Collection Agency vs In House Collections

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All business hinges on cash flow. Bigger businesses can deal with delayed payments more easily than small ones, but no business can sit idly by without making an effort to collect overdue accounts. Individuals and landlords can have even greater problems when collections becomes an issue. Businesses, individuals and landlords all can make good and profitable use of trained and professional collection agencies.

In Business

In his seminal 1960 article, “Marketing Myopia,” Harvard’s Theodore Levitt coined the question, “What business are we in?” Outsourcing became a routine activity throughout American business in the 1980s, extending even to human resources departments in many businesses. Businesses that overdid their outsourcing efforts pulled several essential functions back in house, arriving at a balance between what they need to do for themselves and what could be done better or more effectively by an outside outsourcing partner.

Business collections fall into this category. Business is more competitive than at any time in the past, and astute senior managers have to remain focused on those activities that can lead their companies to shorten billing cycle times, increase quality and reduce costs. Attending to collection activities does nothing to allow organizations to focus on core business. It also derails managers’ efforts to strive for developing processes that allow their organizations to achieve “faster, cheaper, better” results as urged by Michael Hammer, the creator of the business reengineering concept and author of Reengineering the Corporation, still regarded as the most important business book to emerge in the 1990s.

Large businesses that keep collections in house carry more employees than they need to carry, increasing costs not only in direct labor but also in payroll taxes and other costs of maintaining employees. They also are less able to focus on their core competencies, maintaining and growing their market share or improving processes to allow them to operate more efficiently according to the principles of continuous improvement. Outsourcing collections to a collection agency likely will carry less overall cost than maintaining collections activities in house, but the greatest benefit may lie in allowing the organization to focus on its core business. Collections can dilute those efforts and reduce the organization’s ability to become or remain a market leader in its industry.

The benefit is even greater for small businesses. Cash flow can be critical for a small business, but it is unlikely that the owner of a small construction or landscaping company can manage to stay informed about laws governing collections or take the time to study methods and approaches to successful collections efforts. Regardless of the size of the business that chooses to outsource collections, it is a given that a professional collection agency will gain better results.

Collections is not a primary activity for any organization that retains collections in house. It’s a necessary activity, but it does nothing to advance the organization in its industry or market. On the other hand, collections is the primary business activity of the collection agency. Outsourcing collections elevates it from a necessary drain to the primary focus of the collection agency that takes on the responsibility. The outsourcing business gains the benefit of having trained and professional individuals performing the function. It also gains the benefit of ongoing training and continuing education.

Collection Efforts for Individuals & Landlords

As beneficial as outsourcing collections can be for businesses, the use of a collection agency can be of even greater benefit to individuals and landlords. The decision to use a collection agency even can head off lawsuits, fines for breaking collections laws, or even permanently uncollectable debts.

Businesses have perceived authority that most individuals do not. Using a collection agency can enhance the individual’s authority in the eyes of a debtor, and a collection agent generally can get the debtor’s attention much more easily than can an individual. If a debtor can pay but simply chooses not to, it is likely that s/he sees no real consequence of not paying. A collection agent can change that type of attitude.

Many individuals simply are uncomfortable asking for money that is owed them. If they employ a collection agency, then they can avoid that discomfort without foregoing repayment.

Landlords can face great challenges when trying to collect funds due them. Every state has an array of laws protecting tenants, but not many choose to protect landlords’ rights. Every state also has an array of laws governing collections, and it can be quite easy for a landlord to unwittingly violate one or more of those laws if trying to manage his own collections. If a tenant occupies a rented space but does not pay, the landlord still has to pay taxes, the mortgage that may exist on the property, or even any utilities that are included in the rent. Quick resolution is in the landlord’s best interests, and an effective collection agency can bring that resolution about much sooner while eliminating the danger of violating collections laws.

Collection agencies provide valuable services for businesses of all sizes, individuals and landlords. The cost of using an effective collection agency is almost always less than the total costs of delayed payment, and it is always less than never being paid at all.

Levitt, Theodore (1986, July-August). Marketing Myopia (excerpts from previous article). Harvard Business Review, vol. 64, p. 167.

The Process Concept. (n.d.). Hammer and Company. Retrieved from

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