By Michael Klozotsky

Pronounced changes in creditor markets have undoubtedly affected the way accounts receivables management (ARM) companies do business and make attempts to collect. Along the same lines, financial institutions’ ARM strategies must adapt to these changes in order to continue to meet the needs of their clients.

The telecommunications industry is evolving, fueled by the rapid economic factors that will shape the industry in the coming years. Changing internal dynamics will likely come to affect creditor-vendor relationships and tell much about the future of the ARM business.

The telecommunications industry had roughly 97 million mobile phone subscribers in the United States in 2000. By mid-year 2006, U.S. subscriptions had increased more than 225 percent to 219.4 million, according to CTIA, a Washington-based wireless trade association. This growth has come at the expense of land-based (wireline) telephone service, which is increasingly becoming a smaller share of telecommunication companies’ revenues. In order to market wireline telephone service, many major providers now offer a bundled suite of products — commonly phone, Internet and cable television — as a way to bolster decreasing landline sales. Most industry experts are not yet ready to declare landlines entirely a thing of the past; wireline services will continue to exist, but for how long — and as what percentage of industry revenues — remains unanswered. Even as landline units continue to weaken, expansion in other segments, especially wireless and data, will provide avenues for growth to integrated telecommunications providers.

Such industry-wide transitions put pressure on telecommunications services. However, effective ARM strategies must anticipate these changes and prepare to handle diverse, often bundled, revenue streams. A company like Verizon, for example, may have a customer that subscribes to a wireline-cable TV-Internet “bundle” as well as a separate wireless package. If that customer fails to pay his wireless bill but keeps his bundle account current, Verizon will be challenged to contend with the delinquency of one part of the account while retaining the customer (and the revenue he brings) as a whole.

These circumstances will make accounts receivable management third-party providers increasingly attractive to help manage receivables. If you manage an experienced, first-party firm, you can work to bring parts of a customer’s account current, reminding him of a past-due bill. If the debt reaches a particular stage, you, as a contingency agency owner or executive may be contracted to recover bad debt. And as the debt purchase market continues to specialize in specific asset classes, some telecommunica­tions creditors may sell off portfolios of distressed receivables to debt buyers that work telecom accounts.

Various Services Comprise Industry Revenues

The U.S. telecommunications industry revenues totaled more than $292 billion in 2006. The three largest companies in the telecom industry — Verizon, AT&T and Sprint Nextel — posted net revenues of $88.1 billion, $63.1 billion and $41 billion, respectively, in 2006. At just over $192 billion, the combined revenues for these top three telecom companies accounted for roughly 65 percent of industry revenues in 2006, demonstrating the growing concentration in the industry.

Those revenues are increasingly derived from non-landline services. In March 2007, CTIA reported that the wireless segment of the telecommunications industry made up $125 billion (just under 43 percent) of total industry revenues in 2006. Incumbent players in the industry report a significant percentage of their revenues from wireless services alone.

Because American households spend, on average, nearly $200 per month on telecommunications services, which is an increase of at least 5 percent from 2005 figures, integrated telecommunications companies will proceed to bundle more services under one bill to improve profits via consumers’ desire for emerging technologies at lower costs.

According to Daniel Francia, manager of Verizon’s Customer Financial Services, “Bundling keeps customers from entering the collections process because they don’t have variability in their bills each month.”

Receivables management represents a significant challenge for telecom companies attempting to grow their markets. Francia believes that good credit screening is a key control process that determines how a company will grow.

Francia says, “Growth model companies that have to have a little more relaxed credit screening so that they can grow their market share, eventually inherit a poor-performing base. Those [telecom companies] that perform upfront credit screening well are going to fare the best; those that do it poorly are going to inherit what they get. It’s a balancing act: You don’t want to strangle your growth mode, but you want to mitigate your risk as much as possible.”

Proactive credit screening analytics will cost telecom companies with conservative growth objectives less capital in collection and recovery, while those telecoms that need to increase their market share may be forced to loosen their credit standards, ultimately having to contend with a greater volume of bad debt accounts.

Most of the future opportunities for the telecom industry create considerable risks at the same time. Growing a company’s market share may increase bad debt accounts. Youth segments, while key to wireless and emerging services revenue, may present more challenging collections. And bundling of services, a major industry trend that benefits both con­sumers and creditors, often creates unique management challenges.

Francia explains, “When a bundled customer doesn’t pay, and his bill is large enough that you have to bring him into the collections process … because of the regulatory rules you have to literally “unbundle” the customer. This causes the bundled rate or savings to default to regular or à la carte rates. Once the customer fails to pay his $60 per month bill for bundled services and they default to à la carte, he eventually finds that his bill has grown to $100 or $200 because the savings from the bundled services are now gone. Defaulting to the regular à la carte rates creates greater financial stress on the customer’s welfare and eventually results in a larger payment to reconnect service if the customer should default and be disconnected for nonpayment. Bundles are great for customers, but when it comes to collections, the old regulatory rules are like putting a square peg in a round hole.”

The transformation of the telecom­munications industry will continue to challenge aspects of its receivables management strategies. The seventh edition of The Kaulkin Report, Kaulkin Ginsberg Company’s biennial industry overview, explores emerging creditor-vendor relationships like these in order to help banks look to the future of the accounts receivable management business along with the economic factors that will shape the industry in coming years.

About the Author

Michael Klozotsky is an analyst who conducts custom research projects and writes publications focusing on the accounts receivable management industry for Kaulkin Ginsberg.

About Kaulkin Ginsberg

Kaulkin Ginsberg is the leading strategic advisor for the accounts receivable management (ARM) industry. For ARM service providers, their value-add services focus on analysis, growth and exit strategies. For credit grantors, the focus is on optimizing receivables management strategies. Kaulkin Ginsberg’s media division is the worldwide leader in providing timely news and insight on the recovery of debt in all industries. Kaulkin Information Systems creates secure and affordable workflow, document and business process management technologies. Read more about Kaulkin Ginsberg at www.kaulkin.com.

Portions of this article were reprinted from The Kaulkin Report7th edition. ©2008 Kaulkin Ginsberg Company. All rights reserved.