Introduction
In today’s economically challenging world, many businesses are turning to outsourcing to optimize their operations. The outsourcing of work has been a growing trend over the past few years, and thus, it has attracted both praises and criticisms. One of the areas where outsourcing has been utilized is the collection process. Businesses, especially those in the finance industry, often outsource their collection processes to increase efficiency and reduce costs.
This article aims to examine the outsourcing of the collection process. It highlights the pros and cons of outsourcing, discusses the industries that often outsource their collection processes, and also some of the challenges associated with outsourcing.
What is Outsourcing?
Outsourcing is when a company contracts out a business process to a third party. The third party can be located domestically or in a foreign country. This trend started in the 1970s when companies started outsourcing certain processes such as manufacturing to overseas countries that had lower labor costs. However, it is worth noting that outsourcing is not restricted to offshoring. Companies can outsource services to another company within the same country, and it still qualifies as outsourcing.
The global outsourcing market was valued at $92.5 billion in 2019, with the finance and accounting sector accounting for a significant portion of the outsourcing market. Companies often use outsourcing to benefit from lower labor costs, increased efficiency, and access to new skill sets.
Pros of Outsourcing
Businesses outsource their collection process for various reasons, and one of the primary benefits is cost reduction. Outsourcing the collection process means that companies can save on the cost of hiring and training new staff. Additionally, outsourcing helps to reduce the administrative burden on businesses by shifting the responsibility of collecting debts from the business to the third-party company.
Another benefit of outsourcing is expertise access. Collection agencies specialize in the recovery of debts. Thus, outsourcing to a collection agency provides companies with access to specialized knowledge and expertise in debt recovery. Collection agencies use different collection strategies and advanced technology to pursue debts that businesses may not have the resources or expertise to do.
Outsourcing also provides flexibility and scalability. Companies can scale their collection processes up or down depending on their needs. For instance, if the company needs to pursue a large number of debts, they can outsource to a collection agency to handle the process. On the other hand, if the company does not need to pursue many debts, they can reduce their outsourcing needs.
Cons of Outsourcing
Outsourcing is not without challenges. One of the primary disadvantages of outsourcing the collection process is loss of control. When companies outsource to a third-party company, they lose control over the process. The collection agency is responsible for collecting the debt, and companies have limited control over how the third party carries out their responsibilities.
Another challenge is the quality of service provided by the collection agency. Businesses expect their collection agencies to treat their customers with respect and respond in a timely and professional manner. However, some collection agencies may employ unprofessional collection tactics, which can lead to serious legal implications.
Some customers who are under debt collection may resist it, which can lead to negative publicity for the company. If the collection agency does not handle the situation properly, the customer may air his or her grievances on social media and review sites. Negative publicity can damage a company’s reputation and lead to a loss of customers.
Additionally, outsourcing can lead to language and cultural barriers, especially when outsourcing to foreign companies. The company has to ensure that the collection agency they outsource to has an adequate understanding of the local culture and language.
Which Industries Outsource Their Collection Process?
Any industry that extends credit to customers may need to outsource their collection process. The finance industry is one of the primary sectors that outsource their collection processes. This includes banks, credit card companies, and other financial institutions that offer loans and other forms of credit.
The healthcare industry is another sector that outsources its collection process. Unpaid medical bills can accumulate and have a significant impact on a healthcare institution’s finances. Outsourcing the collection process enables healthcare institutions to focus on providing quality care while a third-party company deals with the process of collecting unpaid bills.
The government is another sector that outsources its collection process. Governments may outsource their collection processes for unpaid taxes and other government fees. For example, the US government has outsourced its collection processes to multiple collection agencies for tax collection purposes.
Challenges Associated with Outsourcing
Outsourcing the collection process can present some challenges, especially when outsourcing to foreign countries. The primary challenges are language and cultural differences. Collection agencies must have an adequate understanding of the local language and culture to effectively carry out their duties. Those who receive phone calls or letters in an unfamiliar language may not take the collection process seriously.
Additionally, outsourcing to a foreign country presents a unique set of challenges, including the different time zones and national holidays that may not coincide with those of the client’s country. Different laws and regulations between countries may also pose challenges for collection agencies.
Another challenge is maintaining data privacy and security. Collection agencies have access to sensitive customer information, including social security numbers, addresses, and credit card information. Companies have to ensure that they outsource to a company that adheres to high-security standards to protect their customer’s data.
The increasing trend of cyberattacks and data breaches is another challenge. Outsourcing the collection process can expose companies to cybersecurity risks if the collection agency does not have adequate security measures in place.
Conclusion
The outsourcing of collection process is a growing trend. It provides companies with an opportunity to reduce costs and access specialized skills. However, outsourcing also poses some challenges, including loss of control, language and cultural barriers, and quality of service provided by the collection agency.
Therefore, companies should take a proactive approach to outsourcing their collection process. They should conduct thorough research to identify reputable collection agencies that adhere to strict security standards and understand the local language and culture. Companies should also ensure that the collection agency provides quality service that maintains customers’ dignity and follows ethical collection practices.
Uncollected or neglected federal taxes are among the most austere and difficult IRS problems. The government estimates that on average $270-$300 (or 3-4%) billion tax dollars go uncollected. This excessive disappearance in funding results in a lack of production of public services or goods.
Individuals or businesses who evade or neglect to pay their federal taxes fail to realize the enormity of the issue. Unpaid taxes may provide a form of financial relief in the short run, but in the long run, they disable the government from appropriately allocating necessary functions. The $300 billion in unpaid taxes is not resolved, but instead, balanced through the exclusion of maximum effectiveness of a public service or good.
The IRS problems extend beyond simple lack of payment. The government agency has a multitude of responsibilities, instead of wasting time seeking out individuals or businesses who owe taxes, the IRS has outsourced the fulfillment process by delegating responsibilities to the nation’s debt collectors.
In March of 2004, the IRS problems reached a tipping point. The federal government was funding two wars while operating under a severe national deficit. The precious billions that were uncollected began to weigh on the nation’s finances. As oppose to letting the problem go and allowing individuals or businesses to evade their tax responsibilities, the government allowed the IRS to seek mediation for tax collection purposes.
Like all agencies the IRS is forced to operate with limited resources. In order to run efficiently these resources must be allocated appropriately based on necessity. IRS spokeswoman, Nancy Mathis revealed the IRS problems and the need for the inclusion of a debt collection agency in a 2005 interview with FOX news, “The use of collection agencies allows the IRS to focus its resources on more complex cases and will allow the IRS to handle more cases at an earlier stage before they become harder to collect.” The inclusion of collection agencies is not a novel practice for federal agencies to retrieve debts, however, the IRS was only given such authority through the adoption of the American Jobs Creation Act in October of 2004.
Despite efforts from both political parties to thwart the inclusion of collection agencies, the new policy was codified in 2005. Supporters claim that collection agencies will streamline the retrieval process of unpaid taxes. Through the help of a mediator, the small delinquency cases can be delegated to the collection agencies, while the complicated or paramount evaders will be exclusively sought after by the IRS.
As a result of increased annual evasions the IRS quickly becomes backlogged with delinquency cases. The inclusion of a debt collection agency will mitigate the strain caused by such excess and allow the IRS to pursuit prominent evaders. IRS problems such as tax evasion do not dissipate annually, but instead, increase to absurd levels. Each year as more cases go uncollected they carry over to the next fiscal year where a new accumulation of unresolved payments actualize.
Although the inclusion of debt collectors is though to alleviate IRS problems, many pundits have raised considerable issues over the invasive practice. As a result of the hefty financial windfall (25-30% of amount owed) awarded to successful collections, debt agencies will take part in harassing practices to ensure payment. Separate to crude tactics, the inclusion of a 3rd party for an unpaid tax return, will invariably lead to the transfer of private information.
Critics commonly gripe over the exchange of such information between the IRS and a collection agency, citing that identity theft and privacy concerns augment through the inclusion of a third party. Lastly, a common complaint over the outsourcing of collection arises due to the limited role of federal employees. Hiring an outside source will cut the need of loyal IRS employees.
Due to the exorbitant rates charged by debt agencies, the IRS has recently chosen to eliminate the outsourcing of collection practice. Instead of utilizing third party collection agencies, the IRS has decided to expand its payroll, and hire more employees to take on the crucial collection process.
