Plum Prize for the Taking

In any business, there is always a section of customers who falter on payment after buying a product or using a service.

Though that percentage is often very small for individual sellers, it becomes significant for companies who are into the business of providing credit, such as personal finance and credit card companies. In consumer businesses (such as these), while the overall amount is significant, it is spread over a large number of delinquent debtors. So collection often becomes a difficult task for large creditors, which prompts them to assign the task of collecting their delinquent debt to a third party.

Though in the US, the practice has been there for quite some time, it has been approached by creditors in more of an ad-hoc basis, giving rise to an industry, that is sizeable, yet unorganized, in many cases quite localized. Account Receivables Management (ARM) services, as this service is known in the business jargon, or collections, as it is more popularly known, is one of the fastest growing business segments. According to the Association of Credit and Collection Professionals, creditors placed a total of close to $135 billion delinquent consumer debt for collections in 2000, almost double of $73 billion that was placed for such collections in 1990. Yet, for Indian BPO vendors looking at tapping the opportunity, that is only part of the good news. What should make them more optimistic is the changing trend in how the collection is handled by the creditors.

The US Collections Industry

According to the Kaulkin Report on the US collections industry, published by the Kaulkin Ginsberg Company in the year 2000, there were more than 6,500 collection agencies in the United States, trying to collect about $135 billion of delinquent debt placed for collections by the creditors and making $13 billion of revenues for themselves in the process.

However, what is more important to understand is how the delinquent debt was and is handled by the debtors. According to the same report, 58 percent of the $13 billion of industry revenue came from contingency collections, debt placed for collections on a “contingency” basis, where the agencies are paid on a contingency (only as a percentage of collections) basis.

And not long back, these were often ad-hoc, short-term contracts.

What should be music to the ears of the offshore BPO companies is that it is changing. The report noted that in recent years, contingency collections were increasingly replaced by debt purchasing (whereby a purchaser buys the debt at a fraction of the total value after evaluating the nature and time of the debt and trying to collect a higher percentage thereby making a profit) and contract outsourcing (where a collection agency is contracted on a long term basis to call on behalf of the client and collect the debt and is paid a fixed fee as well, on a contingency basis–similar to our familiar BPO model).

The rate of the change is also fast enough to expect significant change in the foreseeable future. In fact, offshoring could not just gain from it, but could also act as a catalyst in that change. According to the report, while the contingency collections is likely to grow at only about 8-10 percent (even that is not bad by the US standards), the debt purchasing would grow at 20 percent. Outsourcing is likely to grow at a whopping impressive 25-35 percent annually. In 2000, debt-purchasing accounted for 28 percent and long-term outsourcing contacts were 11 percent of the total industry revenue.

Indian BPO companies would gain from the growth of both big debt purchasing trends and outsourcing trends. Not only can they look for long-term outsourcing contracts, they can also target the debt purchasers to collect on their behalf, something that a few India-based BPO companies have already started doing, as we will see latter.

The Opportunities

For the Indian BPO companies looking at targeting this growth opportunity, the opportunities depend on what market-entry strategy they take. Broadly speaking, there could be four models of client acquisition.

n Direct outsourcing contracts with the clients: This is, of course, the most direct model with a far better long-term growth prospects but also the toughest model to follow, because one is directly competing with the established collection agencies in the US. What is more, you have to register as a collection agency in all the states that you carry out your collection activities.

However, direct client contracts, often being early stage collection work (0—30 days), the skill level required for collectors is low. While Epicenter has followed this model successfully, Global Vantedge also has its part of work coming under this model. EXL and Msource are the other companies that have registered in certain states as collection agencies and doing some work. This is especially a good model for companies who want to remain focused, pure-play receivable management companies.

n Partnership with a US collection agency: Another popular way of getting there fast is tying up with a US-based collection agency. This is a model that many of the broad-based BPO companies have followed. For US collection agencies, this is a fast way of leveraging on the offshore model. companies which have adopted this include model Global Vantedge
(OSI), Zenta (with NCO Group), HCL Technologies BPO (with D&B Receivables Management) and Tracmail (with NCI). NCO has a financial stake in
Zenta. This model usually has a balance of early, mid and late-stage collections. Given is a list of major US collection agencies with their websites.

n Partnership with debt-purchasers: This is one opportunity, which is high value, low volume but is better on margins. Though Indian companies are yet to wake up to this opportunity in a big way, some companies like Worldzen are already into it on a small scale. Expect more action in this space.

Challenges

Few tasks could be more important than making people pay, often when they do not want or are not in a position to pay. This is the broad challenge that you need to take when you get into collections. There are also a few challenges that are quite distinct from other BPO opportunities and some of them are as follows.

n Risk: The collection business is still based on a lot of contingent payment. The collection companies are more often than not paid a percentage of the total collection, which means the revenue is a direct reflection of skills.

n Need for registration: Unlike many other BPOs, the client acquisition in receivables management is not just about having a few sales people in one or two locations. For carrying out collections work in a state, most states require a company to register. This has to be done individually in each state, which is a huge task. Indian companies who get work through US collection agencies can skip this route but any company wanting to grow as a full-fledged collection agency has no other option. Apart from the financial implications, the time and energy required is quite significant.

n Building the skills: Among all BPO jobs, collections probably require the highest level of skills among the agents or collectors. What makes it even more difficult is the lots of dos and don’ts that the US Fair Debt Collections Practices Act, makes mandatory for all collectors. They include not calling a debtor too frequently, not using any wrong language and so on. So, training is usually a tough challenge.

n Pricing: However, the biggest challenge so far, is pricing. Traditionally, in the US, the agencies have been paid as a percentage of collections only. This has changed in outsourcing contracts to a mix of fixed fee plus a percentage of collections.

Indian BPO companies, especially those working with collection agencies, must take into account the fact that the actual recovery (success) rate varies largely across types of debt, period of debt, types of verticals and different geographies. For example, according to the Association of Credit and Collections Professionals’ 2000 Top Collections Market Survey, the automobile market had a collection rate as high as 65 percent, while the child-support market had only a recovery rate of 2 percent. The toughness of success is dependent on such factors and since pricing is a factor of success, all these should be taken into account.

Trends

Receivable management outsourcing services are provided by about a dozen of Indian BPO companies, a few of which are focused on this area. We have not taken into account captive centers like GE and offshore operations of banks, which may be carrying out these operations from India. Excluding that, as the table shows you, there are about 3000 people working out of India, in collections. Epicenter is the clear leader in the market, followed by Global Vantedge. All third-party receivable-management companies could soon fit into either of the four categories listed below.

n Specialist Indian collection companies

n F&A companies whose portfolio will include receivable management

n Multi-service companies who would act as the offshore center of US collection agencies; and

n US collection agencies’ own offshore delivery centers

A few Indian companies are on their way to become specialized receivable management companies. Today, Epicenter is the only company that fits into this model. As mentioned earlier, Global Vantedge is also looking at such models. It will not be surprising to see a few others like Zenta focused on
collections going on their own.

Companies like EXL, Msource, and Intelenet are example of companies in the second category. These are broad F&A companies, who would do collections as part of the process chain. bpOrbit foresees many more companies joining this league.

As India gets proven as a preferred offshore destination in collections as well, many big collection agencies in the US will look at offshoring here more seriously. They can be expected to come in partnership with some Indian companies in either JVs or partnerships. This has already happened and companies like NCO, NCI, OSI, and D&B Receivable Management are already here, in partnership with Zenta, Tracmail, Global Vantedge and HCL. This model would be popular in short to medium term, when both the US collection agencies and the Indian companies wanting to tap into collections will find each useful to have partnerships. A few of these partnerships may continue but there would be a tendency, as has been traditionally, to part ways after the initial period.

This would lead to the fourth category, when a few of these players, equipped with India operational knowledge, would try to come on their own. Already, there are rumors that Risk Management Alternative (RMA) is trying to set up on its own.

According to sources, presently RMA does part of its work through the eFunds center in
Mumbai.

Whatever be the mix-n-match of models at a given point of market evolution, it is a no-brainer that a lot more of higher value work will be offshored to India. What is expected in the next 12-18 months are a few trends.

n A beeline by US-based collection agencies to India, either directly or through partnerships

n A lot more late-stage collections coming to India

n A few Indian companies would seriously start looking beyond the agency partnership route, focusing on end-clients and debt purchasers to strike a balance between volume and value.

n We could see a lot more investments and acquisitions in this space.

While we may see some Indian companies actually taking the next level of risk to buy debt, it is not expected to happen in the near future.

Shyamanuja Das in Gurgaon