third Parties
December 2013
This paper identifies eight
key areas with the greatest
impact on your collection
and recovery success.
www.fico.com Make every decision countTM
Summary
If youre in the collection and recovery industry (C&R) and have a mature infrastructure
in place, understanding the limitations associated with traditional debt collection
and practices is key to your success. Applying new technologies to best-practice
processing can transform your performance. Its that simple.
This paper examines eight practices that help organizations not only turn
C&R into a more successful and compliant activity, but also gain a significant
competitive advantage.
1. Reduce operational negation
2. Plan and execute precision-based strategies
3. Apply effort where it secures the greatest reward
4. Optimize channels
5. Make headcount count
6. Take a fresh look at repayment solutions
7. Improve agent negotiation skills
8. Align management information with operational goals
Eight Steps to Collection and Recovery Excellence for First and Third Parties

Economic, regulatory and consumer shifts force first- and third-party collectors to quickly identify
and move past barriers to optimize collection and recovery performance. Insights in analytics, data,
strategy and operations help identify where existing practices are holding organizations back, and
take C&R processing to the next level.

No matter how unique your business challenges or atypical your operations, youll discover how
vastly dissimilar organizations can demonstrate very similar behaviors, and how each can benefit
from the insights provided here.

1. Reduce the Incidence Without systems that enforce consistency and connected decisions, businesses often make one set
of Operational Negation of decisions that negate the value created by another department and another set of decisions. This
in Your Organization is called operational negation. For example: the marketing department attracts high risk customers,
or customer management recommends collection strategies for accounts that are ignored by the
collections business unit.

Rooting out negation is critical to implementing any of the best practices discussed herein. Offered
below are common examples of negation in action:

People: Theres a lack of ownership and accountability, and a focus on productivity rather than loss
reduction or increased payments. Skill sets may be broad but few specialists exist, making it difficult
to identify and enhance underperforming areas.

Technology: Theres too much reliance on power dialersan average 9% right-party contact rate to
(dialer) download is common. Whats happening to the 91% of accounts not contacted?

Process: Theres a big pool approach that combines all buckets of delinquencywith no or
limited operational segmentation. Data-driven, risk-segmented strategies are lost when they hit the
collections operation.

Performance Management: Theres a focus on collecting cash but not necessarily improving
delinquency and increasing collection. Key questions arent being asked, such as: Where is the cash
coming fromearly or late stage? What collection strategies are working? How are they trending?
How many accounts are impacted? Is cash increasing at the same rate as delinquency; and what
is the cost to collect? Are there ample repayment solutions to drive better performance for the
organization as a whole, and retain good customers?

Knowledge Management: The effectiveness of the most experienced collectors is diminished by

buddying with new hires.

External Factors: Theres a potential shortfall in collector resource if external factors arent
considered and fed into a capacity-planning process.

2013 Fair Isaac Corporation. All rights reserved. page 2

Eight Steps to Collection and Recovery Excellence for First and Third Parties

To help identify and move beyond negation, you need a clear perspective of how your organizational
strategies and C&R processes and tools can be improved and realigned. Sometimes this knowledge
comes from within; frequently, however, collection agencies and first parties are reaching to
external sources for clear, unbiased perspectives to gain an upper hand on negation. In either case,
its important to ensure you have full stakeholder buy-in, specific actions and targeted results, and
willingness and flexibility to changeeven when it hurts. Without a clear view of where negation
exists, adopting any best practice will be a challenge.

2. Plan and Execute a While operational business units frequently measure tried and true productivity and resulting key
Precision-Based Strategy performance indicators (KPIs), they rarely calculate the variance to strategy adherence. This is a clear
example of negation at work. If the variance is constant, operations may not realize the results arent
in line with expections from the strategy design.

The following diagram illustrates a planned analytics-derived strategy. Differing risk segments, often
further enhanced by balance at risk, are expected to receive different treatment with respect to the
tone and timing of system-determined collection events.

ANALYTICS HELP PRESCRIBE THE RIGHT CUSTOMER TREATMENTS

Risk/
Intensity Low risk Medium risk High risk
Penetration
(effort)

350%
Penetration
Medium tone

(effort)
Firm tone
Soft tone

200%
Penetration
(effort)

75%

Action type
and timing
Action type
and timing
Action type
and timing

You can expect between

5% and 30% uplift in
collection effectiveness
resulting from data-driven
strategy and decision rules.

2013 Fair Isaac Corporation. All rights reserved. page 3

Eight Steps to Collection and Recovery Excellence for First and Third Parties

However, with negation at work, its not unusual for resource and technology constraints to influence
customer treatments and execution starts to resemble the strategy below.

CONSTRAINTS FREQUENTLY NEGATE OPTIMAL PERFORMANCE

Risk/
Intensity Low risk Medium risk High risk
Medium tone

Medium tone

Medium tone
Penetration Penetration Penetration
(effort) (effort) (effort)

150% 150% 150%

Operations should track relational and specific measures that answer strategy adherence
questions, such as:
Does every message type differ by risk group?
Do sequential messages align with the strategy-planned progressive tone?
What are trended contacts per account at a given strategy point?
Is the effort applied in line with strategic goals? Consider differentiated penetration, contact
effectiveness and negotiation result.
Does the operation send tactical text messages, for example, outside of strategy?
Is the timing of execution optimal, e.g., percentage of operational time deployed at best
time to contact?

2013 Fair Isaac Corporation. All rights reserved. page 4

Eight Steps to Collection and Recovery Excellence for First and Third Parties
3. Apply Effort Where
It Secures the
Greatest Reward
In changing the best time
to call and effort by risk
group, one client realized
300 additional promises
per day, saving 1.5
million in provisions.
4. Optimize Channels to
Transform C&R Results
For one credit issuer,
payments made within
two days increased
from 24% to 74% with
implementation of self-
serve/online payments.
Too often, operational execution is planned around operating hours and staff attendance instead
of aligning each resource with strategy demands driven by optimal effectiveness. In this situation,
where capacity drives strategy, a business will often underperform as the strategy design is adversely
impacted based on suboptimal execution practices. For example: high risk accounts without the
correct intensity level required due to insufficient resources.
For many organizations, resource levels arent coordinated to meet the penetration target during
periods of optimal efficiency. Theres also a need to understand the relationship between effort and
result. Activity-focused metrics that dont align with tangible results cause operational blind spots.
Full transparency is delivered through the gathering and understanding of the metrics necessary
to understand the relationship between five sequential steps: activity, action, response, result
and impact. Without full transparency, organizations arent able to relate penetration to contact
effectiveness. Its possible to have 100% penetration and not talk to a customer. Depending on
how penetration is defined, 100% penetration may be reported though not all accounts have
been worked.
Penetration targets are often deployed only in relation to predictive dialer activity. Consideration
should be given to whether each and every activity type should have varying levels of penetration.
You also need to know where its appropriate to have concurrent activity of different but aligned
actions to drive higher penetration and related results.
Collection contact channels have come a long way in a short time and integration of these channels
is seen as the new norm. Increasingly, medium to large collection operations, along with more
traditional letter contact methods, have deployed or are deploying:
Dialer: Predictive, Preview and Manual.
IVR: Inbound and outbound auto-messaging with self-serve.
SMS, with leading organizations deploying mobile payment and self-serve.
Web: Email, internet portal self-serve, collections online chat.
If these channels arent managed interactively, it becomes common to see:
Customer complaints and possible regulatory repercussions.
Mixed messages to customers.
Overwork of low risk and underwork of high risk customers as different risk types fall under a
pooled execution approach.
Single channel contact to save pennies when thousands of dollars are held in provision.
Common myths that should be re-examined include:
Our customer will not self-serve.
Our customers will not respond through X channel.
We have to speak to every customer.
We save a lot of money by cutting down on use of Y channel.
2013 Fair Isaac Corporation. All rights reserved. page 5
Eight Steps to Collection and Recovery Excellence for First and Third Parties

Channel management, targeting and integration can create C&R competitive and regulatory
advantages. Securing effective communication is the primary success criteria and the action on
which all other actions and treatments are determined.

This is especially true when considering most markets have restrictions on how often a contact
attempt can be made. Most organizations have their own guidelines regarding the number of
contact channels deployed per day in order to avoid
complaints. When layered with multiple customer
Symptoms of channel non-performance products, this becomes an even more complex problem.

Contact attempted at less-than-best contact times.
Inbound calls not managed by risk type.
Compromise on outbound penetration for inbound abandon rate.
Blend across all inbound and outbound resources as opposed to ring fenced
to target/service level agreement (SLA) requirement.
Same timing, message content and script.
Overuse of voicemail messages.
Minimal self-serve functionality.
Non-differential SLAs, for staff and channel, by risk and age of delinquency.
Market leaders are now deploying contact channel
optimization, which considers the best time and
channel to make contact. Reporting and controls
are built in to identify regulatory or policy contact
breaches. Real-time processing automatically kills
other channel activity if contact is made elsewhere;
e.g., a dialer or SMS event will be killed if an inbound
call is received prior to the scheduled outreach. This
helps drive the effectiveness of channels, ensuring
no channel is inappropriately sacrificed for the
achievement or performance of another, without
very clear understanding of the profit/loss impact
of this decision.

5. Make Your In the world of operational negation, capacity planning is dictated by budgetary factors rather
than what is required to deliver the strategy. In mid-sized to smaller operations (e.g., fewer than
Headcount Count
100 collection resources), its rare to see the coexistence of sophisticated capacity and resource
allocation planning. Although collection operations of this size limit options for how capacity
planning is conducted, you can still account for seasonal to intraday granularity, specific industry
and other factors.

Whatever the size of your C&R function, the capacity plan should reflect which risk segment will
require a human action at a given point in time. The resource allocation plan should be of sufficient
detail to identify the skill sets required throughout a given day to undertake work related to a specific
By optimizing resource SLA and level of effort.

use, one organization For first parties, the basis of any capacity plan is to achieve or improve the loss forecast. However, in
achieved a 100% increase many cases, the plan is based predominantly on historical dialer volumes and effort. For third parties,
in delinquency volume the goal is to increase collection and recovery.

managed without Risk-to-skill routing requires a high technology competency and sophisticated resource allocation,
increasing resources. but can more than recompense the investment over time.

2013 Fair Isaac Corporation. All rights reserved. page 6

Eight Steps to Collection and Recovery Excellence for First and Third Parties
6. Take a Fresh Look at
Repayment Solutions
One collection agency
reported a 12% reduction
in charge-off due to
revising its repayment
solution policy.
The range of repayment solutions is often inadequate to cater to the breadth of customer situations
and affordability. Financial institutions have a multitude of credit products to meet customer
requirements; once the customer enters collections, a solution for every need is frequently absent.
Solutions should be appropriate to cover the large number of situations that roll into the categories of:
Disorganized.
Short-term cash flow constraint.
Medium-term liquidity constraint.
Permanent financial change.
Repayment solutions should be available to cater to:
Short-term immediate payment.
Arrangement to pay arrears either in fixed or variable installments and time frames.
Re-aging customers who can meet forward contractual obligations, but are unable to
repay accumulated arrears.
Restructure customers who should be retained but will need revised credit terms to
complete the repayment.
Understand when to deploy a commercial decision to mitigate loss and base it on more than
a fixed percent settlement threshold.
Most organizations dont capture and use the reason for delinquency in their solution selection
rules. Many do not have a decision logic tool at the agent desk level that enables a hierarchy of
solution options presented to agents based on business rules. Also, many either dont have or have
too limited an ability to effectively measure the customers disposable income. Lack of demographic
trigger figures will often lead to inconsistent agent determination of which solution has the best
success potential.
A strong repayment tool kit, supported with flexible but well-defined selection decision logic,
is the primary driver of collection effectiveness after successful contact. Its essential that each
stage of delinquency has a different set of treatments so that conversations can take a different
approach as the account ages, rather than investing in the contact but having nothing different
with which to negotiate.
Repayment solutions can be strategized as proactive offerings across different channels. Collection
and recovery staff should know who to retain or exit, and have solution selection policies and tools
that enable them to retain good customers while mitigating the loss, if any, to be incurred on an
exit customer. Management should understand how solution selection affects portfolio quality, net
present value, provision and capital adequacy, cash flow, and ultimately profitability across the short,
medium and longer term. This management information should be used to refine treatment options
so successful treatments can be identified and promoted while other treatments, perhaps just
delaying the inevitable, are removed.
2013 Fair Isaac Corporation. All rights reserved. page 7
Eight Steps to Collection and Recovery Excellence for First and Third Parties

7. Improve Agents Even if everything else is intact, poor agent negotiation skills can negate your edge. Culprits include a
Negotiation Skills low-cost workforce or failure to train and develop staff in C&R-specific skill sets. Strategic investments
in human capital during challenging economic climates have helped numerous organizations gain
an edge. The combination of flexible strategic repayment options, savvy technology investments and
expert collector negotiation skills helps organizations transform collection capabilities. To be effective,
organizations must ensure collectors have a clear understanding of various call models in relation to
customer profiles and segments.

By investing in an
enhanced agent toolkit,
one organization achieved
a 66% reduction in
solution default rates.
Linking agent success to reductions in delinquency, roll rates and provisions is the bottom line for
leaders around the globe. Many organizations ask questions like:
What are the best metrics to measure collector success?
How should targets link back to forecasted losses?
What type of incentive plans link to strategies?
Collector incentive plans are most effective when they reward behaviors that directly correlate
to delinquency targets. Its critical that targets focus on improving the P&L performance. Many
organizations reward collectors on cash collected and productivity-related measures. Leading
organizations align the targets and rewards to impact on provisions. This often highlights a
differential impact to the P&L where cash collected measures an equal performance or, in the worst
cases, reward the least effective of two collectors. Leading organizations will be measuring provisions
saved per hour at the collector level, rather than relying on cash collected, which may or may not lead
to a provision save.

8. Align Management Substandard management dataand knowing how to use that datalimits an organizations ability
Information with to assess collector, portfolio and strategy performance. Managers find themselves spending a large
amount of time trying to develop reports that provide insight into portfolio weaknesses and trends.
Operational Goals
Companies are realizing the value in linking data sources and investing in sophisticated reporting
packages to precisely track, analyze and change strategies. When you align advanced management
information system (MIS) capabilities with focused operational goals and strategies, you can optimally
determine when to:
Six months after Call vs. hold out.
implementing advanced Use dialer vs. manual.
MIS, one financial Allocate internally vs. externally.
institution reported cards Send letters vs. voice or email.
were 5% ahead of plan Choose the most effective repayment solution for a given circumstance.
and loans 4%. Choose the most effective recovery optionsell, soak (hold), keep or place.
Prevent delinquency or increase collection rates.
Keep or exit a customer (know who and when).
Management information improvements, including automation, allow managers to make clear and
precise decisions to improve efficiency and overall effectiveness.

Most organizations have a base level of actual and absolute MIS. However, few have developed
sophisticated relational measures that enable them to understand the relative performance of
various activities, and the results derived from a combination of these. Advanced MIS allows targeted
champion/challenger campaigns that typically secure a competitive advantage in collection
performance. These organizations continue to push the frontier of efficiency and effectiveness across
the performance of the debt portfolio, operational execution, staff effectiveness and cost of collections.

2013 Fair Isaac Corporation. All rights reserved. page 8

Eight Steps to Collection and Recovery Excellence for First and Third Parties

Transitioning from Many organizations have invested significantly in analytics and technology, but fail to leverage
Operational Negation the investment or gain the competitive advantage and business benefits initially expected due
to operational negation. By identifying and minimizing the impact of negation, organizations can
to Collections Excellence
achieve the maximum ROI possible from their C&R strategies.

IDENTIFYING AND OVERCOMING BARRIERS DRIVES MEASURABLE RESULTS FOR

FIRST-PARTY FINANCIAL INSTITUTIONS

European Bank Asian Bank US Bank

Managed 100% increase in 9% improvement in 35% improvement in

accounts through
economic downturn
ROI of 1200%
7% bad debt saving
Operating costs reduced by
nearly $500K per annum
Promises taken
increased 37%
bad debt
50% improvement in
staff attrition
Greater buy-in and
accountability
Vastly improved problem-
solving environment
staff attrition
Increased productivity
resulting in a 25% improve-
ment in contact rates
Improved employee morale
and engagement
Reduced training and
new hire cost

FICO C&R business consultants can help identify best practices in your market, ensuring operational
barriers are identified, worked around, eliminated and better understood.

If youre experiencing low performing collections and recovery, or would simply like to learn more
about enhancing your capabilities and results, please let us know. For immediate assistance, use the
contact information listed at the end of this paper.

Visit www.fico.com/insights for more white papers, including:

Five Imperatives in a Shifting Collections Landscape
Unlocking New Doors to Collection Success
Realize the Profit Potential Already on Your Books

2013 Fair Isaac Corporation. All rights reserved. page 9

Eight Steps to Collection and Recovery Excellence for First and Third Parties

about FICO

FICO (NYSE: FICO) is a leading analytics software company, helping businesses in 80+ countries
make better decisions that drive higher levels of growth, profitability and customer satisfaction.
The companys groundbreaking use of Big Data and mathematical algorithms to predict consumer
behavior has transformed entire industries. FICO provides analytics software and tools used across
multiple industries to manage risk, fight fraud, build more profitable customer relationships, optimize
operations and meet strict government regulations. Many of our products reach industry-wide
adoptionsuch as the FICO Score, the standard measure of consumer credit risk in the United
States. FICO solutions leverage open-source standards and cloud computing to maximize flexibility,
speed deployment and reduce costs. The company also helps millions of people manage their
personal credit health. Learn more at www.fico.com.

For more information North America toll-free International email web

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FICO and Make every decision count are trademarks or registered trademarks of Fair Isaac Corporation in the United States and in other countries. Other product and company names herein may be trademarks of their
respective owners. 2013 Fair Isaac Corporation. All rights reserved.

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