Expert Roundtable: Government Collections

Contingency collections for government clients currently ranks as one of the fastest growing segments of the ARM industry. With that in mind, CollectionIndustry.com assembled a panel of experts in the field of government collections to probe the latest trends in this fast-growing sector as well as to get an idea of what it takes to collect for government entities.

The panel represents a wide range of disciplines in the government collections sector, from the head of collections for the Department of Education to one of the largest government collectors in the nation. Included in the discussion is Gary Hopkins, Director of the Collections Group of the Office of Federal Student Aid in the Department of Education; Kennon Walthall, President & CEO of AlaTax/RDS; Mike Vallandingham, Partner and National Marketing Director for Linebarger Goggan Blair & Sampson, LLP; David Glezerman, Bursar at Temple University; and Harley Duncan, Executive Director of the Federation of Tax Administrators.

Moderating the discussion was Mark Russell, Senior Associate – Kaulkin Ginsberg Company and Mike Lamm, Senior Analyst – Kaulkin Ginsberg Company.

The panel discussion is also available for download in PDF format. Download PDF (14 pages, 230kb)

Mark Russell: We have brought together a group of five government collection industry veterans to share their viewpoints on the trends and opportunities within the government sector, and why they believe it is becoming the fastest growing market within the ARM industry. According to a recent report by the FMS, a group within the Treasury Department, the federal government market alone increased 12% from 2003 to 2004, generating $610 million in gross collections in 2004. This growth is expected to continue in 2005 and does not take into account the increased outsourcing activity at the local and state government levels, or the additional opportunities coming from other government related entities including the substantial, multi-billion dollar IRS contract.

In addition, this panel will discuss the benefits and challenges of doing business with local, state and federal government entities, and the process that agencies must go through to win these contracts.

Michael Lamm: It would be helpful at this point for all the panel members to talk a little bit about your background, as well as the organization that you’re associated with.

Mike Vallandingham: This is Mike Vallandingham. I’m a partner and the national marketing director for Linebarger Goggan Blair & Sampson, LLP. Our law firm’s been around for nearly three decades now. All our law firm does is represent governments in the collection of their outstanding receivables. We’ll collect a little over $600 million in delinquent revenue for our government clients this year. We have about 1,700 clients, from the smallest cities and schools up to the federal government, and everything in between. I appreciate the opportunity to participate today.

Kennon Walthall: This is Kennon Walthall, President & CEO of AlaTax, an end-to-end tax revenue solution for local and state government clients. Our primary focus and success has been on helping state and local governments process and administer tax revenues, discover and recover delinquent tax payments, and audit existing commercial accounts. We are predominantly focused in the State of Alabama and have been expanding into neighboring states. Within the State of Alabama we go by the company name AlaTax, and outside of Alabama we work under the name Revenue Discovery Systems (RDS). AlaTax/RDS has been around since 1980, starting off as a software company and entering the outsourcing business in the mid-’90s. We also attempted to create an Internet application that assisted commercial businesses in filing their taxes online, called NationTax, in the late 1990′s.

Harley Duncan: This is Harley Duncan. I’m the executive director of the Federation of Tax Administrators. We are an association of state revenue departments and tax administration agencies. Our people administer income, sales and other taxes in the 50 states, D.C., and New York City. One of our principal functions is to stay abreast of a wide range of developments that are of importance to state tax agencies so that we can inform them of these developments and hopefully short-circuit the learning curve for them as they prepare to implement various initiatives.

Gary Hopkins: This is Gary Hopkins. I’m the Director of the Collections Group of the Office of Federal Student Aid in the Department of Education. We are responsible for the management and oversight of the federal government student loan defaulted portfolio of about $18 billion. We also indirectly manage another $13 billion through state and local guaranty agencies. In our portfolio, we have about 2.5 million defaulted borrowers. We have made extensive use of private collection agencies since 1979. We’ve been quite successful with that, so hopefully, we’ll have a lot to add to the conversation today.

David Glezerman: This is David Glezerman. I’m the bursar at Temple University in Philadelphia, Pennsylvania. We are actually a semi-public institution. Our role in credit is dealing with student loans and delinquent educational receivables. I also chair the ACA International’s Government Services Program Committee. So I get some perspective in terms of government issues and tax issues right now from that involvement as well.

Michael Lamm: To kick things off, what major opportunities and challenges exist for collection agencies within the government sector?

David Glezerman: Basically, looking at the environment today, all government entities are looking for new revenue sources and how to actually tap the revenue sources that are out there. Even this morning I read about the State of Hawaii allowing collection agencies to go after traffic violators; you would think in a tropical paradise there would be no problems economically or even societally. But the reality is that with budget deficits running higher and higher at the federal level, at state levels and the trickle-down into local governments, we’re seeing an increasing need to go out and recover delinquencies. You even see libraries now actively pursuing collection agencies to go after their patrons.

Another issue is that taxpayers are looking for government to maintain or even increase services. Without additional revenue streams there’s a breakpoint. When that breakpoint is identified, you start looking how you can increase revenues. So I think the current government revenue environment presents opportunities for collection agencies across the board.

I think the challenges that are involved in working with the government sector and moving into this sector are varied. Political implications cannot be overlooked. There have been situations where a change in party in a given state may change the perspective on how actively debt collection would be pursued.

The collectability of some of these accounts also presents a challenge. What I have found in education is that many accounts that are seemingly collectable within the first year end up being set aside because of, again, policy or political implications. And as a result, until there’s a need to deal with bad debt or to attack the issues of revenue generation, these types of accounts never come forward. I also think we’re going to see the challenge of collecting long-term delinquent accounts, statute of limitations implications, et cetera.

Another challenge, if you look at the issue from the public’s point of view, is the negative image. They’re already looking at the government as being bureaucratic and slow to react. If you add debt collectors to the equation, you get a partnership that may present an image problem. I think in terms of trying to improve this image, it’s something that should be perceived as for the public good. Using a third party as the vehicle to increase revenue is not a negative; nor should it be perceived as a negative. I think government agencies are just now finding that as well. It’s better to work in public-private partnership and be successful than trying to do it alone or just ignoring the issues that are out there.

Gary Hopkins: In terms of opportunities, there is a large amount of debt at all government levels that’s due — there are a lot of opportunities out there. Governments are also coming around on the necessity to enter into more public-private partnerships rather than try to take on more of that operational responsibility.

With respect to the challenges, government debt can be quite different. Government debt is unique in a lot of ways. Some of the things that you just heard with respect to the public image are very true. You’ve got to present a different image. Collectors working on government debt have got to make sure to treat debtors with courtesy and respect. You have to remember that you’ve got a microscope on you — everybody’s watching closely, wanting to point out any instance where any malfeasance has occurred or where any debtor is being mistreated.

So, the biggest challenge in my opinion would be assuming that you can come into the government sector and use some of the same tactics or use the same approach as in private debt collection and be successful.

Michael Lamm: Describe the process that collection agencies must go through to win contracts in the government sector. How are government contracts typically structured? And what are the criteria that collection agencies need to meet in order to be selected?

Gary Hopkins: I’m going to speak with respect to the federal government. Obviously, there are a number of different levels of government. But with respect to the federal government, they always use the competitive process to select contractors. Award requirements and the selection criteria are spelled out in the request for proposals (RFP).

What we’ve seen here in the past several years is that most federal debt collection contracts are awarded through the General Service Administration (GSA) and their GSA Schedules (Multiple Awards) Program. Under the program, the GSA does a review and awards contracts to a whole list of collection agencies. Currently, I believe collections is on GSA Schedule 520-4. Once a collection agency is able to get a GSA Schedule contract, they are eligible to compete for government contracts. What the GSA does is kind of streamline the whole process for both the federal agency and the collection agency; it pre-qualifies the collection agency to make sure that they meet basic requirements. The GSA Schedule Program then allows individual federal agencies to conduct their own competitions based on their individual needs.

When going after contracts, collection agencies need to make sure that they look at the solicitations very, very carefully, because when you’re in a government environment, regulations are very, very important. You’ve got to make sure you follow the rules. The process for winning awards – especially here in the Department of Education — is not the writing contest that it used to be. We used to get these huge, thick proposals. People thought that the thicker the proposal the better chance they had. We’ve gone a long way to try to streamline the process, making it easier on us as well as on the collection agency. We try to focus just on those things that are important to the selection process, which for us is mainly past performance and technical expertise.

With respect to our agency’s contract structure we’re moving more and more toward performance-based contracting. You hear that term thrown around a lot. We’ve been doing performance-based contracting here for a long time. Like most in the industry, the contracts are contingency-fee based. We have rewards based on what you produce in terms of how we measure performance and how we place accounts. It really is a significant change from the days when you had a lot of government-furnished equipment. A lot of equipment was supplied, systems were supplied, and letters were sent by the government agency. We now have very little in the way of government-furnished equipment in our contracts. And I think you’ll see that in most federal contracts that are out there today.

But I think the most important thing to point out is, again, if you’re interested in doing business in the federal government sector, you need to go to the General Service Administration web site, because the solicitation process remains open indefinitely. You can go out any time to try to obtain a GSA services contract. Then you just have to pay attention, keep your ear to the ground and listen to what’s out there. We always try to be very, very public about the opportunities. When you see a task order procurement announcement, pay special attention to the requirements. And then be prepared to operate in a very highly competitive environment.

Kennon Walthall: For AlaTax/RDS, we adhere to the FDCPA and the Taxpayer Bill of Rights. In addition, there are a growing number of certifications that a company must obtain to do this type of business. I think they’re starting to multiply. Our people get certified every couple of months now, whether it’s through the ACA or some other organization.

For certain work that we do, such as reviewing taxpayer records during an audit, our people have to be either CPA certified or have other some state certification to actually review the records.

Mark Russell: Are there any specific legal requirements that differentiate the government sector from the consumer and commercial markets?

Kennon Walthall: I guess the good thing is, the laws are very clear on what you can or cannot do. If you follow what the law says, you will stay out of trouble. For instance, the Taxpayer Bill of Rights – it’s very stringent in timing and when you can do things and when you can’t.

Gary Hopkins: I’ll jump back in to say we don’t typically add on any additional layers of requirements for collection activities. We pretty much require our agencies to follow the FDCPA and to hold licenses where they’re required to hold them. You don’t typically see in federal contracts an added layer simply because you’re doing business with the federal government.

Harley Duncan: If you are doing work for state government tax agencies, as Kennon noted, if you get into actually the account review work and the like, you’ll likely have to have people that are certified and trained in tax law. But beyond that, even if you’re doing straightforward debt collection, you will be dealing with taxpayer return information. That is confidential information, at least in the income tax and sales tax laws of the states. Therefore, your company and your people are going to have to, as contractors for the state, adhere to the same standards that the state employees in the tax department do regarding disclosure of that return information. You’re going to have to sign statements that say you will not disclose information. You will have to sign statements that acknowledge that if you do disclose, you can be criminally prosecuted for the disclosure of the return information. You will also need training programs so that your employees are aware of those requirements. In addition to all that, I think you will have to be careful in how you structure your information systems so that the tax information doesn’t get intermingled with other information. There are limits on what can be disclosed to you. And there are limits on your disclosure or reuse of that information. Those are very important issues for our members.

Kennon Walthall: And this is all laid out in the laws. For instance, the Taxpayer Bill of Rights says that a firm cannot disclose any taxpayer information without the consent of the taxpayer. If a firm violates this provision, both the individual involved and the company can lose their licenses. There can be further charges as well. Our contracts do not necessarily spell out the ramifications of these violations, but we say that we will adhere to the Taxpayer Bill of Rights and all the penalties that go along with it.

Mike Vallandingham: I think Gary touched on this, but when you’re talking about the U.S. Treasury, whether it be the FMS contract or, hopefully, the upcoming IRS contract, not only do you have to get on the GSA schedule, but you’re probably going to have to run out and get your NIACAP certification to be on the IRS contract. And you may have some – or you will have – small business subcontracting goals. All of these things don’t happen in a real short fashion. It might take you a year or more to get NIACAP certified and to get on the GSA schedule.

Furthermore, especially at the local level, this is a long sales cycle. If you expect to grow into the government collection business overnight, you have to think again, because it’s going to take you a while. I would say my general sales cycle is six to 18 months on a good day and 18 to 36 months on an average day.

So this isn’t a business where you just jump in, and all of a sudden you’re one of the big players. It literally takes years, and in our case decades, to become one of the largest players in this market. But it does have a lot to offer to the collection industry, and you can’t ignore it if you’re in the collection industry.

Mark Russell: Obviously, there are challenges in obtaining local, state and federal government clients, but are there also unique challenges to servicing them?

Mike Vallandingham: Well, I’ll start by saying that being in the government sector certainly presents some challenges and some issues that you might not have to deal with on the private sector side of our business. You really have to understand the politics of what you’re doing. You also have to understand that you are collecting for a government client. Not all of the government clients have the same attitude toward collections, and aggressive collections, that Gary Hopkins has over at the Department of Education. You have to understand that government employees are not typically going to receive a big year-end bonus because they collected an extra million dollars at the end of the year. What you have to show them is that you’re going to be a good partner in helping them do their job, and that you’re going to make them look good, and that you understand the politics of what you’re doing. When you’re out collecting from somebody, that somebody might be your government client’s constituent. It could be a voter. If they pick up the phone too many times as you’re going through your collection process, and file too many complaints with the elected officials that you’re working for, you’re not going to be working for that government client very long, and you’re probably not going to survive in the government sector for very long.

Kennon Walthall: If you make enough phone calls, you’ll eventually come across a councilman who’s delinquent. That often does not breed goodwill with that particular elected official.

In addition, a government employee is not normally motivated through compensation incentives to work harder to collect more revenues. In fact, if government employees collect less than their quotas, they’re not necessarily going to lose their job. So, you’ve got to make sure that your client understands it’s a partnership, and that your firm is going to produce better results for the city or the county.

Michael Lamm: Do debt collection law firms maintain any distinct advantages over contingency collection agencies in the government sector? How and why?

Mike Vallandingham: Well, I think so. I think this is evidenced by the fact that, while law firms represent the smallest segment of the collection industry, we’re the fastest-growing segment, according to the latest edition of the Kaulkin Report, as you know. Here are just a couple of reasons why I think that may be the case.

First, I think the most distinct advantage that law firms obviously have over their collection agency competitors is the fact that they can provide their clients with a turnkey collection service, if that’s what they’re looking for. Collection law firms can handle everything: from locating debtors and sending letters and making phone calls on the front end, to the litigation and bankruptcy representation on the back end. A lot of times, it’s the pre and post-judgment enforcement through legal mechanisms such as turnover orders and garnishment and foreclosures that will be the only way you’re going to be able to collect from a delinquent debtor. Collection agencies obviously have to subcontract out their legal work, resulting in some loss of control over that law firm’s activities. And whatever the case may be, the one-stop shopping for services appeals to most of our government clients that we have at this time.

But one caveat is that if you move into the high volume, low margin type of government business we are discussing today, it requires substantial IT infrastructure investment, whether it be a collection law firm or a collection agency. You’ll be at a serious disadvantage in the government sector, especially when you move into the larger government entities, if you don’t make that investment. I know on our end, we’ve had to invest tens of millions of dollars over the last 20 plus years in order to stay competitive with our larger collection agency competitors. So, that’s obviously something that can’t be ignored.

Since the law firm does have the ability to pursue legal remedies on behalf of their clients, and even when a particular contract doesn’t call for that level of service, debtors tend to perceive a collection notice or a phone call from a law firm as being more serious, or some indication that their delinquency has moved into more serious status. As such, we often get better results.

One other thing that is kind of a subtle advantage, I think, is that attorneys have to comply with the stringent requirements of the state bar in the states where they’re licensed. This becomes more important as you talk about different types of government receivables that generally don’t fall within the bounds of the FDCPA, like taxes or court fees and fines. At the end of the day, there’s not any attorney that I know that is willing to risk their law license, or allow anybody that works with them to risk their law license, in order to collect a debt. Sometimes I think this gives a little comfort to the government client, and it may be the single biggest reason that you tend to see fewer complaints about collection law firm practices than perhaps you do with traditional collection agencies.

One little perk that our clients do like from time to time is that we can give them legal advice and consultation on matters – laws, statutes, court decisions, whatever the case may be – that affect the collection process on both of our ends.

Let me finish by saying that there is one notable disadvantage, even for a large and sophisticated collection law firm: it typically costs us more to do business. Therefore, we’re rarely in the position to be the low bidder when going up against our collection agency competitors. In fact, being the national marketing director for my law firm, I can tell you that when low bid wins and nothing else is being considered, we generally don’t respond to those RFPs.

On the bright side, it seems like governments are starting to see that when it comes to collections, the lowest bidder isn’t always the best choice, whether it be collection results or level of services provided or how their constituents are treated in the process. If this is really the case, I think it’s going to be good for the entire industry, whether it be collection law firms or collection agencies.

Gary Hopkins: This is, like a number of these questions that we have here today, an example of how it really depends on where you are with respect to what level of government and what agency you’re dealing with. For example, with us, the Department of Education on the federal level, we take a different approach to litigation for a couple of reasons. Number one, the Department of Justice handles all of our legal work. Secondly, we have so many collection tools that litigation as a collection tool is our least effective and the one that’s used least. So we don’t threaten it much because we don’t utilize it much. But, again, it’s based on the types of debt that we manage and the tools that we have. Administrative wage garnishment does not require court action. Offsetting income tax refund, and a number of other federal monies that may be due to a defaulted borrower, does not require any type of legal action or a judgment. In our environment, it doesn’t create a lot of advantage.

Mike Vallandingham: Gary, I think you’re in the position that most creditors dream of being in, because of all the tools that you do have at your disposal.

Gary Hopkins: That’s true. But I wanted to touch on something else you said with respect to your costs and the fact that you see a lot of government agencies going away from the low bidder. That’s very, very important to us. We go on best value. That’s why we place most of our emphasis on your performance. As a matter of fact, we’re a little unique in that most of the industry talks about netback, and they do their performance measures based on netback. We discovered in our history – you know, we’ve been doing this for a long time — that measures that went toward netback, encouraged agencies to bid lower prices when they weren’t as confident in their ability to perform.

I’ve worked for collection agencies, so I’ve sat in rooms where people decided what they were going to bid, based on how well they thought they would be able to compete. If they thought they weren’t quite as good as some of the competition, they’d bid a little lower price because on the netback approach to performance measurement, they didn’t have to produce as much. If they were confident that they’d be one of the best performers, then they’d bid a higher price. They weren’t afraid of the netback approach. So we went away from that and decided that we’d do our own market research. We determined what would be the best pricing and the best value for the Federal Government.

We try to attract – and this is something we try to be the leader on – the agencies we think are the best in the business. We want to attract not only the best agencies in the business, but also the best managers at those agencies and the best collectors at those agencies. We know in order to do this we have to pay a fair price so that the collection agency is also getting value. We promote a target price, so that every agency gets paid the same amount. That way the netback rate is the same for everyone. All that matters then is who’s doing the best job for us; who is producing the most.

You’re absolutely right in that we don’t like the low bid approach. We want to get the best value. In addition to that, we want to come up with a price that we’re confident will attract the best collection agencies in the industry. And at those collection agencies, we want their best. Our collection partners do tell us that the best collectors that they have at their particular agencies want to work for the Department of Education. That’s the environment we’ve been trying to create here, and we think we’ve been pretty successful at it.

Mark Russell: Gary, do the other federal government entities share your perspective on the benefits of using a debt collection law firm?

Gary Hopkins: If they don’t have the same number of tools that we have, then they may lean more heavily on litigation. They may rely more heavily on that. It really depends on the agency and the tools that they have available to them. You may be surprised to know that for a long time, Treasury did not have the same collection tools that we have, they did not even have access to the same databases that we have. So they may place a little more emphasis on other tools than we do.

We have spent a lot of time over the past seven or eight years – at the federal level anyway -working on doing a better job of exchanging information between government agencies. We meet with Treasury officials now on a quarterly basis. We share information. The IRS people, who are getting ready to start up with their debt collection effort using private collection agencies have spent a lot of time talking to us about managing private collection agencies. Because of that, we believe they’re going to take some of our best practices, whatever tools they can use or whatever strategies they see has worked for us, and determine whether they can make them fit in their own environment.

You were speaking about challenges earlier. The challenges that these agencies will have is that, where the Department of Education has been utilizing private collection agencies since 1979, the Treasury and IRS and others don’t have that track record. They will probably have to be a little more careful in what they do. You can’t expect them to come out and immediately start doing a lot of the things that it took the Department of Education 25 years to develop. They’ve got to do some things that are unique to what’s in their portfolio. For example, the Department of Education has only education debt and student loan debt, in contrast to Treasury, which has all types of debts from different government agencies to manage. They’ve got a mixed bag, so they’ve got to take a little different approach.

With respect to what I was saying about pricing, yes, I believe that is the direction we see other federal agencies going. We are going to the more value-based pricing approach and not just low bid. You will see us trying to attract the best in the business, not just the lowest priced.

Mark Russell: Harley, could you give us any insights into the benefits that state governments could realize from using a debt collection law firm?

Harley Duncan: I really think it’s pretty much like Mike outlined. It’s really a question of what they are looking for. Is it a full-service operation where they would like to turn over the whole process and get out of some of the legal back end? Or are they really looking for that heavy-duty, large volume offloading of the receivables work?

To this point, I think most states have been leaning toward the latter; large volume, probably low margin work. But as everybody tries to do more with less and focus on core competencies, dealing with debt collection and litigation and bankruptcy is probably not necessarily a core competency. So I could see them moving toward the full service arrangements more in the future.

David Glezerman: I can relate to the experience we have at Temple where we utilize both law firms and collection agencies to handle our delinquent accounts. We look at it as a certain specialty. We only wish that we had the same types of tools that the Department of Education has, for example. But we have to focus just on what a particular firm can do for us and to what extent. For example, utilizing a law firm can make it easier for us to deal with judgments in other jurisdictions. We depend on those types of legal networks, where that tool may not be as readily available in other venues. But generally – and I speak of higher education generally – we’re looking for those types of niche specialties.

Kennon Walthall: We’re not a law firm, but we do use one, typically as a last resort. Our goal is to collect the debt before it has to go to litigation. And I’m sure Linebarger is the same way. We don’t want to go to court because it drags out the process and increases the cost. Even if you get a judgment, it can take months if not years to generate revenues.

Michael Lamm: Are there any opportunities for debt buyers in the government sector?

Gary Hopkins: On several occasions, the federal government has sold debt in the private sector. The Small Business Administration has done that. I believe HUD has also done some sales in the private sector. The Department of Education even sold some college housing loans in the private sector back in the ’80s.

Currently at the Department of Education we have done some recent studies. We commissioned a report several years ago. We learned the biggest challenge that we have to the possibility of selling our defaulted debt is that most of the value in terms of our debt and the collectability of it is in those collection tools that you’ve heard us talk about in this call. We have not determined a way to facilitate a sale and transfer the authority to utilize those collection tools. So if the debt is sold without the ability to garnish and to offset, then the value of the portfolio, of course, goes way down. When we’ve done analysis, we’ve found that the price that we would get in selling the assets would be far less than our own collection experience.
Even though we have the authority to do it, and we’d be willing to do it in terms of the return to the federal government, so far we have not seen that it would make a whole lot of sense for us. But, as I said, there are federal entities that have participated in debt sales.

Mike Vallandingham: I agree with Gary. Moving it to the local level, I think most of the local governments don’t even have debt sales as an option in the laws that they operate under. A lot of state constitutions around the country do not allow you to discount what somebody owes, say, on a tax. You have to collect the entire amount due. In other words, you are prohibited by law from settling for less.

There’s also a lot of reluctance – and I think rightfully so – on the part of elected officials to sell their debt to a private entity, lose control over the collection process, and then have the possibly of multiple purchasers of debt collecting from their constituents. I think, those reasons are why you haven’t seen the purchase of public receivables take off to the extent you have in the private sector.

David Glezerman: Actually, I hear a lot of companies now, which I never would have expected to be interested in debt buying, looking in that direction generally throughout the industry. I think everyone pretty much expressed the issues on the government sector. But I also find that in higher education today, we’re hearing more and more about the purchase of tuition debt at individual institutions. There are some barriers for public institutions because of state statutes or other regulations that may prohibit sales. But I’ve got to believe that private institutions may be looking at this as another revenue stream somewhere in the near future.

Kennon Walthall: Some of the cities and counties we work with don’t even know the amount that they’re missing. So, it would be hard for them to sell their debt because they don’t even know how much is outstanding at any given time.

Michael Lamm: What advice would you give to a collection agency seeking to enter the government sector?

Harley Duncan: I’m not sure I have any unique insights here, but there are several points that are probably just sort of standard business practices. The first thing is to know your customer. If that customer is going to be different than some straight commercial enterprises and contracts you might have, understand what’s motivating them. Is it strictly increasing revenue yield? Are they just trying to get more money in the door? Or is it part of a larger, strategic realignment of what the government entity is doing? They could be considering offloading the back end debt collection in lieu of making major investments in the collection technology. Or is it part of a reengineering process that’s trying to focus them on something on the tax law side or the returns processing side? So you really need to understand what motivates them because that’s going to drive the type of service that you want to provide to them.

The second thing is to know the market. Find out as much as you can about what sorts of receivables they’re going to give you. Unfortunately, as Kennon pointed out, there’s a lot we don’t know about our receivables. We may not even know how much it is. I think the states are getting better, but I can guarantee you it’s still not perfect in terms of how much it is, what it is, how old it is and what we know about that debt. So that’s going to influence a lot the profitability of the account for you.

Third item I think would be if you are dealing with tax agencies, be sensitive to the tax component of it. I suppose everybody believes that they’re a unique client and customer and that their activities are different. We in the tax field, when it comes to debt collection, believe that. We are providing you with information that is confidential return information, and we are relying on you then to keep that confidential. That is an important obligation, and one that we can go to jail for and that you can go to jail for. So that’s a very important item to us.

The fourth item is understanding that there’s a heightened public sensitivity about the use of private debt collection agencies for the collection of public debt, particularly tax debt. While it makes all the business sense in the world, and there are lots of proven track records out there, it is a highly sensitive matter to the public, and because of that, to elected officials. You just need to be aware of that. And as Mike said, go with the politics of it, and enter into a partnership with the agency.

Also, be effective at communicating your strengths. If I’m sitting in a tax agency and I’m looking at private collection agencies and contracts, I’m going to want to know the services you provide, the technology you are using, what’s your demonstrated history, what are the references, what sorts of complaint levels do you get – those sorts of things. What’s the business operation that you are going to bring to me to augment what I’m doing with my own people, or to replace what I’m doing with my own folks? I think the idea would be to play to your strengths in that regard.

The last thing to remember is it’s not a short-term proposition. It takes a while to get in the contract cycle, go through the contracting cycle, and then to build the IT infrastructure necessary to communicate back and forth. So it’s not a quick-hit, short-term reward situation.

Gary Hopkins: I would echo the last statement for certain. This is not a short-term process. It’s not the typical marketing approach. I kind of liken it to people who are trying to sell mainframe computer systems to large corporations. You know, it takes a while. It’s not like an opportunity that pops up every month. For instance, we go out for a procurement about every four or five years. So, if you started trying to familiarize yourself with doing business with us and pairing with us, you’re talking about what will be at least a three or four year process.

You also want to establish a record of top performance, because if you look at our process, you know that criterion is going to be tops on our list. You want to make sure you’ve got the right kind of experience, as someone already said. You want to make sure you know what we’re looking for.

We do have a lot of information available on doing business with us, and we make it available on public Web sites for interested parties to do their own research. You want to seek out clients that have some similarity to us so you can demonstrate that your ability to do similar type work. Attend whatever meetings you can with respect to federal agencies. Even if you are not a current contract holder, attend meetings and offer suggestions and comments. Ask questions when needed.

All of these things are very, very important. Remember, again, this is a long-term process. It is not something that you come in and meet with somebody, you schmooze them for an hour, and you’re in good. You’ve got a long-term process of learning what the client expects and then creating that level of performance so that you can come in with a proven track record that demonstrates you’re not promising anything, you’re showing you’ve already done it.

Kennon Walthall: Have deep pockets and be prepared for a long sales cycle. We’ve worked on some clients for as long as six years, but the typical sales cycle is six months to a year.

Michael Lamm: How significant is the IRS contract to the debt collection industry today?

David Glezerman: I think this may be the contract that everybody’s been waiting on for years. I think this is the second go-round. Because of what happened before, there may be some apprehension. Also, there are still the political issues that are associated with this.

But I think, initially, this is a contract that may demonstrate collection agencies’ abilities to perform well and reduce some of the public negativity. I think, in terms of right now, the Department of Education experience has been a good one. I would hope the IRS would follow, to some extent, the example that was set in that venue.

I think that most of the agencies that have the capability or have the capacity are looking at this as an opportunity. I think, in the long run, we could see some partnerships developing here to try and handle this business as well. I do believe also that this could have a trickle-down effect on the industry. If an agency that wins the contract dedicates their resources exclusively toward the IRS, or even to a large degree toward IRS, what impact would it have on their other clients? I think that’s one thing that we have to be careful of and look at. While there’s going to be an opportunity for a few, there may be a residual effect going forward throughout the rest of the industry.

Gary Hopkins: David raised a couple of points that I agree with. Everybody is going to be watching, particularly because of the fears we had last time. It is a good opportunity, probably the best opportunity, for the collection industry to show that it can produce results on sensitive projects, and address all of those privacy issues that are prevalent when you’re managing tax debt. This is an excellent opportunity for the collection industry to show that it can operate professionally, not like the old stereotypes that were mentioned earlier.

The other point he raised is also an excellent one. Eventually, this can get so big in terms of outsourcing; it can suck up a lot of resources in the industry. Here at the Department of Ed, you heard me say earlier that we like to attract the best – not just the best agencies, but the best collectors and managers at those agencies. So, if we’ve got an agency under contract – and I suspect this will happen – that also wants to do business with the IRS, we’re going to be watching closely to make sure that the IRS contract isn’t consuming all the resources that they’ve used to be successful with us. That’s absolutely a concern. Any time you’ve got something that’s potentially as large as the IRS contract would be, it’s going to come with some concerns about resources.

Mike Vallandingham: I can tell you in our firm, we’ve been talking about the IRS opportunity for a couple of years now, and following it and helping support that effort in different ways. And even for a large company like ours, we’re anticipating spending a million plus dollars in the first few months of this contract. So, if you really haven’t been in the government sector, and if you haven’t collected tax at some level, or if you haven’t represented the FMS, or ED, and haven’t really jumped into a really big, government contract in the past, you have to be prepared for the fact that your initial investment and resulting losses in that first six to 12 plus months can run into hundreds of thousands of dollars a month. You have to be prepared for that. Your partners have to be prepared for that. And like Gary said, it will take more resources than you could imagine. You can’t start early enough preparing for this contract, especially if you want one of the ones that they’re going to offer this summer.

Mark Russell: Mike, could you further clarify why you are assuming a potential loss of hundreds of thousands of dollars initially? Is that for capital startup costs?

Mike Vallandingham: That would include capital startup. You’re talking about employing upwards of – over an 18 to 24-month period — several hundred plus employees: collectors, managers, IT support personnel. You’re also looking at buying computers and leasing space. You’re possibly looking at 30,000-40,000 square foot call centers, if they were to divvy this out to 10 or 12 firms and refer out the volume of accounts that they’ve talked about over the last couple of years. And the money just doesn’t start flowing with the first letters and phone calls. You’re going to have to accept payment plans. You’re going to have a lot of bad addresses. It’s just going to take a while to ramp into this to where your revenue stream crosses and passes your cost for handling this type of contract.

Gary Hopkins: Mike, if I could jump back in. That’s something that’s not unique to the IRS. It is an accurate depiction of what happens when you do business with the Department of Education or Treasury. Our partners tell us that typically it takes eight to nine months of work before you even have your first breakeven month with us, and it’s 18 to 24 months, if you’re doing well, before you break even on the entire contract. There are significant startup costs. You’ve got to get the resources in place and you’ve got to do those things before we even send you the first account.

So, Mike is absolutely right and it’s something that’s not simply unique to IRS. It’s a characteristic or a factor that you’ve got to deal with in most federal agencies. If you talk to our collection agency partners, they’ll tell you pretty much the same story.

Mike Vallandingham: We had that same experience on the FMS contract. And you just can’t ignore it. If you’re really just coming into your own as a collection firm, whether you are a law firm or an agency, this isn’t where you want to start into the government sector. If you snuck into this deal somehow and you just don’t have the financial stability to be there, it could literally pull you under before you made it into profit territory.

Gary Hopkins: As a matter of fact, it is one of the things that we tell agencies they have to have – significant financial resources or access to significant financial resources.

Kennon Walthall: We don’t have any grand illusions that we’re going to be one of those 10 to 12 that would get the IRS work. With that being said, we do see it as a positive, in that the old adage of a rising tide lifts all boats. If those 10 to 12 that get the IRS contract do a good job, then it’s going to make the local and state governments feel more comfortable outsourcing their debt collection and related services. We might never get a dollar from the IRS contract, but we believe it will produce a positive result for us and the industry. "If the IRS is doing it, it must be a good thing."

Gary Hopkins: When you talk about resources, don’t forget about the potential for subcontracting opportunities. Whether you’re a small or a large company, the opportunity for subcontracting to share some of the risk involved and spread out the enormous resource demand will be there. There will be a lot of partnering and subcontracting opportunities.

Harley Duncan: I think, from the state perspective, what we’d be watching is two things. As Gary mentioned, does this create a resource drain for the firms that we rely on? If so, what’s the spillover effect on us?

The other thing is a little darker. I guess Kennon must be a glass-half-full sort of guy today. I’m sort of half empty today, which is to say, if things go well, great. If things go poorly, we’ve got real problems. The public doesn’t differentiate between state tax and federal tax. I think it makes the use of collectors and all sorts of debt collection more difficult if there are mishaps of some sort.

Kennon Walthall: Now, Harley, I’ve got to be optimistic.

Harley Duncan: I know you have to be. I usually am. And it should go well, I hope it goes well, and there’s no reason that it shouldn’t. But if it didn’t go well, the public doesn’t differentiate, and it’s very hard to change perception.

Edited by: Patrick Lunsford