I.C. System Releases Analysis of Debt Collection Liquidation vs. Unemployment

St. Paul, MN – There is no question that the recession has had a tremendous impact on credit grantors and collection agencies. Many people have commented that this must be a very good time for the collection business since there is so much delinquency. How wrong they are. Yes, debt placements increased in 2008 and 2009 but the collectability of that debt decreased faster than the volume increased.

The collection business is a relatively low-margin business that’s heavily dependent on labor as its primary expense. If you have a 5 to 10% pre-tax business and liquidation rates are down 20%, there is no easy way to make a positive bottom line. An increasing placement volume means additional labor, postage, telephone and other direct costs. The only leverage we have is to keep the fixed costs fixed and to minimize any support-cost increases.

Surviving the Economy
Companies surviving these troubled times have the ability to leverage technology. Automating as many labor-intensive functions as possible is absolutely necessary. Analytics are essential so that we can determine which debts should be worked harder and which should be worked less while allowing us to meet clients’ performance expectations and minimize margin erosion. Champion-challenger strategy testing allows us to continually improve upon workflow processes; if you cannot do this sort of testing and do it well, you will soon be out of business.

Looking Ahead
We believe that debt volumes will decrease in 2010 as credit policy changes have significantly reduced the amount of credit that clients are willing to extend. We already noticed a decrease in placements from our financial clients in 2009. The question is, when will the economy turn, and what will be the key indicators that a recovery is on the way for the collection industry? The 2009 stock market increase had little or no impact on debt recovery that we could see.

We believe the unemployment rate is the most significant economic factor affecting liquidation. We base this on our recent analysis of a holdout sample from a large portfolio that we’ve had for many years. We plotted our liquidation rates for the last three years and compared that to the unemployment rates during the same period.

97% Inverse Correlation
Our analysis indicates a 97% inverse correlation between liquidation rate and unemployment rate. (Please click www.icsystem.com/unemployment to view a graph.) While the unemployment rate increased 5.5 percentage points over the three years, our liquidation rate decreased 33%. We can calculate that for every 1 percentage point the unemployment rate increases, the liquidation rate decreases 6%. In other words, if your liquidation rate is 10% and the unemployment rate increases by 2 percentage points, your liquidation rate decreases to 8.8%. It is difficult to test this hypothesis on our other portfolios because we have had to significantly increase work effort on nearly every project to maximize clients’ results.

The question is…will liquidation rates increase at this same rate once the unemployment rate decreases. Hopefully, we will find out very soon.

About I.C. System
I.C. System, a privately owned company founded in 1938, provides accounts receivable management services for 30,000 clients within many industries, including healthcare, financial services, retail, utility, and communications. Headquartered in St. Paul, I.C. System has offices in North Dakota, Iowa, and Wisconsin. For more information about I.C. System, please visit www.icsystem.com.