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In 2003, an estimated $60 million of debt was written off by call centre companies in India, The Philippines and South Africa with India accounting for nearly $40 million of that figure.This figure undoubtedly doubled in 2004 and probably will again this year.American companies accounted for most of that debt with British companies disproportionately high given that the offshore market from the UK is substantially smaller.

THE PROBLEM EXPLAINED

Quite a few years ago, a friend of mine was tasked with going to India to buy an Indian call centre vendor. On his return, he told me of his theory that call centres go through 3 phases. Phase 1 is to get some clients. This means any clients or “bums on seats” as people in the industry often say. Phase 2 is to get some clients who pay. It seems that even back then, clients were missing payments. Phase 3 is to get some clients who pay enough to make a profit. Those clients who make it to Phase 3 survive and those who don’t don’t. It may seem an over-simplistic theory for outsiders to the industry but to those companies involved in the industry, this is a daily struggle. Excluding the multi-national vendors, most offshore outsourcing call centres are currently in limbo between phases 2 and 3.

Phase 1 — Find some customers
Phase 2 — Find some customers who pay
Phase 3 — Find some customers who pay enough to make a profit

There are of course some areas which get hit worse than others. Outbound is more prone to bad debt than inbound. Performance or commission based projects are worse hit than hourly paid. Projects which come through brokers or middleman have higher debt ratios than projects directly with clients and the more middlemen involved the more hands which touch the money and the less likely the centre will get paid.

WHY IS THERE SO MANY BAD DEBTS?

Before you can start to resolve the issue, it is important to understand why the problem is so severe and in particular why call centres allow such massive debts to pile up seemingly unchecked.

There are many reasons. For example, call centres that are keen to expand tend to avoid essential pre-project commencement legal matters such as ensuring credit checks are conducted or having a fair contract in place which ensures fast payments, keeps credit to a minimum and provides a clear path if the worst happens. There is also the issue of geography. You may be able to fly anywhere in a day these days but the distance does create a psychological barrier than the client thinks they don’t have to pay and the centre thinks they can’t get paid.

There is also a major lack of understanding of legal and debt collection issues from the call centres. Assuming the client has the ability to pay and there is no major breach of contract, a call centre has a very strong chance of getting paid. Clients who are wise to the process will try to make it more complicated and call centres often give up. This only emboldens unscrupulous clients to do the same again. It’s also true that many call centres are focusing their efforts heavily on growth and don’t have the resources for litigation or debt collection. Litigation can often be very effort consuming for senior management and it is important for call centre executives to weigh up the opportunity cost when undertaking such action. The cost of litigation can also be a prohibitive factor when chasing debts. Some countries including England and Wales often require an overseas claimant in a litigation case to make a bond to cover the legal costs of the defendant. Many call centres see this as a step too far given that they have already paid to undertake the work and are now being asked to put up even more money with no guarantee of a return.

Across the industry, there is a lack of information sharing. I am quite fortunate in that I have been in the outsourcing industry for a long time and have a large group of trusted associates with whom I share information on an informal basis. Newer entrants to the industry don’t have such a luxury.

It’s also important not to underestimate the cultural issues for why offshore companies choose to write off debts rather than pursue the options open to them. For example, it is very difficult if not impossible to use the legal system in India for collecting payments so businesses are accustomed to writing off debts. In China, it has been a common practice for debts to be paid at Chinese New Year and then to start the New Year debt free. Indeed, across many developing nations, companies use social pressure or force rather than the rule of law to enforce payments. Obviously such “social obligations” are not tradition in Western countries particularly amongst those who seek to defraud others. The sheer extent of the globalization of the industry also makes it far easier for clients to avoid debts. A client can go across India, The Philippines, Africa and The Caribbean leaving a trail of bad debtors in their wake. It’s also true that middlemen, intermediaries, brokers or independent marketing companies who generate new business that often complicate collection efforts. It’s important for any call centre to know the whole money chain. Check how many people are in the chain from the client who is ultimately paying the money to the person who pays you. Any credible broker should be able to provide this information.

Finally, it should be noted that in many cases, what call centres claim are debts, are not. For example, I was recently asked by a client of ours to help intermediate with a call centre to which they have outsourced a substantial amount of work. In truth, the call centre was offering an abysmal level of service and the sales they were attempting to bill for where nothing more than fake sales. Mis-selling is rampant among a number of offshore centres. Given the speed with which the industry appears to have matured, I am shocked by the quality of some sales, the lack of quality control processes in some centres and in some rare circumstances what appears to be management engineering a system to defraud their clients. However, this should be put in perspective. The majority of centres have effective quality control and in some centres, the Quality Control teams can often be over-zealous. It’s also worth remembering that many onshore centres also have agents who stretch the definition of what a sale is and so it’s not a problem unique to the offshore industry. However, centres which through their own inactions, negligence or cheating are damaging the reputation of both themselves and the wider industry and I have little compassion for them if they fail to get paid what they believe is due to them.

HOW ARE CALL CENTRES FIGHTING BACK?

When a client has defaulted on a payment, many centres will threaten to suspend operations until payment is made. If the project has already stopped, it often appears as thought all they can do is to beg for their money.

However, some centres are starting to fight back. There is now increasingly more information being informally shared by angry call centre executives. Unfortunately, these are often in unregulated websites hosted in countries where libel laws don’t exist or are not enforceable. In fact, these sites are often used by call centres that have simply fallen out with their client or by the competition of the client and so this has made the information on these sites effectively worthless. I also came across a group in India which had supposedly set up to work on the issue. Each centre was asked to register their clients when they took on a project and then to tell the group if the client defaulted on payment. When I first heard of the idea, I thought it was an excellent idea. However, it turns out that the organizer of the group was simply taking the contact details of the newly registered clients and calling them to offer his company’s services. The group was in fact little more than his own lead generation scheme!

Call centres are also changing their practices but often in worrying ways which will undoubtedly slow down the growth of the industry. Many call centres are now insisting on pre-payments or deposits. Unfortunately, some unscrupulous centres have realised that it is often more profitable to take these pre-payments and then not do the work. If you think it’s difficult for call centres to use the legal system sue clients in developed countries, it is impossible for clients in developed countries to sue offshore call centres. It is actually unreasonable to expect clients to pay advanced payments. Everywhere in the world, business to business transactions operate on credit terms and the call centre industry should be no different. All industries suffer from bad debt and they don’t resort to such measures. They simply adopt processes to reduce bad debt where possible and to minimize its impact. However, such is the paranoia in the industry that I recently contacted a company in India about doing some business and they asked me for a deposit before even asking what the project was. Just like everyone else operating a call centre, I tell my agents to forget their last bad call and move on to the next one with a positive state of mind. However, call centre owners are not heeding this advice themselves and are heading into new business meetings with the negative viewpoint from the client before who failed to pay them.

Call centres have started implementing better pre-project commencement checks. However, simple credit checks rarely have any impact. Companies with poor credit can simply bankrupt one company and start up again. It is far more important to do background checks on the individuals involved. This could involve checking with other centres, web searches or understanding more about their industry. For example, if a company is in an industry which seems to operate in an unethical way to deceive its customers, there is a very strong chance they will deceive their suppliers by not paying them. There are also a few small, quick checks that I would advise every call centre to do. It’s also worth doing a check on the company’s website. If the domain was recently registered, it should raise a red flag. If a prospect emails me from Yahoo, Hotmail or a similar service, I would typically not waste my time to even contact them. Also, check when the company was incorporated. While it is no guarantee that a well-established company will pay its bills, businesses intent on fraudulent activities tend to be in a rush to make their money and make a fast exit. The call centre industry is surprisingly small and it’s usually not difficult to find information out about a particular person or business. It should be worrying if the feedback you receive is bad or if there is no feedback at all.

One overdue trend is that call centres are also automating their financial management processes. It is amazing that a call centre company can spend millions of dollars on technology and yet prepare their accounts in Excel. There are some companies who don’t even have their accounts on a computer at all! I have even heard of 1 company where they lost $200,000 apparently because nobody in the account team knew whose role it was to send out the invoices.

Centres are now increasingly spending money on ensuring that contracts are properly prepared. It never ceases to amaze me how a call centre can grant 100’s of 1000’s of dollars worth of credit without a contract in place. As our debt-collection agency told me “an unwritten contract is not worth the paper it’s not written on”. It’s difficult enough to get paid when there is a signed contract so it’s imperative that one is in place. It’s also worthwhile going through the contract in detail. Too many centres are so desperate for business that they will sign any contract placed in front of them.

CONCLUSION

Bad debt is nothing unique to the offshore call centre. It affects practically every industry in every country. However, come of the characteristics of the call centre industry clearly make it even more prone to this scourge.

Call centres need to be vigilant both at all times in their processes before, during and after projects. They need to be careful about whom they deal with and ensure credit limits and terms are kept in check. There needs to be systems in place to ensure the entire financial management process works effectively. It’s also important that call centres take the appropriate steps to recover their money in the event of a default. The fact that debt is being so easily written off is attracting the wrong type of clients to the industry.

Clients of offshore call centres need to be aware of the sensitivities of these issues and make sure they pay their bills on time. A call centre’s sole motivation for taking on a project is to make profit. Unfortunately, call centres are bound to think that any slight delay in payment is an attempt to defraud them. You make think you have a legitimate reason for paying late but the reasons given by the non-paying clients also seemed legitimate at the time.

Finally, call centres need to leave the collecting of money to their CFO and leave the rest of the management to do what they were supposed to. The issue of debt is diverting much needed attention away from the urgent need to improve the quality of offshore operations. Remain focused on the original plan and don’t let this issue take away your focus.