DOLLARS COLLECTED vs. AGENCY FEE RATES
Which is Most Important?
There is an unknown saying amongst agencies that “0 x 0 = 0”. This refers to collection agencies’ rates and effectiveness. No matter how low a rate might be if there is not a recovery then the rate doesn’t matter. Returns, collection costs, interest, no charge deductions, allowances, discounts, defective merchandise and a number of other fluctuating factors influence the total fees that an agency invoices to a client. An agency’s fee rate schedule and the cumulative overall Fee Rate Ratio (average) are never the same. The Overall Fee Ratio is determined by Total Fees/Total Dollars Collected. Agency Fees and their impact on the bottom line “Net” cannot be objectively compared unless agencies, given the exact same amount to collect, obtain the exact same results. Only then can one determine the effect that fee differentials have upon the “Net”.
The Amount Collected/Amount Placed Ratio is known as the Recovery Ratio. Agencies never perform equally. A difference of a 2% higher Recovery Ratio nullifies agency fee rate differentials amongst agencies. (See Bottom Line Net Performance Chart.) The Recovery Ratio less the average of all fees (Overall Fee Ratio) is the only exact way to measure the net returned. The most accurate method of gauging agencies’ performances is summarized by the following equation: [Total Amount Collected/Total Amount Placed – the Overall Fee Ratio = Return Per Dollar Placed.]
The agency fee always represents a fraction of the amount collected. Fee rates of 33%, 25%, 20%, 16% and 10% expressed in ratios are .33, .25, .20, .16, and .10. The “fee” is a fractional deduction from the amount collected; the remaining portion is the “Net” which can also be expressed by a Fee Multiple. The Fee Rate times the Fee Rate Multiple equals what was collected (Amount Collected).
Consider the following: The fee rate difference between 25% (Agency #1) and 16% (Agency #2) is 9% or .09. Therefore, if agency performance and amount placed is identical, the fee rate differential downside risk is only 9 cents on each “Net” dollar. Whereas for “every dollar not collected”, the downside average “Net” loss will be between 84 cents (16% fee rate) and 75 cents (25% fee rate) on the dollar. Who cares about a potential fee differential of 9 cents when 84 cents is lost for each dollar that an agency does not collect!!
As stated earlier, the agency fee represents a fraction of the amount collected, which means the difference in agencies’ fee rates represent “a fraction of the fraction”. The “Net” amount is always a multiple of the fee rate but there is no “Net” unless the agency recovers what is placed. The “Net” substantially increases when there is a recovery and this increase is always at some fee rate multiple, whereas the fee rate itself is always a constant.
Williams & Williams, Inc. routinely can deliver a Recovery Ratio of 86% or higher if the company placed for collection is in business. Based on our rate schedule and terms, an Overall Fee Ratio of 16% is not unusual, meaning that for every dollar placed, after collection expenses, we can deliver a Return of 70 cents (.86 - .16 = .70). For one of our clients over the course of four years, contingent upon the debtor being in business, we have delivered a “Net” return of 80 cents for every dollar placed.