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The Art Of Negotiation

Not surprisingly, 'negotiating with debtors' is one of the issues most commonly referred to within a debt collection environment. Appraisals often encourage collections staff to 'improve their negotiation skills', collection trainers are invariably asked to include tips on effective negotiation within their training sessions and the industry regulatory bodies are keen to ensure that negotiation is entered into with debtors and their appointed representatives wherever possible.

However, despite these common scenarios, I believe it is important to define exactly what is meant by the term 'negotiation', to avoid it being used inaccurately to reflect purely a telephone contact with a customer or an assertive demand for full payment.

Negotiation is the ability to talk or consult together with someone for the purpose of mutual arrangement; to bargain; to arrange by agreement.

Fair and supportive treatment

The role of effective negotiation cannot be underestimated in the debt collection environment. The ability for a collector to tailor an organisation's standard demand for the contractual obligations to be met is vital in ensuring that customers in genuine financial difficulties are treated fairly and supported where they are making a genuine effort to recover their financial position.

In many instances negotiation will identify the most commercially viable option for a creditor, prompting, for example, a policy of interest rate reduction, concessionary repayment plans or full and final settlements. Entering into negotiation with a customer can also provide an excellent opportunity for a collector to build up a true picture of a customer's profile and circumstances with regards their intent and ability to repay the debt in full.

However, despite the undoubted advantages of negotiating in many cases, it is also important to acknowledge the potential disadvantages of, for example, negotiating too early on an account and, in doing so, risking the fact that a customer's true willingness and ability to pay may never be established.

It is important to bear in mind that, in the twenty-first century, which is characterised by the relative ease with which credit can be obtained and the increasing European focus on human rights and regulatory controls, the average customer is more credit aware than at anytime in the past. Terms like 'financial difficulties', 'write-off' and 'payment arrangement' - once the exclusive language of the creditor - are now introduced into conversation just as regularly by the customer themselves. There is always a risk, therefore, that a collector may too readily assume that negotiation is required and, in doing so, pass over control of that negotiation to the customer, and with it the rights of the creditor.

Should you negotiate?

Deciding if, when and how to negotiate with a customer is an integral part of effective debt collection and proper thought needs to be given to these questions from both a strategic and operational view point.

There are strong arguments in favour of allowing different levels of negotiation flexibility on different 'types' of account - for example a customer who has never paid would rarely attract the same level of concessionary options as a customer who is experiencing short-term financial difficulties after a sustained period of regular payment. Similarly, on accounts where litigation is deemed uneconomical, and the bad debt provision is high, a one-off full and final settlement may provide the most sensible 'win-win' solution.

An organisation's policy on collector rewards and incentives should also be taken into account when deciding the 'rules' on negotiation, to ensure proper alignment of the two. There is little point, for example, in expecting collectors to negotiate with customers if they are then rewarded on the number, rather than the monetary value, of 'kept promises to pay'. Similarly, the targets set for calls per hour, for example, need to take proper account of the level and type of negotiation a collector is expected to apply to the particular type of account being worked. This is likely to vary dramatically between early collection cases where rehabilitation and customer retention may form a much greater focus than in later arrears cases where the relationship with the customer (in addition to the account itself) has been terminated, and loss recovery is the clear priority.

The differing business dynamics and profitability models of, say, a mortgage lender conducting in-house collections versus a debt purchase company, are also likely to influence what type of negotiation policy needs to exist. Training debt collectors in effective negotiation techniques is key in optimising the return from those customers who are unable to meet their contractual obligations. Such training will minimise the risk of under confident collectors entering into concessionary arrangements too quickly, but also equip the overzealous collector to listen to what the customer has to say before automatically assuming that negotiation is unwarranted.

Encouraging collectors to obtain relevant information from the customer (which is not always the same as the information which the customer wishes to give) is also vital in ensuring a fair balance between the rights of the creditor and the rights of the debtor.

Training should be undertaken to assist collectors in encompassing the following six general rules of negotiation within their own individual style of collection:

• Establish the minimum and maximum requirements, but do not disclose them.
• Encourage the customer to make the first proposal.
• Do not consider concessions immediately. Wait!
• Apply marginal conditions wherever possible.
• Do not be afraid of stalemates.
• Close the call effectively and set the customer's expectations for what may be required after the concessionary period.

A regulatory requirement

As well as making sound economic and ethical sense, the willingness of a creditor to negotiate is also required by the regulatory authorities, as illustrated by Section 13 of the Financial Services Authority's Mortgage conduct of business, and the Office of Fair Trading's (OFT) Guidance note on debt collection. In terms of negotiation with authorised third parties the sentiment is similar, and the OFT guidance note states it is an unfair business practice to "operate a policy, without reason, of refusing to negotiate with debt management companies". I am sure it would be fair to say that debt collectors do not always agree with the reasonability of the offers put forward by such third parties, but this is no defence for refusing to negotiate on the proposal being made.

Some companies - depending on the nature and value of the debt - may, however, take the view that automatic acceptance of these third party offers is a more cost effective policy than entering into protracted communication with no guarantee of a proportionate increase in the offer being made.

Gauging the customer's intent

A collector's ability to accurately evaluate a customer's intent and ability to pay, as quickly as possible, is paramount in understanding when and when not to negotiate. Answers to the following four questions must therefore be sought:

• What is the customer's intent to pay?
• What is the customer's ability to pay?
• What are the timescales over which the customer's intent and ability might change?
• What is the degree of likely change?

Unlike ability to pay, intent to pay has nothing to do with financial capability, but focuses solely on responsibility. The high intent customer accepts that the debt is something that should be repaid in full, and that they may need to consider reasonable lifestyle changes in order to repay the debt.

In my opinion, collectors should be careful in entering into negotiation with customers who do not display a reasonable intent to pay, as these cases often result in them paying considerably less to their creditors than they can reasonably afford. Such customers of course have every right to be treated fairly, but should not be openly encouraged to exercise their rights over and above those of the creditor.

In terms of low ability, both the Banking Code and mortgage regulations unambiguously state that the lender will consider cases of financial difficulty sympathetically and positively. That includes treating cases fairly, judging them on an individual basis, considering all reasonable options taking into account the previous payment history, and suggesting free advice agencies from which the customer can seek help.

I believe the best way for most firms to comply with these regulations is to identify specialist individuals or teams who negotiate solely on financial difficulty cases. They can be trained to become experts on the complexities of the benefit system and should be afforded the necessary time to allow the difficulties of direct contact with appointed third parties to be overcome.

Such specialists should be empowered to consider what options exist, and negotiate with all relevant parties, explaining the responsibilities and consequences of each option.

To summarise, there is, and always will be, a variety of different reasons why customers do not pay their debts. A customer's attitude to their debt, and their financial ability to repay that debt, can be affected by a number of factors. However, the bottom line remains that, irrespective of circumstance, the lender and the customer will have options, and the art of negotiation is key in ensuring those options are properly and fairly applied.

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