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Outsourcing: Commercial Collection Agencies' Best Growth Opportunity?
What is Outsourcing?
Outsourcing is when a company farms out a non-core process to a third-party supplier. An example might be a bank outsourcing its entire IT operation to IBM.
In this scenario, IBM would agree to ensure that the bank's computer systems always meets certain performance and availability standards that have been laid down in service level agreements (SLAs) within the outsourcing contract. In return, the bank would pay a fixed fee.
Depending on the deal, IBM might, upon signing the contract, buy all the physical components that make up the infrastructure, and take onto its payroll all of the bank's staff who had previously worked to maintain and improve the systems.
Commercial Collection Agencies and Outsourcing
The non-core activity that a commercial collection agency could most readily add to its portfolio of offerings is the outsourcing of accounts receivable management. A collection service has specialist expertise in this area that has real value. And it is only by adding value that any business makes profit.
Right now, this profitability issue is absolutely critical in the collections industry. Most customers see collection as a commodity, and buy a collection service almost exclusively based on price. That drives down the fees, and commissions that commercial collection agencies can charge.
Smart collection service managers are looking for ways to escape operating in this high turnover, low-profit, commoditized environment. They want to add more value so that they can make more money. And outsourcing can be a great way to do that.
Outsourcing Advantages for the Customer
- Free to focus on core business
- Lower head count
- Lower management overhead
- Predictable costs and easy budgeting
- Any rapid growth is outsourcing supplier's problem
- Any seasonal surges are outsourcing supplier's problem
- SLAs guarantee quality and effectiveness of supplier's performance:
- Better cash flow
- Lower Days Sales Outstanding (DSO)
- Reduced bad debts
- Access to wider expertise than is affordable in-house
Outsourcing Advantages for Supplier (Collection Service)
- High value work dramatically boosts bottom line
- Diversification is often commercially healthy
- Long-term contract guarantees income regardless of economy
- Opportunity to optimize human and capital resources
- Proven success in outsourcing opens vast new business opportunities
- Enhances corporate credentials and profile
- Opportunity to acquire new expertise
Commercial Collection Agencies' Barriers to Entry
Entrusting a third party with an essential--albeit non-core--activity such as accounts receivable management is a big step for any company. Managers may need a great deal of reassurance that a collection service pitching for their business has the necessary will, skills, expertise, infrastructure and resources to deliver all the required services.
A potential outsourcing supplier with an existing track record can show case studies, and provide customer references that prove its capabilities. But how do commercial collection agencies with no such a track record win a prospect's trust?
The answer is to think small, and approach prospects with whom one already has a relationship. An existing client is much more likely to outsource to a supplier it knows and respects than someone who walks in off the street.
And once a collection service has one or two satisfied outsourcing clients, it is often much easier to recruit more--and bigger--ones.
Not an Option for All Commercial Collection Agencies
Naturally, not every collection service is going to be able, ready or willing to diversify into outsourcing. To start with, most managers in the industry are already working flat out just handling their existing businesses. They don't have time to develop new offerings.
Then, there is the issue of investment. Like all new ventures, outsourcing carries a risk, and some will be unwilling to take that chance.
And, finally, successful accounts receivable management requires additional skills, and a different culture from straightforward collections. So many commercial collections agencies may reject outsourcing.
Which makes it even better for those that don't.
Sources
Commercial Collection Agency Association
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