Breaking Up Bad Debt

No matter how many customers you bring in each year, their money is not revenue until you collect it. According to the Telecom Risk Management Association (TRMA), a person could go for seven years without ever paying a bill now that so many choices for wireless service exist.

In the North American telecommunications market, uncollectible debt ranges from 3% to 10% of revenues, or more than $6 billion annually, and some firms have experienced as much as a 35% increase in net bad debt. Wireless carriers tend to be on the higher end of that spectrum because they have been competitive longer than some other parts of the telecommunications industry, said Liz Titan, American Management Systems (AMS) principal. Concern about bad debt in the wireless industry is evident, as every year more seminars and forums are devoted to helping carriers handle this growing problem. About 150 attendees from 30 telecom carriers recently gathered to share their insights and strategies for using credit risk management to turn revenue into profit at the Fifth Annual Credit Risk Management Forum, hosted by AMS.

GTE Wireless, like many wireless carriers, has taken steps of its own to reduce bad debt. At the forum, the company discussed the challenges it has experienced with launching its risk-management program, dubbed RACM.UP (Risk Assessment and Collections Management Upgrade). Its risk-management and financial-services departments partnered to implement the program in response to several key corporate objectives, said Linda Salter, director of financial services.

"We had net-bad-debt targets that we needed to meet, there was pressure to reduce our unit cost by 10%, and we had to increase our productivity," Salter said. "Along the way we had to manage customer satisfaction and retention."

Since migrating to a risk-based program, GTE Wireless has met all three goals. The carrier reached its net-bad-debt targets for the year, reduced unit cost by 10% and increased productivity by 7%. RACM.UP has come far in a year's time, but getting GTE to where it is today was not without challenges.

Prior to this initiative, the company revamped its organizational structure. Financial services, including collections, used to be part of GTE Wireless' finance organization, Salter said, and each of the six collection centers across the country reported to a different local director. The company brought credit/collections and risk management under the customer-services umbrella and then centralized its call centers under one director so that financial services could operate as a single unit.

"Customer care and financial services have a common thread; we both have customer contact," said Charlie Falco, director of risk management. "This structure allows us to leverage the call-center infrastructure by putting financial services and customer care in the same place."

Next, the financial services group had to clean up its data, upgrade its software, build a behavioral scoring model and install a decision-engine software, Salter said. All of these things came with a price tag. Getting funds for them was the next major challenge because senior management typically did not allocate significant amounts of money to the collections department. While budget decisions were being made, financial services introduced a solid business case that showed decision makers how a risk-management program would benefit the entire company.

"By having a solid business case, we were able to state to the rest of the business why our projects were important," Salter said. "We have now moved to the top five on the priority list."

LINING UP THE SHOT RACM.UP required significant modifications to the billing system, which was not feasible. The department circumvented that challenge by using a copy of the customer database that is automatically updated every day. The data is "cleaner" than ever before, Falco added, and GTE Wireless has improved the data refresh time to less than 24 hours. In the past, he explained, collection representatives were working with 48-hour-old data, which meant that the customer already could have made the payment by the time the representative reached him on the phone.

"That consistency in our world is huge and critical to our success every day, " Salter added.

Once the database was complete, some of GTE Wireless' existing technology had to be upgraded. For almost eight years, GTE Wireless has used CACS, an AMS collections software application that assigns customers to collection representatives based on management-defined criteria and then performs the action that needs to be taken with those customers. When Salter first joined GTE Wireless, she was told that the collections system was not providing sufficient results for the company. She and the team educated the executives and themselves about all of the tools and technologies that were available. Soon they realized that GTE Wireless already had an effective solution in its existing product.

"We just weren't doing anything with the collections system," she said. "We hadn't trained ourselves how to use it, and we hadn't built our processes around it, or maybe the managers had become so numb trying to work with our systems people for upgrades or changes that they just gave up."

For the first step in RACM.UP, GTE Wireless introduced judgmental segmentation. In the past, work queues were based on dollar value or account-driven cycles. The lists were not generated based on behavior or risk, and everyone was treated the same way. Most customers received a phone call, a dunning letter and a follow-up call.

"We needed to find a better way to take advantage of those tools and start segmenting and balancing differentiation treatment strategies," Salter said. "As yourcustomer base is growing, it becomes a very expensive proposition to treat everyone the same, and you have a pretty big segment of customers who just may be habitually late payers that you are treating the same way as a high-risk customer. But those customers have options, and they can go somewhere else."

Step two included an upgrade to CACSPlus 6.4, which allowed GTE Wireless to introduce more sophisticated automated account routings. This allowed them to reduce non-value-added activity as well as pull out people who were under investigation for subscription fraud or bankruptcy and assign them to different work queues.

Step three was the introduction of Strata, an AMS decision engine and an empirical derived behavior model. Through empirical segmentation, the company found that more than 20% of its customers were low risk, so those people were assigned a less aggressive treatment strategy. Once GTE had stratified its portfolio, it was able to be more productive by focusing on the higher-risk customers instead of wasting time chasing late payers.

DEVELOPING A STRATEGY Implementing a new risk-management program, or even redesigning an old one, sounds like a mammoth undertaking, but you should be encouraged, not daunted, by GTE Wireless' experience, Falco said.

"We boiled it down to a very basic concept: we said we are going to fundamentally improve client collections," he said. "When you start tearing the process apart, you will find that there are a lot of things going on in your environment, and there is a lot of non-value-added work that your company does."

Salter said garnering executive sponsorship was the key to GTE Wireless' success in putting RACM.UP together. The financial services group had to justify its existence constantly, and other departments became customers, or "key stakeholders," to which they had to market their business plan. Now Falco, Salter and the entire financial services group not only have the continued support of their direct boss, Penny Tallis, vice president of customer services, but they have developed a healthy relationship with the finance department, which has helped in the budgeting process tremendously. Partnering with decision makers and finding executive sponsors in the finance organization allowed the team to enhance its relationship with the marketing department. Today, it even works with marketing on pre-qualification measures.

"If you are not invited to the party, you have to invite yourself," Salter said. "We had to crash the party time and time again in the beginning. Decisions get made, and it is not that people are intentionally trying to do the wrong thing, but we would get wind of something and realize it was going to throw us back, or it had a significant impact on our project or what we were trying to do."

Now that other departments at GTE Wireless realize the value of risk management, financial services is invited to the discussion table, Falco added.

A risk-management program is only as strong as the people who work on it. If you want to create or revise your program, you need to do everything in your power to make sure you build a cohesive team, Salter and Falco agreed.

GTE Wireless has motivated its team by keeping the lines of communication open and by simply having fun. The group created a logo for its RACM.UP program, which it put on hats, T-shirts and buttons. Key phrases, catch words and programs are important, Salter advised. If you start using a tag word or a phrase around the process, you can make it fun.

Salter added that RACM.UP's progress is equally as dependent on the team's ability to work with people in the field and with other departments. Subject-matter experts from operations have continued to be involved in roll-out.

"They have been the eyes and the ears of the field to the project team and anticipated or worked out issues prior to going live or implementing pilots, " she said.

LOOKING AHEAD Although RACM.UP has improved the company's game as a whole, GTE Wireless has not lost sight of future goals. In the next year, it hopes to improve the existing collection strategies, reduce unit cost and increase productivity even more. The company's customer-to-representative ratio has improved by a minimum of 7% over the last three years.

The group also plans to realign its processes across its six collection centers. Doing so will help the company when call centers must rely on each other for backup, Salter said.

"We should have a consistent process if we are segmenting our customers by judgmental rules or by empirical rules," she said. "Whether it is a Tampa, Houston or Cleveland account, how our associates interact at that moment of truth should be the same."

GTE Wireless' experience with moving to a risk-based business strategy is instructive. A project of this type is never easy, and you are bound to run into some bumps in the road. But if you have the will to move forward, even when you must deviate from your plan, you can meet any goal you set for yourself.

Your deadbeat database is made up of three groups of people, said Mike Bray, Sprint Customer Services Group assistant vice president of operations. The action you should take with a customer depends on which group he belongs to.

First, you have the never-pay group. These are customers who simply do not pay their bills. It is best to try to get them off your service and let the competition have them, he advised.

Next, you have the hard-times group. These are people who have personal problems that are preventing them from paying their bills. They may be ill, or they may have job-related problems. It is worth it to work with these people even though there is a risk. Their situations may turn around, and they will remember your kindness and be loyal for life.

The third group is the slow-pay group. Chasing down payments is a wasted effort because they are perpetually late paying bills and will pay you sooner or later. If you do find them, suggest an alternative payment method to them, such as an automatic payment plan.

"Once you identify which kind of customer you are dealing with, you can determine the appropriate treatment," Bray said. "But you need to be consistent to avoid legal issues."

Bad debt minimization is a major part of optimizing your company's portfolio, said Larry Grant, Bell Atlantic vice president, and Jeffrey Cleveland, American Management Systems principal. The two suggested four steps to creating the most efficient risk-management program.

1. Manage the accounts receivable across the entire credit life cycle. Some companies make the mistake of managing accounts receivable only in collections, but risk management is an end-to-end process from product planning and development to marketing, acquisition, usage management and collections. What comes out in bad debt is really a function of what goes in, which means the credit quality of new accounts, Grant said.

2. Rely on quantitative analysis to understand and manage the various trends within your portfolio. Quantitative analysis requires tons of data, which comes from all credit life-cycle points. Flexible systems are needed to warehouse this data, which can be used for detailed segmentation and to build robust behavior models to predict future customer performance.

"You cannot analyze what you don't have," Grant said. "You just have to get in and start collecting data, even if you are collecting it manually, even if you have to get dirty and learn. It allows you to build a track record and can demonstrate what you can improve."

3. Create an environment of continuous learning through the use of test-and-control methodologies. Constantly challenge the assumptions of how various segments of your portfolio are responding and evaluate the effectiveness of both strategic and tactical decisions. Use tests to measure performance, as multiple tests yield multiple learnings.

"Where you have processes in place that you think are good, try and make them better," Grant said. "Structure the work in a way to allow people to be more successful."

4. Provide a centralized coordination of policies, strategies and tactics across the entire credit life cycle. By talking with everyone in the company, not just your management team, you will gain partners and allies who otherwise may not necessarily be thinking about your issues.

The age-old battle between marketing and collections might be setting you back more than you know, said Deborah Mentgen, SBC Services managing director of credit and collections. While marketing is intent on bringing revenue in the door, collections is emphasizing the fact that nothing is revenue until the bill has been paid.

"Marketing needs to put in more control at the front end," she said. "It's not a successful acquisition if it's a deadbeat account."

Robert Patton, SBC general manager of sales and operations, countered that problems arise when the collections department only approaches marketing when it has a conflict. To resolve the problem, the credit and collections teams need to stay in constant touch with marketing and explain where their strategy is going.

The solution, they agreed, is a team approach where the two sides link goals. Credit and collections departments need to understand that marketing's job is to get customers. At the same time, Mentgen added, they should rev up testing and bring the results to marketing. Hard data will prove the importance of paying attention to the customer-acquisition process if the company is losing money at the back end.