For the past couple decades, I have worked in banking, software, health, and government. In each of these areas, I have dealt with many aspects of legal recovery, and the one thing I know is that if you are pre-paying legal costs, YOU ARE PAYING TOO MUCH! I want to take you through a recent example from my experience that exemplifies this problem.
THE PROBLEM
During the first weeks of my employment as a bank officer over collections and recovery, I was reconciling the recovery payments from our legal recovery vendor and noticed a line in the invoice: “Prepaid Legal and Attorney Fees”. As I tried to understand this, I worked to get a breakdown of these costs and learned the information was limited and difficult to obtain.
I realized I needed to dig into this process and worked with our data analytics team to determine the areas we needed to focus on. We agreed to focus on three main areas:
- Ability to Recover – What is the value of court filings? What is the current vendors’ ability to recover funds.
- Costs Association – What are the true costs of recovery, and are we able to associate costs and recovery with a specific group?
- Process Improvement/Automation – What can be done to simplify or reduce processes that are impacting our work?
THE TEST
Our data analytics team and I ran a champion-challenger test that would compare different legal recovery models, which would assist in evaluating our three main areas of focus. This test compared our current “Prepay Legal Fee/Manual” model (Champion), with the challenger “Net Commission Only/Digitized” model. This new vendor model utilized asset detection and evidence of assignment, and they carried the burden of paying legal fees.
To support the test, we built reports that grouped placements based on month and year, reviewed each group, and compared this against our new agency doing net recovery on the balance. The reports tied pre-paid costs to each group and accounted for internal costs in the management and execution of affidavits.
THE RESULTS
In the early stages of the test, we ran an analysis of our prior placements and immediately saw concerning trends. With legal fees, court costs, judgment renewals, and miscellaneous fees, these expenses were close to or exceeding the total dollars recovered. We determined the problem was that previously we were only looking at total net commission at the time dollars were recovered and not taking the time to associate the upfront expense with the recovery.
Additionally, due to the upfront fees, the long-standing legal recovery vendor had no incentive to control costs and was filing legal action on all accounts regardless of whether there were assets. We also found another alarming trend in states like California and New York, where significant costs associated with these filings often cost us more than the balance we recovered.
As we compared the results, it was clear that the new firm was showing a true recovery rate with a higher net recovery. We saw a few things that made the difference with the new vendor:
- Asset Review – Prior to forwarding any account to the attorney, the new vendor had processes to confirm assets and determine the likelihood of payment.
- Cost Control – The new vendor was on the hook for any fees associated with the recovery vs. the bank.
- Innovative – The new vendor had built processes that limited the requirements for affidavits. Instead of thousands to execute, we had fewer than twenty each month.
As you evaluate your legal and recovery model remember to look at the true cost of recovery as the initial picture you see may not be telling you the whole story/cost of your legal recovery services.