Transactional Collections Bridges Gaps
By Jim Marsh
The role of many telecom
service provider risk managers is to keep the questionable or credit-challenged customer
off the network. They attack the potential customer as an undesirable entity with little
or no compassion. This approach is not completely without merit, but largely ignores the
broader objectives of the telecommunications company and how the managers can assist in
achieving the objectives.
A more holistic approach to risk-management–combining the strengths of the company’s
fraud, credit, collections and usage management applications–is called for. Such a
process could be termed "transactional collections."
Transactional collections does not eliminate fraud or credit and collection functions,
but adds the missing component that separates these areas. Fraud departments focus in a
near real-time environment, dealing with activity that is, at most, one day in time.
Collection departments work with past-due invoices, which are often 60-plus days after a
customer’s installation. Transactional collections fill this time gap by gathering data
over a longer timeframe, beginning the day the customer starts using service.
Risk Management Today
Risk management in telecommunications still is relatively new. It only has been
recently that telecommunications companies have migrated from standard collections
practices to more effective ones that take advantage of new technologies.
One dramatic change in the process is the evaluation of a potential customer’s prior
credit and payment history. But are the results of that evaluation correct? Is an
evaluation of how a customer pays his auto loan similar to how he will pay for
telecommunication services? Are there guarantees that the potential customer, who has just
exited a series of hard times and is on the road to recovery, will default? Or, do
potential customers who have these problems only find another door slammed because of the
past financial history?
Risk management is the mitigation of risk, but at what cost? Does the cost of
determining the value of all incoming customers outweigh the benefit these customers can
bring? What is the cost associated with customers of little value? If less than 15 percent
of the prospect pool is expected to turn into bad debt, is it truly cost beneficial to
evaluate 100 percent of the pool? If 65 percent of the high-risk customers will be
delinquent, does not the value of the other 35 percent become important? Can a high-risk,
high-value customer bring value to the bottom line? How you manage that type of customer
and the associated costs of acquisition is a true measure of risk management.
Statistical modeling is all the rage within the telecom industry, partially due to its
influence in the credit card industry. Do these models guarantee the elimination of bad
debt? If they provide the benefit stated, then why does bad debt continue to increase? The
credit card industry has seen higher rates of bad debt than ever before; it is scrambling
to understand where its models have gone wrong. Statistics and modeling are tremendous
tools; however, they are not the end, but the means. They are tools to be used in
conjunction with other data and processes to improve the likelihood that the limited risk
management resources are focused properly on the high-risk customer.
Department-specific performance benchmarks have forced risk managers to zero in on
reducing fraud and bad debt, blinding them to the impact their actions have on other
departments within their organization.
The fraud and credit-collections departments each state its reason for being is
reducing revenue loss. Each has become a power unto itself and, as such, engages each
other in battle as often as the customer who is causing the revenue loss. Despite their
recurring conflict, each possesses a wide variety of tools and resources that, if used
together, could make dramatic reductions in revenue loss.
A Holistic Approach for Tomorrow
A more holistic approach to risk management, transactional collections begins with the
thought: No customer is a bad customer. Only the method of customer evaluation is
Transactional collections is a strategy of cooperation. It involves building a customer
model that looks at other departmental objectives and makes the best decision based upon
the customer’s status–new, high-risk, low-risk, delinquent, has high-risk usage or is
long-term and current.
If a customer is evaluated from the day he begins service, a carrier has the ability
not only to assess his worthiness to pay for service, but also his potential to take
additional services or be offered special promotions. Trans-actional collections assists
in identifying these opportunities and in reducing churn, thereby serving as not only a
risk management tool, but also a sales and service tool.
In contrast, today’s fraud detection environment focuses little on the customer’s
current status, only on prior calling history. Upon breaching a certain threshold, a new
customer with little calling history is often immediately deactivated. Con-versely, a
customer who slowly increases his fraud usage never trips the alarms because his usage is
within the normal parameters of the profiling model. Transactional collections forces that
a more in-depth evaluation of the customer and his past history is available before any
action is taken.
The same gaps can be found in today’s collection environment. For example, an invoice
must be created and become delinquent before any collection activity can begin. Collection
departments use behavior scoring to reduce unnecessary calling, but behavior scoring
requires four to nine months of history to be beneficial. The bulk of collections problems
is with those customers who don’t pay and therefore will not fall into the behavior score
model. Most collection departments do not use unbill activity as part of their evaluation
strategy; therefore, a customer can have excessive usage, even while negotiating payment
terms. Transactional collections eliminates that barrier and addresses the customer based
upon risk, current charges, unbilled usage and subscribed products, often before
collections can act, therefore reducing overall exposure.
Making transactional collections work requires interdepartmental cooperation–such as
sharing tools, systems and processes–and interaction with the customer. Sharing–and
eliminating duplicate efforts–results in more efficiency from each departmental staff.
The objective in transactional collections is to build upon fraud’s sophisticated
alarming process, add application processing and past historical information that can
screen out the "false positives" and provide focus on truly risky customers for
further evaluation over a wider timeframe. Adding collections’ customer interaction
component and behavior scoring creates a powerful force that results in reduced revenue
Transactional collections acknow-ledges changing demographics and the indicators that
mark a growing bad-debt trend in telecom. It is a process that is ever changing and
evolving as technology and products change. It recognizes the basic fact that not all
potential customers are bad, even if their history is suspect. It knows that the costs to
acquire customers are quite expensive. Yet the value it brings is the coordinated effort
to bring departments with diverse goals together for the protection of the revenue stream
and revenue growth potential seen by handling customers professionally, uniquely and with
Jim Marsh is a senior consultant with The Management Network Group Inc., Overland
Park, Kansas, a consulting firm to all segments of the telecommunications industry. He can
be reached by phone at +1 314 458 1390, or e-mail at Marshgrp@aol.com.