The mention of the debt collections industry frequently conjures up images of dark, smoke-filled rooms occupied by employees who utilize tough-guy tactics to demand payment from delinquent consumers over the telephone. But industry boiler rooms represent a bygone era for young, data-savvy leaders like J. Brandon Black, president and CEO of Encore Capital Group Inc.
Black relied heavily on increased employee productivity to initially turn Encore Capital Group around after assuming the position of chief operating officer in May 2000. Since 2000, he has continued to drive the company to new heights by attaining a revenue growth rate of nearly 40 percent from 2001 to 2006 and net income of $24 million in 2006 on revenue of $255 million. Along the way, those numbers also earned Black a promotion to the CEO role in October 2005.
“When I started in 2000, the company was close to bankruptcy, and we were losing almost $23 million,” Black says. “I had a mandate to make the company profitable in 90 days because in 91 days, we would be in default. I hadn’t done something like this before, but I learned to just trust my instincts. I think that sometimes when you’re a leader you can get too emotionally attached to the business to see the solutions, and that’s what had happened here. Sometimes when the plane is out of control and falling toward the ground, you just don’t think to change the pilot.”
Black became the pilot who managed to pull up on the company’s throttle just before it crashed and burned. Since then, he’s continued to grow revenue and net income by attracting a new breed of employee, harnessing the power of performance-based compensation to drive employee productivity and learning to anticipate problems before they occur. Most important, he says that he’s learned to avoid the trap of letting his emotional attachment to the enterprise keep him from conducting timely and objective evaluations of his team’s performance even when the numbers are good.
Don’t let up
With only 90 days to turn the company around, there was no time to spare. Black says that he initially looked at the big uses of cash and the return for those expenditures to take speedy, cost-cutting measures.
“In most companies, there are five to 10 meaningful places where cash is spent,” Black says. “Generally, salaries and benefits are one of those biggest areas of cash expenditures, so I looked at the return we were getting for our investment. I looked at the three different sites where we were running our collections operations and each had a different return. I think we fell into that typical 80-20 rule. We were getting 80 percent of our return from a few sites and collections teams. Then, I looked at how the employees at each site were spending their time and the return for their efforts. Because each site handles different client portfolios, it helped me rank the portfolios and the teams according to profitability. We had a number of places where we had efforts but no results.”
The evaluation helped Black make his first tough leadership decision. To stop the bleeding, he needed to downsize the company from three offices to two, and he would have to get the same or better results with 400 employees instead of 500. The financial improvements afforded by employee productivity gains proved to be a winning strategy not only during the turnaround but when applied continuously.
“One of the biggest lessons I’ve learned as a CEO is to continue to employ the same review strategies and the same level of energy toward productivity improvement in good times and in bad times,” Black says. “I think during that initial 90-day period I was extremely focused and disciplined, but during good times, you have a tendency to let up and not be as disciplined. In order to sustain growth, you have to be consistently focused and disciplined.”
After the first few years on the job, Black says that he found himself falling into the complacency trap and not managing with the same level of intensity that brought him success in the early years. As a remedy, Black initiated an ongoing site and team review process that is strictly focused on productivity and continuous improvement.
Black conducts a robust planning cycle four times per year with his management staff diving down into the detailed returns for each account’s portfolio and each collections team. In particular, he measures activity levels and the corresponding results generated by each team across the company, looking to extract the best practices and assure continuous improvement companywide.
“To drive productivity you have to focus on it, and that’s what our planning process is all about,” Black says. “It would be like the CEO of a door manufacturing company taking his management staff aside for the express purpose of focusing on what will help them manufacture doors more quickly. I’ve learned not to just look at each collection unit’s results in a silo but to compare the results of the various collections teams against each other horizontally across the enterprise. That best practice has helped me optimize productivity throughout the company because now we’re more team-focused, and we work to continuously improve all of the collections teams. When I get down into the detail and compare the units, I can ask why one group may be achieving better results than another, and we can make adjustments.”
Black acquired much of his expertise in modern collections strategies during his previous tenure at Capital One. Like so many industries, profitability in the collections business is commensurate with the cost of the labor relative to the results achieved. So maximizing employee efficiency through properly aligned incentives is vital to making money.
“I don’t generate any money in this company. It’s all about the people on the phones,” Black says. “I’ve aligned everyone’s incentives with the company’s performance goals, starting with the CEO and going five levels down because everyone has to be rowing the boat in the same direction or else it will sink. Before our variable compensation was function-specific, and it was not aligned to overall company or team goals. Since we’ve taken this step, our results have improved dramatically.”
About 90 percent of Encore Capital Group’s work force has a variable compensation plan and 25 percent, mostly the management team, has equity incentives in the form of restricted stock and stock options. Black has realigned the agents’ pay to reflect both individual and team bonus opportunities, which meshes with his team-focused business model, and it isn’t unusual for top collectors to make six-figure incomes. Black says that paying top dollar is important because good collectors, like most good employees, can find work opportunities anywhere.
Black says that he achieves buy-in from the agents for implementing new collections techniques or agreeing to a new compensation plan by protecting them from financial loss in case the new process or compensation plan doesn’t work out as expected.
“Not everything works in any business,” Black says. “I’ve learned that in order to retain top collectors, you can’t get into the production workers’ pockets. If we change something in a comp plan, we’ll run both the new and the old plan in parallel for a while, and we’ll pay based upon the greater payout between the two plans so people are encouraged to step across the line and try new concepts. In a production-oriented environment, you can’t change comp plans too often because anybody only has so much change quotient, and you have to respect your relationship with that worker because it’s like an informal social contract.”
Black points to Encore Capital Group’s voluntary average annual employee turnover of 25 percent versus an industry average of 100 percent as proof that he’s on target with his compensation plans and philosophies.
In addition to redesigned financial incentive plans, much of Encore Capital Group’s improved productivity has resulted from Black’s initiative to train collections agents to review all of the available data on a consumer before deciding on a situation-specific collections strategy. The agent also decides how long he or she will work the account before referring the case for litigation, so in this case, increased worker effectiveness and decision-making translates to profitability.
Conducting data analysis and making crucial business decisions such as these on the fly are a far cry from merely reading a script over the phone, so in many cases, upscaling the work force was vital in order to achieve Black’s vision of increasing worker productivity as a means of increasing company profits.
“When I got here, I embarked on the process of bringing in workers and new managers based upon their intellectual capabilities with no collections experience because success was commensurate with being smarter than the competition,” Black says. “It was hard to attract people to this old-school business, so you have to start in a hole and work your way out. I start by dispelling the traditional notion of the collections business and appealing to a prospective candidate’s sense of opportunity.”
Black says that he’s upscaled the company’s talent by hiring most of the company’s mid-level and senior-level managers during his tenure and favors using a series of interviews that put the candidate face to face with peers, managers and subordinates as a way of getting a behavioral read on the candidate as well as assessing the candidate’s ability to adapt to the industry. Referrals are a major source of new agents, but many of the new managers have been sourced from unrelated fields. Black says that exposing potential high-caliber employees to other Encore Capital employees who have made a successful jump to the industry appeals to the candidate’s desire to achieve similar goals.
Anticipation sustains growth
“I think one of the mistakes that I made, which I’ve learned from, is that in order to sustain growth, you can never think too far ahead,” Black says. “Since I’ve been here, after initially scaling back, we’ve increased our number of collections sites up to five, including one in India. You have to anticipate the increased demand for people that accompanies growth, so you can conduct proactive hiring.
“You also have to be realistic about everyone’s ability to continue to rise up to the increased expectations by asking yourself and your management team if anybody appears to be stretched too thin or can’t keep up with the pace of the growth. I’ve learned that anticipating potential cracks in your operation and filling them before they blow open is the key to sustaining growth.”
Black says that an outgrowth of his revelation is that he now devotes more time to forward-looking activities and conducts weekly leadership meetings with his 35- to 40-member management team reviewing strategies and people issues related to growth. The team continually forecasts forward at six-, 12- and 24-month intervals, which Black says puts it in a proactive planning mode and eventually reduces the amount of time that managers spend putting out fires. It also means that Black has had to learn to be open to hearing about potential problems.
“One of the things that was brought to my attention as a barrier to anticipating problems was a communications issue in the company,” Black says. “People said they were afraid to fail, and consequently, they didn’t want to tell me or other members of the senior management team about potential problems, and they also said that oftentimes if they did tell me, they thought I wasn’t listening. So I acknowledged the issue, partnered with a firm to help break down those communications barriers and went through outside communications coaching along with our top 35 to 40 managers. Now, I spend a great deal of my time in informal sessions with employees, and I try to willingly listen and give people the benefit of the doubt. I think I approach those situations completely differently now.”
Black says that potential cracks in the company’s infrastructure also come to light during the staff evaluation segment that is conducted as part of the firm’s quarterly planning cycle reviews. It’s also during those same staff evaluations that he’s reminded that growth not only results from anticipating problems but from using emotional intelligence in tough situations, as well.
“As I compare the productivity of the different collection teams, I can see that 50 percent of the time, the people on the lagging team just can’t keep up with the increased complexities of the job and the rapid growth, and the other 50 percent of the time, the team falls behind for other reasons that we can work on,” Black says. “Then I think about how that person stuck with us during the hard times in 2000 and realize that I’m in the trap of being emotionally tied to the business and that it’s my responsibility to make those tough calls when they’re necessary.”
HOW TO REACH: Encore Capital Group Inc., www.encorecapitalgroup.com