How do you calculate a collection agency’s cost to collect, and lower it, including on low-balance accounts?

The short answer

Cost to collect is what you spend to collect, divided by what you collect. Worked out per dollar, it tells you how much of every dollar collected goes back out in cost. Worked out per account, it tells you whether a particular kind of account is worth the effort you put into it.

In our experience low-balance accounts are where the numbers bite. A call, a letter or a minute of a collector’s time usually costs about the same whatever the balance, so the smaller the balance, the larger the share of it that the work uses up.

How to calculate it

Per dollar: total collection cost for the month, divided by dollars collected in the month.

Per account: the cost of working an account, set against what that account is likely to bring in. For a kind of account, add up the collector time, calls, letters, texts and payment fees it takes, and compare that with the dollars that kind of account usually returns.

The per-dollar figure tells you how the operation is doing overall. The per-account figure tells you where the money is lost.

What to count

The figure is only as good as what goes into it. In our experience agencies that count only collector pay find their cost to collect looks better than it is. Count:

• People: collector pay, commission and bonuses, benefits, team leads, managers, quality and compliance staff, trainers.
• Contact: dialer and phone costs, letters, texts and emails, and the data used to find consumers.
• Payments: card and bank fees, and the cost of the payment portal.
• Running the floor: systems and licences, compliance and legal review, disputes, office and overhead.

What you include changes the answer. In hospital billing, the Healthcare Financial Management Association works out cost to collect from the total expenses of the departments that collect, divided by cash collected. It leaves one department out, and notes that an organisation that counts it should adjust its target to match (HFMA, 2012). In our view the same applies to an agency: decide what goes in, write it down, and keep it the same from month to month, so this quarter can be compared with the last.

Why low balances are hard

On a low-balance account, the cost of collector time can be a large share of the balance itself. In our view that is a reason to plan the effort, not to give up on the account:

• Start with the cheapest contact that is likely to work. A text, an email or a payment link, before a collector’s call.
• Make paying easy. In our view a consumer who can pay in a few taps without waiting on hold costs less to collect from.
• Give collector time to the accounts likely to repay it. Balance on its own doesn’t say that; what matters is how likely the account is to pay and how much. Getting more from collection scores works through this account by account, with a calculator.
• Know when to stop. In our experience extra effort on an old batch eventually stops returning much. Reading each placement month on its own shows when that point arrives. How to prioritise account inventory.

Where the cost usually comes down

In our experience labour is the largest cost on most collection floors, so most of the room is in what each collector hour produces:

• More collected per contact. A collector who turns more right-party contacts into kept payments lowers the cost of every dollar. What RPC conversion is.
• Fewer wasted attempts. Calls to bad numbers, at the wrong time or on accounts that won’t pay this month use collector time and dialer cost for nothing.
• Self-service for simple payments. In our view consumers who only need a way to pay shouldn’t need a collector.
• The right collector on each account. In our experience collectors differ in which kinds of account they collect best, so who works an account changes what an hour of work brings in. Raise collections per agent without more headcount.

Whatever you change, measure it against a control group, with the full cost counted, including any extra commission it triggers. Did a change on the floor really work?

Where agent matching fits

Agent matching doesn’t change your costs directly. It is aimed at what each hour of collector time brings in. BestPair sends each account to the eligible collector who has done best with accounts like it, from the floor’s own call and payment history, inside the rules and workload limits the agency sets, and measures the result against a control group. If the same hours collect more, each dollar collected costs less. The result on any one floor is what the control group shows.

Sources

• Ask the Expert Answer: Calculating Cost-to-Collect: Healthcare Financial Management Association, 25 October 2012; how hospital revenue cycle teams calculate cost to collect.