After the organization met all of its obligations to the customer who did not pay his debt by the terms of the credit (and thus the customer essentially violated the contract between the parties), and after exhausting all collection processes as required (phone calls, letters, voice messages, meetings, etc.), the organization is now forced to use enforcement measures to ensure the collection of legally owed funds.
Enforcement in the field of collection means severing the commercial ties between the organization and the customer, partially or fully. The methods of enforcement are many and different and range from disconnecting a customer from the service (cell phone or landline, gas, water, electricity, internet and more); by stopping the supply of products on credit, switching to cash only, or completely stopping the supply of products; and transfer the client debt to legal treatment. The range of options is extremely wide and depends on the industry in which the organization operates and its character, the nature of the client, and the (economic) importance of continuing to work with the client.
The principle in this progressive process is to make increasing efforts to collect the debt, while notifying the customer of the next step or steps in the collection process, and while adhering to a framework of action in accordance with what was notified to the customer.
We will illustrate with a diagram example describing the escalation process that a commercial organization can takes against payment refusers.
The collection process proposed in the example before us lasts about seven weeks – from the customer entering debt until the debt is paid off or transferred to legal.
The process begins when the customer enters delinquency, that is, at the end of the credit period agreed upon at sale stage. First, a contact is made with the customer, after which the collector tries to find out the reason for the non-payment and immediately begins to work to remove the reasons for the customer’s objection to pay. After the reason for the non-payment is dealt with, a second contact is made to the customer in order to collect the debt (between the middle of the second week and the middle of the third week). And if the customer does not settle the debt despite repeated requests, a written notice is sent (approximately in the middle of the third week) about the cessation of commercial activity with him (stopping the supply of products or services) within X days, if the debt is not settled. At the end of the fourth week, the commercial activity with the client is stopped and a final warning is sent to him before legal proceedings are taken. At the end of the sixth week, the client is transferred to legal.
It is important to note that if at any stage of the process information is discovered about the client’s financial difficulties, the entire collection process must be shortened, request immediate payment of the debt and consider urgently transferring the client to legal, in order to be among the first creditors of the debtor and achieve better chances compared to others to collect the debt or part of it.
The above example does not consider the issue of customer retention with all its implications. In an organization where customer retention is a top value, the collection processes will be smoother and longer before reaching the stage of ending the commercial relationship with the customer, including ending provision of services.
Further on, we will present the variety of tools available to the collection manager when he comes to escalate the collection processes.
Escalating collection enforcement procedures while maintaining customer expectations.
Assertive collection is a combination of a wish to collect an overdue debt and a wish to keep the client. In order to maintain normal relations with the customer even in a dispute situation, we must act as much as possible in accordance with the customer’s expectations and adapt over time the customer’s expectations on the development of the collection process and continue to inform him in advance of the escalating measures that are about to be taken against him – while leaving enough time for a reaction on his part. An unusual action that was not reported to the customer in advance, or that was taken before he had time to react, may result in the customer’s churn, even in cases where it is clear as day that the organization is right in its demand and that the enforcement actions are appropriate.
Immediate activation of an extreme enforcement measure, such as a letter from a lawyer, which arrives only a few days after the agreed date for debt repayment, may cause the debtor client to terminate the business relationship with the organization. The client is aware that he owes a debt in arrears, and he expects to receive a direct demand from the organization and not from his lawyer. This excessive reaction is perceived by the client as “breaking the tools” and as a serious and misplaced threat.
In summary: each step in the collection process must include a notification to the client about the next step in the treatment, in order to adjust the client’s expectations for the rest of the process and prevent him from (bad) surprises.
The decision to stop providing goods or services to the customer.
This is a complex and very significant decision for the organization, both for financial aspect and for reputational aspect. Therefore, it is important that the policy on the subject be accepted at the higher levels of management and backed up by procedures in a clear and uniform manner, including a timetable for enforcement measures, defining necessary documents for enforcement and guidelines for when to act flexibly (all of these according to the type of client, its nature and the scope of its activity). At the same time, it is important to carry out continuous and ongoing controls on compliance with procedures and to consider unusual approvals.
As a general rule, it is recommended to make a coherent decision on escalation based on the recommendation of a qualified person (usually the collection manager), and base it on the customer’s payment history, the efforts taken to collect the debt in accordance with procedures, a personal impression from a meeting and/or telephone conversation with him, as well as information from external and internal sources – All this is subject to the size of the outstanding balance of the debt and the number of days in arrears as of the time of the decision.
Generally, it is recommended not to exceed a 30-day delay before taking further steps, this is because the risks inherent in further arrears and increasing the due balances for additional products or services provided to the customer increase as time passes.
However, in material transactions, there is sometimes room for a mediation or arbitration procedure to be held before severing the commercial ties with the customer.
Customer segmentation and adjustment of collection enforcement processes to the type of customer
We previously defined the collection process as an industrial process, and similar to such processes, the resources available for collection are limited. Therefore, it is very important that the collection manager defines the operational strategy of the collection within the business strategy of the organization.
The collection and escalation processes should not be the same for all the organization’s customers. A correct segmentation of the customer population must be carried out, in order to decide on an appropriate and distinct operational strategy for each customer group.
Enforcement according to customer classification:
• According to the customer value, a value – in grades or monetary values - that reflects its value and importance to the organization according to a scale based on a formula or model that the organization has adopted.
For example, a customer who always paid on time and had an automated method of payment, and whose transaction turnover was over amount X and who had a bank direct debit returned to him for the first time – will receive personal collection treatment (for example, in an outgoing call or in a meeting) without immediate use of the enforcement measures available to the organization.
• According to the type of client (strategic, security, institutional, private, business, large, medium, small).
• According to amounts of debts in arrears.
• by depth of debt; (the age of the debt) according to sales turnover.
• Geographical location in the country but also compared to customers abroad.
• by product/service line (one-time or ongoing).
Determining priorities – “queue management” for handling overdue debts
After segmenting the customers and adapting the collection process to the nature of the customer, we must define the priorities for collection from delinquent customers. This problem can be viewed as a classic “queue management” problem.
We can divide the queue into two main groups: a) a normal priority group, according to criteria we will define in advance; b) a higher-priority bypassing-queue group, which will receive treatment before everyone else.
The customers who will be classified in a normal priority group will be prioritized according to weighting criteria that will reflect the operational strategy of the collection manager, for example:
– according to the size of the debt;
– according to the period of the debt in arrears;
– according to the customer’s part in creating new debts for the organization;
– according to the share of the monthly cycle resulting from the client;
– according to the customer’s credit risk level;
– according to the customer’s profitability;
– according to the customer’s value;
– according to the degree of difficulty to collect from the client;
– according to the customer’s payment method;
– according to the customer’s payment ethics;
Further on, we will present two quantitative methods for determining the priorities for dealing with overdue debts, when it is necessary to consider several criteria.
The debtor customers who will be classified in the highest priority group will be dealt with immediately, regardless of the criteria and priorities of the regular group. For example, it is possible to define as top priority criteria a customer for whom information was received from business information companies about submitting an application for the appointment of a liquidator or a commercial bank filed a debt claim against him for a large amount.
Documentation
Documentation of the collection process and the efforts invested in collection from the customer are extremely important and are an integral part of all collection processes. During all the financial steps conducted with the customer – from the signing of the sales contract, through the delivery of the products and/or service to the activation of collection enforcement processes – we must document every interaction with him: phone calls, written or oral complaints, various requests and more.
Today, organizations have call recording systems that record the overall financial activity with the client. This is necessary in order to effectively handle each and every transaction, but we must also take into account that some clients will eventually end up in legal collections, and in such cases the strictness of documentation is even more important: if and when we end up in court, we do not want the judge to doubt whether we acted properly, or unfairly and that we allowed the customer to pay his debt. This is fundamental to the legal system from two aspects: on the one hand, the desire to maintain appropriate and fair behaviour in trade, and on the other hand, the desire to spare the courts procedures that could be arbitrarily achieved by reaching an agreed and early solution between the two parties.
NEXT: Debt collection in arrears, Phase 4: the pre-legal process