Round table: improving debt recovery

​Most of us have at some stage lent money to someone – a friend, relative, colleague, you name it – and failed to get it back. After all, it can be hard to keep track of who you’ve lent to, and how much. And if it’s a sum we can afford to lose, we may prefer to let it slide rather than taking the time and having the awkward conversations required to get it back: we often forget debts when we can afford to, but remember them when times get tough. As for the debtors – many seem to find it very hard to keep a track of those long-spent loans.

HM Government isn’t so different: it’s been slow to chase the billions of pounds it is owed by the citizens of this country – a sum estimated at some £22bn by the National Audit Office in March last year. But it’s now taking action to get its money back, having launched the Fraud, Error and Debt (FED) Taskforce in 2011: the agenda was given a big boost following the financial crash and subsequent budget cuts. 

The FED team claims to have saved the government £10bn in total over the two years to March 2013. However, so far much of the focus has been on its fraud and error briefs, and government is only now moving rapidly on debt. It is doing so with the creation of a ‘Debt Market Integrator’ (DMI) – a joint venture, set up with a private contractor, which will take on creditor departments’ uncollected debts and use analytics techniques, collection work, enforcement and litigation, debt sales and expert advice to bring in as much as possible of this outstanding money.
The Cabinet Office tender process for the DMI recently closed, and work is now underway to select the main provider for this five-year, £1bn contract. The prize is a big one but there are substantial reasons why government has not made much progress on it so far.

At a recent Civil Service World round table, held in association with analytics providers SAS, Richard Houlbrook – the head of debt recovery at the Legal Aid Agency – noted that if most of the government’s outstanding debt was collected, it “wouldn’t have to make any cuts to frontline services at all”. So how can civil service debt specialists best help government organisations to collect the money it’s owed?

Consistency
One of the problems, according to Antonia Gracie, an audit manager at the National Audit Office (NAO) – and the author of an NAO report on government debt – has been the lack of a common, government-wide approach to debt management. When working on her report, she said, “we found that there wasn’t a shared set of objectives, definitions, measures of performance, or costs and benefits.” If the whole of government isn’t clear on what constitutes debt and how to measure the cost of recovering it, it becomes almost impossible to “manage it strategically”, she added.

This is, Gracie added, in part due to a lack of transparency: “Departments aren’t all required to report debt, debtors or aged debt; and if it’s not a big issue for the departmental board, they may not really notice it very often.” Due to this lack of consistency, she added, the NAO figure of £22bn of government debt is only a rough estimate: “It wasn’t possible to get a very clear figure of all of [the debt], and there were very different definitions across government as to which pots debt was sitting in and whether it was due or overdue or not due.” The real total might even be more than £22bn.

Because departments don’t have a good understanding of how much they’re owed, how long it’s been outstanding, and how much it would cost to recover it, they can’t accurately value their debts. Some of the debt, classed as assets on balance sheets, might be worth less than thought – if those owing it simply have nothing – or more, if the money would be easily obtainable. It is possible, participants suggested, that the risk of having to write down the book value of debts found to be unrecoverable is deterring departments from taking steps to pursue them.

Like departments’ methods of measuring debts, their processes for recovering them are quite separate – leading to a lot of duplication as, for example, individuals are chased by several different departments for small amounts owed to each of them. Departments have no way of joining up their activities, and are constantly re-inventing the wheel.

Limited resources
Different parts of government also have quite different policies on debt recovery. For example, Houlbrook’s agency only goes after debts bigger than £600 – the cost of chasing smaller amounts would be greater than the amount collected. Steve Williams, head of finance at the Defence Science and Technology Laboratory, raised some concerns over this approach: “Is that not self-perpetuating?,” he asked, concerned that members of the public aware of this benchmark could take advantage of it. But Houlbrook argued that “with limited resources and limited options, you go for the best recovery you can get”.

This, Houlbrook said, is one area in which the DMI may be helpful: if it’s successful in securing debt recovery work across government, the economies of scale produced may enable government to cost-efficiently chase smaller amounts – so Houlbrook could lower the floor below which he doesn’t chase debts. The DMI should enable departments – especially the smaller ones – to “get more services than they could afford on their own”, he added, commenting that “there are things that [the DMI] can do that I will never be able to do – they’ve got more people in analytics than I’ve got in my entire department”. 

As well as services, the DMI will also offer advice and consultancy to departments, helping them to work out how best to best pursue debts. So as Gracie observed, what’s on offer is not just the “savings you could get immediately by contracting”, but also the “added value of the expertise”.

The DMI will be able to make some inroads into the amount of duplication across government: for example, it could carry out a credit check on an individual, and use that information whenever any of its client departments require it – sharing the cost of conducting the check between them. 

A holistic picture… to a degree
Having the DMI should help produce a “holistic picture of what’s going on in government”, commented Simon Dennis, SAS’s central government client director. Its bird’s eye view of the types of debts owed to a range of government bodies, and of their success in collecting them, could be useful in analysing departments’ approaches and developing stronger policies and processes for use across government. After all, he said, “if your customers are in debt, there is a problem – either with your process or with what you’re delivering. So what I’d like to see is this being viewed as a real opportunity for government to continue on the journey to understanding customers”.

The DMI will not, however, be able to sidestep the data protection laws which constrain departments’ ability to collaborate on debt collection. Unable to exchange information on individual debtors without those people’s permission, departments can’t identify people with debts to many arms of government and combine them in a single recovery process. So if government takes action against an individual owing money to three different departments, it has to do so three times – as Heather Neathe, a member of the Department for Work and Pension’s data solutions team, noted. With the cost of legal action being “quite enormous”, she added, this is a significant problem. The DMI will be similarly constrained, unable to – as Houlbrook put it – “put one and one together”.

Currently, departments can’t even warn each other about bad debtors. Rosemary Carter, operations policy manager at the Skills Funding Agency, pointed out that if her agency finds out about a financially problematic customer who is holding government contracts elsewhere, she cannot alert those other departments. “All I can do,” she added, “is to say to [the other department]: ‘You now need to seek an assurance on the delivery that you are buying from this organisation’. It’s ridiculous.”

Her views were echoed by Houlbrook, who said that ideally the DMI should be able to consolidate the debts of people owing money to several public bodies. This, however, he added, is “much further over the horizon.” The DMI, he said, “isn’t at that point yet; it’s still got the barriers between who can and can’t share data”.

There’s only one scenario in which several creditor departments can act together to pursue money owed by a single individual: if the debtor agrees to have their details shared, the DMI would be able to combine the debts into a single case. Debtors could be incentivised to give permission by, for example, the prospect of government writing off a percentage of the total debt. Also, “if the debtor gives the authority to ten people to consolidate the debt into one place, it’s easier for the debtor and the creditor to manage,” Houlbrook said.

Concerns
The fact that the DMI will be bound by the same data management constraints as departments means that it won’t be able to create a “massive transformation”, said Gracie. It does present opportunities – DSTL’s Williams called it a “step forward” – but its introduction is also raising concerns, some of which were aired at the round table. What’s to say, for example, that the DMI won’t start pursuing small business for small amounts of money, thus hampering economic growth?

Houlbrook reassured participants, saying that “we instruct them: the DMI won’t chase [small businesses] unless we’ll give their cases to the DMI to chase. So it’s going to depend on the credit policy in the organisation. If your agenda is to go after small businesses, you’ll use the DMI to do it; if not, then you probably won’t”.

Another point was raised by Williams, who asked how the DMI’s role will link in with HMRC’s newly announced powers to take outstanding debts directly from people’s bank accounts. “What if the DMI ends up with that power?,” he asked. While Houlbrook described the coverage as “a press scare story”, Michaela Woodhouse, inspector of taxes at HMRC’s counter avoidance team, said that this power will “only be used in in extreme circumstances”, adding that “I would imagine it’s going to be quite limited”.

Agnes Aniereobi, a reconciliation and debt manager at the Home Office, raised a more fundamental point: why go to the private sector in the first place? Instead, she said, the work the DMI is to undertake could be “developed in-house, and piloted in the civil service to see how effective it is before it goes to the private sector”. Testing out the model and evaluating it before handing it to a private company, she added, would enable government to undertake “evidence-based research” and formulate exactly “what we hope for [in the contract]”.

Houlbrook responded that the DMI will operate as a joint venture, with “the public sector as a significant but minority holder”; he added that departments will have the option to carry out debt work themselves if they can achieve better value for money than the DMI. The DMI, Houlbrook said, is “more about options, scalability, procurement and pricing.” And its business case does not currently include any provisions for civil service staff transfer: “At the moment, it’s more about having an a la carte menu of services that people can draw down at a fair price.”

Looking to the future
Debbie Tuckwood, director of learning and development at the Institute of Credit Management, argued that alongside the introduction of the DMI, civil service bodies should be seeking opportunities to improve professional skills and exchange ideas. “Debt management is such a big area, so complex, that it requires high levels of skill,” she said. “Every [civil service] organisation has a completely different culture, make-up and priorities, all at different stages of development. But I think you can all learn from each other by having groups that are meeting together and sharing good practice.”

Her view was echoed by Houlbrook, who called for greater emphasis on professional standards within the civil service debt management profession. “Over the years, I’ve encouraged people to do professional study,” he said, adding: “Those people who do study have increased capability, which makes for a better customer experience: we all know that if you talk to somebody who knows what they’re talking about, it’s much easier to get to a conclusion than with somebody who is making it up as they go along.” In order to “improve the professionalism of individuals”, he suggested rotating staff around departments, transferring knowledge and expertise. “I’m absolutely certain that government has collected more money because of different bits talking to each other, even on an informal basis,” he concluded.

Hassan Ali, a team leader at DWP’s fraud and error service, argued for a greater focus on prevention. His role is to prosecute fraudsters, and he has targets to hit – but there are perverse incentives in the system: “I’ve got targets to prosecute people,” he commented. “I don’t want to prevent anything, so I can hit my target and keep my job. But there must be a better way. We need to spend money preventing [fraud], so that we don’t end up chasing debt and putting people in prison.” His view was echoed by Kate Downey, a member of the defence business service team in the MoD’s finance department, and Katherine Harrington, senior investigator at the Legal Aid Agency, who both described prevention as “absolutely key”.

Despite the current drive to crack down on debtors, Houlbrook warned that government has to be aware of the consequences of its actions. He used the example of a family owing money to the Legal Aid Agency: he would have the power to seek repossession of the house, which would resolve the debt issue. But “if I do get the house they live in, I just disrupt the children’s schooling. Maybe the relationship falls apart, and guess who funds the divorce? That’s me again. So we’ve got to think more about consequences in government, and not pursue people who’ve got nothing.”

Whichever bidder wins the DMI contract, its success will depend on departments’ readiness to buy into its services. Government must therefore ensure that it, in Gracie’s words, “learns from the lessons of shared services in other big contracts, and really makes sure that the benefits are tracked and evaluated clearly – because if the benefits are not captured, politicians and others lose interest and it doesn’t deliver what it is set out”.

Those benefits could be huge: the DMI could drive down the cost of all services, and improve the availability of professional debt management, advice and support across government; and it could change policies to reduce the creation of debt and aid its pursuit.

This agenda, the ugly duckling of the FED triumvirate, has made slow progress under the coalition – but things are now moving. Like a once-generous individual forced during lean times to call in their half-forgotten debts, the government has got its act together and pulled out its dusty loan book. The circumstances may be uncomfortable, but the result may be that the honest majority are taxed less as the government taps up its debtors. And in that case, this aspect of government operations will emerge from the recession in far better shape than it was at the time of the credit crunch.

Download the SAS point of view on Debt Recovery to understand more about how SAS can help to drive segmentation and automation needed to maximise recoveries.