There’s no way around it. It’s been a while!
I always tell myself that I want to write more … then the week hits and it somehow always ends up being priority item number four when I only have time to work on a list of three.
I’ve learned to give myself grace. After all, I have been very busy, and I think that I’ve been prioritizing effectively. One of those priorities has been preparing to welcome (and then care for) a baby girl, which meant that I needed to make sure things could run smoothly when out for a month on paternity leave.
That time off predictably flew by. Honestly, it felt great not to think (that much) about work. But in those many delirious, sleep-deprived 2 am windows one thought did come back to me repeatedly: I want to write more.
Writing activates a unique part of my brain that would otherwise lie dormant. It forces me to better clarify and organize my thoughts. And to arrive at a defined point of view on important topics that might otherwise remain fuzzy.
All this to say, I’m excited to be writing again! Especially about a topic that I haven’t been able to shake from my head these past few months.
Before we move on though: A quick tease: When I was out on leave, I spent some of my (very little) downtime playing with new AI tools. Let me tell you, things have advanced RAPIDLY the past few months. I get asked about how I think about and use AI constantly, and I built something cool to help me answer that question. Stay tuned for next week!
Introducing the Theory of Constraints
Every collection operation is a system. The Theory of Constraints is a management framework built around one simple idea: Every system has a single bottleneck (constraint) that controls everything. To improve overall performance of the system, there is ONE key constraint that must be fixed.
There are certainly many problems, all competing for your attention.
But there is only ONE that really matters. And your recovery rate - regardless of how well everything else functions - is capped to however well that constraint is performing.
Before this gets too dry, let’s use a hypothetical to illustrate. Pretend you are an astronaut, on a solo mission in outer space. While circling in Earth’s orbit, uncertain of when you’ll be able to return home, you decide that you better take inventory of your resources.
You find that you have enough oxygen to last for ten days. Enough water to last for four. And enough food to last for seven. What’s the constraint here?
Water! Any time spent trying to solve the air or food problems will be a waste of time and resources. You’d die of dehydration before they ever become relevant.
This is a simple example that obscures the real challenge that presents itself once you embrace Theory of Constraints.
In a collection operation, there are no shortage of problems worth solving. And solving problems is often easy. That’s what makes TOC so useful. When fifteen things look broken, the constraint is the ONE that actually matters. Identify and solve for it first. Everything else can wait.
“There is nothing so useless as doing efficiently that which should not be done at all.”
- Peter Drucker
Quick side note before we dive deeper: Yes, small improvements are valuable and compound into meaningful productivity improvement. And non-operational challenges (compliance, for example), can muddy the TOC decision-making process. I won’t focus on either here, as I want this to be readable over one cup of coffee.
Same for fully outlining the full TOC process. If you want the full deep dive, check out Eli Goldratt’s Theory of Constraints book. And reply letting me know if I should circle back with a part two to this initial look at TOC.
Introducing the Theory of Constraints
At the risk of oversimplifying, total recovery is a basic equation:
Outbound attempts X RPC Rate X Promise to Pay Rate X Average Promise Amount X Promise Kept Rate.
Each variable is a lever. The constraint is whichever one is limiting your output (total dollars collected).
This distinction matters more than it sounds. When recoveries are down, managers don’t usually ask which variable is the bottleneck. They ask what can be improved. And the answer is often the one that is most actionable, not the one that will remove the constraint.
Example 1: Delinquency is rising. Volumes of accounts to work are rising and recovery rate is slipping. In many shops, the move seems obvious: add more staff. More collectors means more outbound attempts, which means more dollars.
But what if the constraint was not outbound volume at all but RPC rate? In this case, sure, increasing outbound communications will increase recovery, but at an inefficient rate. More communications just means more unanswered outreach at an increased cost. What actually needs to change is channel strategy - digital communications, caller ID remediation and/or other changes that drive a fundamentally different approach to generating contact.
Example 2: Recovery rate is soft. Management sees that the team is setting up primarily recurring payment plans that extend for a long period of time and determines that average promise to pay size is the primary problem. They invest heavily in retraining their team and in providing real-time conversation coaching tools to help them better negotiate larger average payments.
But the constraint was actually a leaky bucket - a low promise kept rate. All those recurring payment plans seemed great at the time, but they were failing at an alarming rate. Consumers were simply agreeing to payment amounts they couldn’t sustain. Attempts to increase average payment size actually further reduced the promise kept rate, decreasing the total dollars collected. Good faith coaching made the problem worse.
Management actually needed to find the cause of the leak and plug it so that recurring payments translated to actual dollars collected.
In both examples, the operator identified something real. But neither identified the constraint. That’s the expensive mistake that TOC is designed to prevent.
Strategies for Identifying the True Constraint
Solving problems is easy. Identifying the correct problem to solve is the real challenge. Use these strategies to help find the real constraint before you waste real time and resources solving the wrong problem. '
“It isn’t that they can’t see the solution. It’s that they can’t see the problem.”
- GK Chesterton
Look for where work accumulates. Look wherever accounts are stuck waiting. This can be by work period (15-day, 30-day, 60-day, etc.) or work step (skip tracing holds, legal review triage, dispute resolution, etc.). Within systems, the constraint is almost always at or just before the backlog.
The “unlimited resource” test. Pick any part of the operation and ask: “If I had unlimited capacity here, would total recovery go up proportionately to the increase in capacity?”. If yes, this is likely the constraint.
Distinguish busy from productive. Activity isn’t the same as output. Do a time study, not to micromanage, but to better see where capacity is actually going. Collectors doing manual account prep isn’t producing. Supervisors prepping reports aren’t actively improving their teams. Constraints can hide within the gap between how your teams actually spend their time and the work that actually drives recoveries.
Follow the firefighting. Look for supervisors that are reacting to problems rather than proactively managing. Watch where their unplanned time goes and where workarounds become routine. Inefficiently functioning systems surface constraints through noise. Wherever the most fires are burning could be near the bottleneck.
Ask what everyone already knows. Collectors tend to be a savvy bunch. It’s the nature of the job. You can’t be good without having strong problem solving skills and a refined BS detector. Before trying to map anything, just ask your team where they get stuck. Sometimes the constraint is hiding in plain sight where only those closest to it can see it.
Next Steps
Most collection departments don’t have an effort problem. They have a focus and prioritization problem. Prioritizing solving the wrong problems creates inefficient return on resources (time and money) at best and even decreases overall performance at worst.
My challenge to you: Spend an afternoon mapping workflow and taking the time to truly understand what your one real constraint is.
Once you’ve identified it, ask yourself before considering making a new hire or approving a new process: “Will this help alleviate the constraint?”. Then table any projects that do not work towards resolving the constraint.
Tip of the Week
I’ve been heavily using Whispr Flow the past few months. It’s a (free) speech to text transcription tool that works natively on both my laptop and phone within whatever application I’m already using. I simply hold a button, speak what I want to write, and the words appear.
It’s faster than typing, works when I only have one hand free (a frequent problem in my house these days!) and it even helps make me more verbally articulate by forcing me to think before I speak.
Last Week (Year) Lowdown
ICYMI: My last newsletter focused on finding the right ways to incorporate AI into your workflow. In the six months that have passed since the article, AI has advanced WAY faster than I expected. But I still feel like the article holds up, especially if you’re a late adopter ready to start dipping your toes into the water. Click here to view the entire post.
Are we on the same wavelength? Check out EngageARM.com for free resources in-depth tutorials to help you build a highly-effective recovery department.
I’d like to close this with a quick ask. If you enjoyed this, please share with a colleague. Even better, take advantage of the referral program (linked below). If you disliked it, let me know why. All feedback is good feedback, after all.
Cheers,
Nate
