Selecting the right recovery agency is a critical decision for any creditor, but it’s easy to fall into common traps that lead to suboptimal results. From assuming bigger is better to thinking aggressive sales tactics reflect the agency’s collection abilities, many misconceptions influence the selection process. This blog explores the fallacies that often cloud agency selection, the theories guiding agency performance, and the fundamentals you should consider to ensure you’re partnering with the right agency for your delinquent accounts.
“Tell me the Top Ten Agencies, I want to make my choice from the top ten,” says one recovery professional.”
“I visited five agencies. They all have computers and all say they have the best people, and the best security – there’s no difference,” says another.
“If they can collect my worst paper, some of it has really been through several tertiaries, then they get a chance on better paper,” another recovery manager confides.
“The salesman has been pestering me about using his agency. He’s here every month wanting to take me to lunch, with ball game tickets in his hand. If they pursue debtors half as much as the pursue my business, I’ll be in great shape,” another reasons.
“An agency offered me 5% less. What have I got to lose?” an old-timer wonders.
The Fallacies of Agency Selection
The above five recovery professional quotes represent five fallacies of finding the right agency for your delinquent accounts.
- Big Is Better Fallacy
- They’re All The Same Fallacy
- If They Can Collect This… Fallacy
- Aggressive Salesman = Aggressive Agency Fallacy
- Low Rate Fallacy
Bigger Is Better
“Bigger Is Better” is a common fallacy. Certainly the argument that they wouldn’t have gotten big without being good is supportable, however, it does not necessarily translate that they would also be good for your company, and collect the maximum return on your accounts. If you are also in the “Big” category, then there is more evidence that Big is appropriate for you. However, be careful with the assumption that Big equates to Good or Great. There is an industry tendency and perception that the top ten in size are the top ten in performance. When a random group creditors were asked to list the five top performing agencies and the five worst performing agencies, 37% of those listed were listed in both categories. So, top performer for some, were also worst performer for others. Size of the agency does not directly relate to performance.
They’re All The Same
“They’re All The Same” Fallacy is easy to believe when you take a look at simply their phone pitches, the proposals and the contacts. However, visits to their offices may be the first clue that agencies are not all the same. Specifically, agencies can vary dramatically in computer facilities, security, policy and procedures, and capabilities. It’s easy to make the assumption that if the agency has the resources, that they will be used on your portfolio. However, this is not necessarily the case. One difficulty for the recovery professional is that the computer boxes and terminals on the desks have a tendency to look alike. Physical security is visible at the site visit, but the other aspects of security might be harder to assess for the recovery manager. In an ideal world, your company has an IT or Security Team that can assess this aspect for you, but generally, the recovery manager also needs some background to be able to ask the right questions. Some agencies have down time every single day, or system challenges although they profess to have “very little” down time. Another factor, which is especially true with autodial systems, is the management of the technology. Just because two agencies have the same equipment doesn’t mean that they use that equipment effectively or efficiently. Software versions vary, and skill levels to use them also vary. In fact, agency strategies and technique can be more important than machines. Check that the minimum technology is there, but check further into how that technology is used to really understand which agency is best for your company. Even if they look it from the outside, they are not “all the same”.
If They Can Collect This… Fallacy
The “If They Can Collect This…” fallacy is not uncommon. A creditor recognizes that his work has been attempted by his own extraordinary recovery department as well as several agencies. The tendency here is to believe that any additional collections really indicate a superior performance by the agency. That performer, therefore, would be even better on earlier, more collectable work. This is not necessarily the case. Two specific ideas need to be considered further. The first is that an agency might collect fourths, fifths, sixths, etc. because of changes in circumstances of the debtor during that time frame. It could be that they were finally able to reach a certain percentage of debtors whose conditions changed. Therefore, just because an agency collected money on older placements does not necessarily translate to collecting money on other, maybe newer placements, or even a different product. It is possible that the agency may be good at the older type of work, with heavy skiptracing, but not necessarily competitive on accounts with good telephones, or heavily disputed collections or those requiring a special finesse.
Also, we tend to judge an agency based on whether any collections are made, rather than with a solid measurement system of control group vs. activity. Therefore, most of the time there is poor control on what the agency’s recovery number should be. The thought is that they were able to collect when someone else didn’t. It is not a valid comparison.
This throws into question the decision to start agencies with third placements and move them progressively to better placements when a good job was done on the poorer work. It may be a good method in some circumstances, but it does not follow that it will always be so.
Aggressive Salesman = Aggressive Agency Fallacy
The “Aggressive Salesman = Aggressive Agency” has been the reason for many agency selection decisions. Sometimes I think the aggressive salesman just finally wears the prospective client down. After all, the recovery professionals’ job is also one of fighting fires. When a problem occurs with an agency, or the recovery professional decides it is time to try another agency, a natural tendency is to look at adding an agency that has been constantly pursuing the business. It requires less of that valuable commodity, time, and it makes sense that aggressiveness runs in the company. Unfortunately, all that is guaranteed is that the salesman is aggressive. Be careful to learn much more about the company and its collection technique, financial stability and facilities prior to making decisions based on aggressive salespeople. Aggressive salespeople just might be adding more clients (possibly more profitable or desirable clients) to the agency regularly. Sometimes aggressive salesmen/saleswomen can even sell more than the agency is staffed to handle at the time. Aggressive salesmanship is not an indicator of collection performance.
Low Rate Fallacy
The “Low Rate” fallacy is also a very tempting concept. An agency offers to perform the same service for 5% less. It’s tempting – who doesn’t want a 5% discount! It’s trickier here because we aren’t buying a product like a pencil or a pen, or where we can easily see the quality. We are purchasing a complex service. The experienced recovery professional knows that low rate is not necessarily a bargain. Even so, most have been tempted to give it a try when management insists that costs must be reduced. The problem is that costs might be reduced, but with that reduction comes a reduction is recovery dollars, thus costing your company money. Sometimes the old adage, “You Get What You Pay For” is in play here. Be sure to check to see if the agency is reducing their profit margin or their activity level.
The Next Step – Theory
Understanding the common selection fallacies is the first step in appropriate agency selection. The next step is to understand the six basic theories of selecting agencies:
- Monogamy With Agencies Theory
- Non‑Exclusivity (or Competition Breeds Higher Net Return) Theory
- Territory Issues ‑ National vs. Regional Theory
- Agency Expertise Theory Big Fish, Little Pond ‑ Small Fish, Big Pond Theory
- Continuous Testing Theory
Monogamy With Agencies Theory
The Monogamy Theory means that only one agency is selected and a partnership is developed. A percentage of creditors prefer to use only one agency. It certainly simplifies the processes, and for small volumes, could be the right answer. An offshoot of this theory is when one agency is selected for a certain portion of the portfolio (i.e. out‑of‑state accounts, deceased, seconds, thirds, bankruptcies, etc.). If a creditor is confident in knowing the appropriate liquidation percentage on his/her accounts and if that creditor can substitute a factor or changes in economic conditions or changes in internal efforts; then, he/she can be comfortable with a monogamous relationship. The difficulty with this relationship is verifying that maximum results are being obtained. If the agency collects less than expectations, the question of the influence of economic flux or internal changes will always arise. Certainly, there are always questions as to whether the result is actually agency experience and exceptional prowess or internal staffing changes at the creditor prior to placement.
One method of verifying that maximum efforts are being performed would be to set work standards and audit to those standards. At that point, the recovery fluctuations will be explainable if the work standards are achieved or exceeded. When work standards are not met as expected, the loss of recovery is more difficult to estimate than when comparing competitive agencies.
Non-Exclusivity (or Competition Breeds Higher Net Return) Theory
Competitive vendors is a more common theory. The idea that competition among agencies increases the results from each agency is supported by a large number of creditors who use 2 to 3 agencies at a minimum. Some in our research are using 4 to 6 agencies and larger volume clients have been known to use many more, often segregating by product type, region, specialty collections and more. Particularly with larger volumes, the risk of “placing all the eggs in one basket” is greater with fewer agencies. In addition, agencies have shown tremendous competitiveness and strive to outperform other agencies when results are shared. This theory has wide acceptance. The creditor needs to be careful to evaluate performance and results fairly and in a comparable manner, which is much easier said than done. (Various measurement methods and biases are covered in a different blog.)
Territory Issues – National vs. Regional Theory
The “National vs. Regional” theory depends greatly on the creditor and the types of accounts. It seems that this theory may be less important with today’s technology than in the past, but many creditors still like to use a regional approach. When a creditor’s accounts are all in a certain geographic reason, there is a natural tendency to think that the agency needs to be in that region. However, it has been seen that agencies in another region can also collect just as well. I believe that the location of the agency can be important, but it is just one factor, and not the sole reason for a successful result. Some recovery managers prefer a random distribution of equal amounts of accounts to agencies. Others prefer a performance distribution (the high performing agency receives a higher percentage of placements (which makes evaluating and measurement agency performance more difficult). Others use product type distribution, alpha splits and even a combination of the placement methods listed. The regional issue is probably most important when a creditor’s work has specific regional quirks, or the creditor’s product is only sold in a specific regional area. When collectors understand the product, it makes things easier.
Agency Expertise Theory
The “Agency Expertise” theory means that the agency is chosen for their expertise rather than other factors, which could include size, facilities and stability. In earlier research, many chose Expertise as a number one factor in selection (assuming the basics of security was consistent.) Agency Expertise was followed by the concept of agency financial stability in the selection process. The need for specific agency expertise may be directly related to the complexities of your portfolio. Oil and gas exploration and detailed contractual relationships may require a more knowledgeable collection effort than a credit card, as an example. If your accounts are highly complex and/or highly disputed, agency expertise may also be more important.
Big Fish, Little Pond ‑ Small Fish, Big Pond Theory
The “Big Fish – Little Pond and Small Fish – Big Pond” theory is based on the idea that it is better to be a big fish in a little pond than the smallest fish in the big pond. When you are the biggest client with an agency, you can often demand more service, or quicker service, or immediate action. However, there are downsides to every positive. Being the largest client also has risk. Being a small client in a large agency can be less than successful also. Just because they work on commission doesn’t mean they have the staff available to work every client’s accounts to the maximum level. When staffing challenges arise, the smaller clients might feel the pain (in this case, not have collectors available to work their accounts). Certainly agency efforts may be based on the priority and importance of a client compared to other clients. This is a theory to consider when selecting the right agency for your accounts. Finding the right fit for the relationship between agency and client is important. Most agencies cannot be all things to all people. Recognize what other factors are at play at the agency in addition to your accounts at the agency. Sometimes the lack of collection activity on your accounts is directly related to other clients or distractions at the agency that don’t relate to you at all. For most, the relationship you have with your agency, and the feedback and communication you provide will have the most impact on your results. By maintaining a solid foundation of policies, auditing and communication, you can improve your results – whether you are the big fish, or the little fish.
Continuous Testing Theory
The “Continuous Testing” theory applies to those creditors who believe it is important to always have a test agency in the wings to replace one of the core performers, if necessary. However, this can be difficult to manage and measure. One difficulty with obtaining maximum results in this situation is that most often, the worst accounts are put into this test. As mentioned in the “If They Can Collect This… Fallacy”, this may not be a good idea. It has been seen on many occasions that the collectors form an opinion on a client’s work when they first see it, and that never changes regardless of the quality of work or changes in fee percentage. Therefore, the collectors never get past an initial gut level feeling that the client is “good” or “bad.” Therefore, the collector’s self‑fulfilling prophecy comes true, and the “bad client” never gets better. It is difficult to run continuous test programs that are completely fair and results comparable, but it can be done.
Recognizing the key fallacies and theories, a creditor is now prepared to review the fundamentals of agency selection.
The Fundamentals
Fundamentals include the basic elements which should be checked or verified prior to selection of an agency. This includes:
- Licensing, Bonding & Insurance
- Complaint History
- Financial Statements & Stability
- Security
- Policies and Procedures
- The Proposal & Contract (Work Standards)
- Reference Checking
- Personal Visit
Licensing and bonding varies dramatically by state. Insurance can vary within the agency, depending on client requirements. Many larger creditors also require additional insurance or bonding from their agencies.
Complaints are an important area to review. Check the agency’s complaint log and history. Also, be sure to check with the CFPB consumer complaint database.
Financial statements and verification of agency financial stability cannot be overemphasized. Make it a point to review financials prior to selection as well as on a regular basis afterward.
Security is an area you must evaluate. Some companies have IT and Security Teams that handle the security review prior to any selection process. If your company doesn’t have that, be sure to use a detailed security questionnaire and check with the agency about details on how their company keeps your data secure.
Check policies and procedures, for security, and all aspects of agency operations. Ask to see the hiring, selection, background checks, training policies, and termination policies. Check how they keep collectors up to date, and how the continuous training for laws, regulations, cybersecurity, etc.
The proposal and contract should identify the specific efforts you have negotiated with the agency. Work until all efforts are exhausted” or “Until completion” are too vague to enforce. The proposal and contract need to be specific enough that you know what you’re buying.
Reference checking is extremely important. Don’t diminish its’ value with the belief that only good references would be given. Investigate references for yourself, and check to see that the companies listed have work similar to yours. Many times I have found that people assume you won’t check references – and it’s a big surprise when you do!
The personal visit is a necessary step which should not be avoided due to distance or time. It provides the opportunity to meet the staff responsible for your collections as well as review systems and procedures.
Agency Selection – A Critical but Complicated Task
It becomes obvious that selecting an agency is not a simple task. Choosing a recovery agency is more than just picking the largest, loudest, or cheapest option. By avoiding the pitfalls of common selection fallacies, understanding the theories behind agency performance, and focusing on key fundamentals like security, complaint history, and financial stability, you can make an informed decision that benefits your bottom line. The rewards—maximized returns and a trustworthy partnership—are well worth the effort. As with any important business relationship, thoroughness in selection leads to better outcomes.
Author: Judy Hammond
Judy Hammond is founder and President of Resource Management Services, Inc. The corporation was founded in 1986 and specializes in auditing and consulting, serving the collection and recovery industry. As President of Resource Management Services, Inc., she has more than 35 years of experience with an emphasis on operational reviews for compliance and operational effectiveness of collection operations, both for creditors’ internal collection and recovery operations as well as collection agencies and attorneys. She has worked with top banks and financial institutions, utilities, credit unions and telcoms, (and their vendors) and has conducted many Best Practices projects. She is author of various industry publications: “Comprehensive Agency/Attorney Usage Study,” “Comprehensive Agency/ Attorney Usage Study II” and “Collect More From Collection Agencies”. Her work with creditors who were looking to sell debt for the first time, and subsequent Buyer/Seller research was the foundation for the second corporation, The Debt Marketplace, Inc. She worked with Dennis Hammond as co-founders of the Debt Buyers’ Association, (now RMAi), building the foundations for industry standards, as well as the original code of ethics. She developed and produced two industry conferences, Collection and Recovery Solutions and Debt Connection Symposium & Expo, from their inception in 2002 and 2006, respectively, to 2022. Prior to starting her own company, she worked with two large collection agencies.
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