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ACCOUNTING

The Collectors

A start-up collection agency hopes to collect from "deadbeat dads" with more success than the government.
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Nailing fathers who ignore court orders to pay child support is a difficult job.James Jones, founder of Child Support Services, thinks he can succeed where the government has largely failed

It was the first case we collected on," says child Support Services' chief executive, James Jones, with a slight Virginia drawl. "They had been married for 15 years. She had three kids. The last time she had received a check from him was nine years earlier. She'd hired a private investigator to track him down, unsuccessfully. She paid an attorney $2,600, and he hired a PI. Nothing. She had used the state of Virginia for about six years but only got an intercepted income-tax return.

"The guy had skipped and moved to North Carolina. He used a post-office box. The bills were in his new wife's name; he had no credit history. We tracked him down through information obtained from a utility. When I got him on the phone, I put the words on him real strong. He Fed-Exed us $600 toward the current support of the kids. He owes her something like $86,000, and she needs the money bad. He drove a Mercedes and had even inherited money."

Meanwhile, says Jones, "he hired an attorney to get me off his back. Finally, he set up payment terms. Then he disconnected his phone and moved again. We tracked him down again; he paid again. So," concludes Jones, "if we really stay on his butt, he'll pay, but it's a constant battle; nothing's set in stone. He's a worm, a typical deadbeat dad. He has the ability to pay, but he's a hard nut to crack."

Sure, there is legislative and legal machinery in place to prosecute those who fail to pay child support. Already, in a number of states, failing to pay child support isn't just a civil offense, it's a felony punishable with jail time. All states have automatic wage withholding to collect support, and most have laws to bring out-of-state offenders to justice. But the problem, as always, is enforcement. The states' offices, often understaffed, have neither the time nor the skills to get all the deadbeat dads (more than 90% of nonpaying parents are male) on the phone and ultimately paying. The national caseload is 14 million plus and climbing by about 10% a year. In the meantime, the courts are backlogged with "more pressing" crimes.

Too many parents discover that if they don't want to pay child support, no one will make them.

* * *

The Idea
If ever a public problem was destined for the private sector, this is it. There are billions of dollars at stake. For 15 years the government has tried to collect overdue child support, but by 1990 delinquent payments totaled $23.8 billion. The states collected just 23% of that. As for arrearages (the years and years of past-due support), in 1990 the states recovered $1.2 billion, only 8% of the amount due.

In stalks Jim Jones. Standing about six feet one inch, he has an imposing physical presence that's softened by casual attire (polo shirt, Dockers pants, and loafers without socks). "I'm not afraid to see someone go to jail for failing to pay child support," he says flatly, "but I try to be positive and reason with them -- 'If you're out of a job, get one. Don't take it out on the kids because you're in a fight with your ex.' "

The adopted son of a lifelong Ford Motor electrician, Jones worked for several collection agencies before starting his own, Management Services and Collections, in Norfolk, Va., in 1982. It later merged with another local agency, Credit Service, and in 1989 he became the new Credit Service's president and CEO. Credit Service expects to net about $400,000 in revenues in 1992, above average for the industry. Credit Service's customers, largely physicians and utilities, pay an average fee of 32% on whatever the agency recovers.

The leap from bill collection to child-support collection came naturally. "I heard so many custodial parents say, 'I can't pay my electric bill because I'm not getting my child support,' " he says. "Even five years ago I saw it as a legitimate excuse, but I didn't really put two and two together until articles started coming out about the scope of the problem."

The market research was all around him. "You go to a party and almost everyone has first- or secondhand knowledge of this," relates Jones, a 40-year-old divorcÉ. A small group of friends fighting for child support acted as his sounding board. He presented them with several scenarios. "What if a private company charged you $50 up front and took one-third of what it collected?" Too high, they said, but they indicated they'd probably be willing to pay a $35 application fee and a 25% contingency fee if he could do what they and the state could not.

Jones was game. He coughed up $25,000 in seed money and persuaded two "venture-capital friends" to kick in $75,000 (in the form of a three-year balloon loan at 10.5%, on which he pays $1,000 in interest monthly). After clearing the red tape with a number of state offices, he began operating his new venture as a division of Credit Service in July 1991. (On his lawyer's advice, Jones later made the operation a separate entity, known as Child Support Ser-vices, but the wall between the new company and its parent remains flimsy.) Jones received his first case that September and collected his first payment on October 4. At Credit Service, the average bill he goes after is about $200. In the child-support game, debts start at about $2,000. "I see this becoming much bigger than Credit Service," he says.

He figured if he could apply the techniques and efficiencies of Credit Service to Child Support Services, he'd also have a nicely profitable venture. His original projections saw the business doubling in 1993, to about $1 million in net revenues, with about a 50% increase in expenses. Jones has since scaled back his expectations (see Financials, page 6 of this document) and accounted for higher expenses, but pretax margins close to 40% still appear attainable over time, he says. Unlike the state, he can pick and choose his cases and begin working on each case much quicker than civil servants can.

He's even gained the (guarded) approval of the state offices he's competing with for cases. "We understand our relationship with Child Support Services. The growing pains are over," proclaims Ron Harris, district manager of the Child Support Enforcement (CSE) office in Virginia Beach, Va., from which Jones has drawn many of his clients. "Personally, I see it as the mother's choice," adds Harris. "There's certainly enough business here for all of us."

* * *

The Market
Every entrepreneur's dream: a market niche that's virtually unlimited and untapped. Jones views anyone who will tie or has tied the knot as a potential client, and in Virginia alone, 27,307 couples divorced in 1990. There's one restriction on the potential market: Child Support Services can't handle welfare cases, as any money collected for past or current recipients of Aid to Families with Dependent Children (AFDC) must reimburse the state. Even so, at stake is some $220 million in non-AFDC debts Virginia has failed to collect.

Soon after Jones got into the business, he uncovered a promising submarket: selling his consulting services to the start-ups springing up every day in this blossoming industry. He charges about $1,250 for a day and a half of "insider" information on how to deal with the government, customers, and marketing. He figures the consulting market will peak in 1994. But so far along the way, he has picked up a few contract collecting accounts, doing back-end collection work for start-ups that want to concentrate their efforts on simply screening and signing up clients.

One thing is clear: Jones is not limited to his home state. Since many cases involve out-of-state fathers anyway, the company is equipped to handle customers calling from Anywhere, USA. He has already expanded his reach into the Middle Atlantic states through an affiliate office in North Carolina. And the future looks wide open. "Someone estimated that New York City could support 15 of these agencies," gushes Jones, whose closest competitor is in Washington, D.C.

* * *

The Marketing Strategy
The results of Jones's initial marketing campaign attest to the national need for a service like his. His first, and so far only, TV commercial premiered on five Virginia stations on Thanksgiving Day 1991. The timing was a coincidence; the response was not. Jones's small office was inundated with calls, almost 9,000 in three months. Although the 30-second spot aired locally, grandmothers watching the ad in Virginia called their daughters in New Jersey, Ohio, and North Carolina.

Marketing was not Jones's strong suit, so he'd hired a public-relations firm, which in turn hired an advertising agency. The TV commercial it produced is a classy affair. No images of abandoned, dirt-smudged children. The ad's words appear in white on a black screen, accompanied by a soothing female voice-over. The tag line: "Child Support Services. They make sure the check's in the mail." The commercial could pass for a public-service announcement.

Happy with the ad's quality, Jones continues to use it for what he calls "maintenance advertising." For a company with limited start-up funds, though, the cost of the campaign was steep, and the success questionable. "Of the 9,000 calls, only 3,000 calls were qualified to use our ser-vice. The other two-thirds were AFDC cases," he laments. "I had to pay for 9,000 calls on the toll-free number, plus the ad agency took its 15% of the $25,000 ad [it ran 250 times] and charged me another $3,000 or so to produce the commercial." He figures the company got 3,000 qualified leads at a cost of $2.30 a pop. "That's high for the collection industry." And the $2.30 doesn't count the toll-free charges, which totaled about $8,500. From that, he's signed up about 550 clients, or less than a fifth of the qualified callers, a hit rate he's not satisfied with.

Nevertheless, the campaign appeared to achieve its basic goals: to establish Child Support Services' name and to discourage competition. As word spread, the company became a media favorite. Reporters cast Jones and his company in the mold of knight-rescuing-damsel-in-distress. One local newspaper story picked up by the Associated Press led to TV coverage in Ohio and some 100 calls from moms in the Rustbelt. The company had definitely arrived when Tom Brokaw interviewed Jones last July 31 for an "America Close Up" segment on the new industry. The coverage continued to snowball, convincing Jones that the best marketing is free or nearly so. He dropped the ad agency and the original PR firm. Instead, he hired Lisa Belkov, owner and sole employee of PR firm Write Productions, in Norfolk. Belkov, 29, has become an expert on child-support issues and legislation, and frequently gives talks on the topic in her second role as spokesperson for the American Child Support Collection Association. She fields interviews from the press and pens her own stories as well. In addition, she's passed out thousands of fliers at supermarkets and holds free public clinics.

Jones worked out an incentive-based compensation plan that makes sense for a young cash-strapped company. He pays Belkov $1,500 a month, a small retainer in PR. Her real reward is a piece of the consulting business. Several start-ups that have come through Jones's offices have retained her. In the future, she'll share in the bonus pool from his company's profits, Jones says.

Jones's goal is to continue to reduce the cost of marketing. He knows he can't count on free press forever. If Child Support Services is to consistently bring in 100 new cases a month, as forecasted, he has to do more advertising. But that mustn't distract him from the real money-making process of locating deadbeat dads. The challenge: more targeted, less costly marketing.

Referrals will also play a bigger role in the marketing mix, according to Jones's plans. Toward that end, Belkov is cultivating the support of local hospitals, military outreach offices, and public-private organizations. Recently, employers who've read about the company have inquired about providing the service to their workers. Belkov has made presentations to several large local companies and has held a few employee seminars. The way it might work: workers would receive a flier on Child Support Services in their pay envelopes, and Jones would waive the application fee.

* * *

The Service
"No one vanishes unless he changes his name and Social Security number or leaves the country," states Jones. Even then, he adds, "we'll find him." Child Support Services locates about 85% of its targets, using the classic techniques of the bill-collection trade. "My people are trained to skip-trace, to search to locate someone. They don't have to leave their chairs. They're calling neighbors, credit references, past employers," explains Jones. "The state can look into some databases I can't, like the IRS's and Social Security's, but I have lots of other tools." Those include instant on-line credit reports, department of motor vehicles reports, magazine-subscription updates, post-office changes of address, "list enhancement" services from major credit-card companies -- and direct contact with the target's creditors.

Jones has ample room to negotiate payment terms with support offenders. While the 1977 Fair Debt Collection Practices Act strictly regulates third-party debt collection, it doesn't appear to encompass child-support-collection agencies, which attempt to enforce direct court orders. "I'm going to be in a guy's back pocket. I want a payroll deduction, a debit from a bank, whatever," says Jones. Still, he must be careful to follow state guidelines: The first money collected goes to current monthly support. The check must go to the appropriate state child-support-enforcement office, which documents the payment and sends it back to Jones, a process that can take days, weeks, or months. The check is made out to the custodial parent care of Child Support Services, as spelled out in the client's one-year contract. In the end Jones takes 25% of whatever is collected, until the arrearage is paid off or the yearly contract terminates.

If the absent father wants nothing to do with his ex, Child Support Services acts as an objective go-between. "If you know where the guy is, you should be able to take the court papers and do it yourself," client Martha Bond, who has a 15-year-old daughter and a mortgage to meet, says with a sigh. "But he won't pay unless someone makes him, so I've got to renew my contract."

Only half of Jones's clients actually pay the application fee up front. He concedes that the $35 has been a sticking point with would-be customers. He's waived that fee numerous times and even arranged a volume discount for one woman with two ex-husbands. "I'm in business to make a profit, don't get me wrong. I have employees to pay, but it's not cut-and-dried. You have to have some compassion."

Nevertheless, keeping overhead under control is a major challenge. He spends much of his time detailing expenses per account, and "they're always changing." Time spent getting parents to fill out the applications and calculating arrearages, and data entry (which costs $18 a case) to put the case on the books, quickly consume the $35, says Jones.

* * *

Operations
Child support services is located in a 100-year-old onetime livery stable in Ghent, a Norfolk neighborhood where the rich and the poor sections overlap like the cases in Jones's files. There's little decor in the 2,000-square-foot office, which is open six days a week and in the evenings.

In the first year of business, Jones took on some 900 cases, with two administrative employees, two full-time collectors, two part-time collectors on the night shift, and two key managers, J. D. Summerhill, who signed on in June as vice-president of operations, and Sandra McElroy. Most employees came over from Credit Service. Jones, Summerhill, and McElroy run both companies and have agreed to defer their compensation from Child Support until the end of its first profitable year. In late September Jones hired another full-time collector, a former military policeman who pursued AWOL cases. "I want collectors who've worked the toughest cases there are," says Jones.

Collectors are paid a low base salary but receive a 5% commission on the down payments they arrange. "Down payments are where we make our money," explains Jones, who also runs contests such as one to reward collectors who get the most overnight payments. For the company to be profitable, he has calculated, payroll can't exceed 40% of revenues.

Jones uses a $175,000 network of IBM and Digital computers to run both companies. Despite the shared setup, he is quick to admit that collecting a child-support debt isn't like going after an old dentist's bill. In the latter case, a collector might spend a few minutes on the phone; with child support, 20 minutes or more.

Because there are no industry statistics, determining the "collectability" of this new class of debt is hard. The job now falls to Summerhill, who says: "No two deadbeat dads are alike. Sometimes we spend many hours on a case and get nothing; other times there's a big payoff for a few hours' work. If we put an account on hold, we'll let the mother know." The company tries to avoid having clients go back to court. A voluntary arrangement with the absent parent is always best.

Interstate cases are the toughest. Child Support Services sometimes sends cases to other companies in the industry association -- with mixed results. After the company teamed up with a California start-up to collect a rec-ord $17,000 down payment, the West Coast company tried to reduce Jones's cut. "It's bad enough collecting from deadbeat dads," says Jones. "Now I've got to collect from the collector."

He confesses the company experienced other operational snags earlier this year. Each case leaves a complex paper trail, so Jones had to improve his "intake" system. He did that by redesigning the forms new customers fill out, starting a logbook to track checks to and from the state, and hiring a full-time intake manager, who answers all customer calls and does the paperwork to ensure cases get worked on ASAP.

Early results have been encouraging. Of his first 100 cases, Jones receives regular payments from about 35% of the deadbeats. Each pays about $200 monthly for current support and $100 toward arrears. In addition, 20% of them made an initial down payment, averaging $1,500. Jones believes he can maintain that model as he increases his marketing and caseload in 1993. "We think we can ramp up quickly now."

* * *

Risks and Hurdles
Can Jones ramp up quickly enough to surmount the formidable hurdles ahead? Some are classic company-building problems; others are wrinkles particular to this nascent industry.

* Satisfying customer demands. Jones isn't accustomed to dealing with Jane Q. Public. "The 60% we don't collect for scream the loudest," he laments. The obvious solution goes against his nature. "Before I take the $35, we need to ask everybody, 'What steps have you taken yourself? Do you think I'll ever collect this?' " But then he adds, "That's a posture I'm not sure I want to take, because I've collected from some I didn't expect to." Another problem is that qualified potential customers are embarrassed about using the service or will make appointments and then back out. Jones must continue to improve his relationship with customers -- which is tenuous at best -- or risk losing them.

* Low barriers to entry. Almost anyone can enter this industry. A collection background isn't mandatory. More ominously, the new industry has already given rise to a number of scams. Competition can be considered anyone from the mothers, to lawyers, to the states, which recently have achieved success with Most Wanted lists. Jones also faces potential competition for new cases from any area start-ups with enough money to blitz the market.

* Government interference. While the private agencies appear to have Uncle Sam and stricter laws on their side, in reality, some states refuse to cooperate. Jones will have to continue to forge better links within Virginia. He acknowledges, "There's still a lot of animosity from the state. We get no cooperation from some district offices." Potential PR hurdles. As Ron Harris of the Virginia Beach state office notes, "Child support is an emotional issue, and some people have problems with the application fee and taking 25%." Jones is painfully aware of the public's perception of collectors and anticipates the day when the press will examine new ventures like his more closely. How he handles any negative PR could determine whether Child Support Services thrives or dies.

* Operational issues. Running two companies is apt to take its toll on the management team. "Credit Service has definitely suffered somewhat this year," Jones says. What's more, the CEO will be hard-pressed to meet the expense figures he's projecting for Child Support Services. If he goes ahead with a new advertising campaign, he'll need to hire more collectors. That means a heavier training burden. Also, Summerhill and McElroy need to be compensated.

* The consulting business. Is Jones selling out his opportunity to eventually take his company regional or national by sharing the tricks of the trade with other start-ups? He thinks not. "I can keep the child-support-collection side coming along on a local basis. I'd like to see 500 companies around the country just like mine."


EXECUTIVE SUMMARY

Company: Child Support Services, Norfolk, Va.

Concept: To collect overdue child-support payments, largely from "deadbeat dads." Act as consultant to and contract collector for similar start-ups

Projections: Pretax profit of about $100,000 on

revenues of $300,000 in 1992. By 1995 revenues should climb to about $700,000 with a profit just over $200,000

Hurdles: Making money in what's essentially thankless, nonprofit work. Determining the marketing mix that will bring in enough cases but not overwhelm the small staff. Establishing industry ground rules in a new field with few regulations or barriers to entry. Gaining the cooperation of state agencies, which are also competitors. Thriving in a business in which there will always be unhappy customers. Investing in ongoing training and sophisticated computer equipment


THE FOUNDER
James Jones
Age:
40

Family: Single

Personal funds invested: $25,000

Equity held: 80%

Education: Three years of college; numerous accounting courses

Other companies started: Management Services and Collections, a bill-collection agency

Last job held: Currently CEO of Credit Service collection agency

FINANCIALS
Child Support Services Income Projections
($ in thousands)
1993 1994 1995

CUMULATIVE CASES* 1,950 3,150 4,350

REVENUES

Collection fees** $360 $500 $625

Application fees $21 $42 $53

Consulting fees $50 $100 $50

TOTAL $431 $642 $728

EXPENSES

Overhead $22 $29 $35

Marketing $92 $108 $136

Collection (including collector $191 $271 $339

salaries and commissions)

Consulting $15 $25 $15

TOTAL $320 $433 $525

PRETAX PROFIT $111 $209 $203

PRETAX MARGIN 26% 33% 28%

*Balance forward of 750 active cases

**Based on overall collection rate of about 15%


WHAT THE EXPERTS SAY

POTENTIAL PARTNER/COMPETITOR

JOYCE MCCLARAN

Director of child-support enforcement for Tennessee, which in 1991 completely privatized one of its local CSE offices

I am impressed by Mr. Jones. He seems like a caring, hardworking person. And his business seems like a viable alternative. I am also impressed with his relationship with the state of Virginia. But in some states, such as Tennessee, the child support has to be paid to the court, which then disburses the money. Some courts and state agencies do not want to send the check to anyone but the custodial parent. I'm sure Mr. Jones doesn't want to have to collect from both the husband and the wife, but he may have no choice. Also, private companies need to understand any perceived or real animosity from the state. The contingency fee is not really the issue, because that's no different from lawyers' hourly rates and retainers. But it is frustrating to see a parent turn over 25% of everything collected, including money the state might have collected for her. Private companies like Mr. Jones's might find contracting with the state to be a more lucrative niche. They would get a volume of cases and a percentage of collections and would not have the direct involvement with the custodial parent, which can result in unhappy customers.

POTENTIAL CUSTOMER

SUSAN MATTHEWS

Women's health coordinator at Sentara Norfolk General Hospital, a 644-bed hospital with 3,000 employees, mostly women, in Norfolk, Va.
We see a relationship with Jones's company as an opportunity to educate not only employees, but the customers who call our information line, about a service that could be available to them. There's no reason we shouldn't share information about his agency with our employees. It's something we can do to try to enhance employees' satisfaction -- if they're having problems at home, it certainly could affect their work life. One thing I didn't know is that Child Support Services can't help people on welfare. Still, if it is able to handle a certain population, that's great. I don't necessarily see the 25% contingency fee as a problem. It's the mother's personal decision.

OBSERVER

CHUCK PIOLA

Partner in NCO Financial Systems, a $4-million collection agency in Blue Bell, Pa.

I don't think he's going to collect on as many debtors as he figures. You're talking about an expensive type of collecting. I'd compare these cases to "repo deficiency balances," the balance on a car that's been repossessed and sold at auction; you might collect 8% or less. But the application fee raises his unit yield. He'll make money, but he can't hit a 35% recovery rate.

POTENTIAL CUSTOMER/COMPETITOR

DONNA WARREN

A San Jose, Calif., mother and small-business person who through her own 12-year effort has so far collected $22,000 of a $47,000 support debt

I never considered using a collection agency, because I didn't want to spend any more money on what was mine. If I'd known then what I know now, I'd probably have hired an agency right off the bat to avoid the fights, the pain. I can understand why Jones spent money on TV advertising. Who's going to open the yellow pages and look for a collector? If I were him, however, I'd talk to parent-teacher associations, I'd donate money to after-school day care, I'd put out drug-prevention booklets with my company's name on them. He spent a lot of money on something that didn't help these mothers. If you give back to the children, then you touch each parent. He should call his staff "representatives," not "collectors," and there should be a lead representative for parents to talk to, someone who'll say, "What do we need to do to make this better?" Most district attorneys don't listen. If Jones listens, that's what will give him free advertising; that will make customers renew the contract. If he could diagram for each client what he's done, share the knowledge -- that alone would be worth the 25% fee. He wouldn't lose customers; he'd gain them. He's got to perform a service, not just a function.

CUSTOMER

MARION PULLEY

A working mother in Richmond, Va., who hopes to recover more than $3,000 from her out-of-state ex-husband

When I signed up with Child Support Services, I was told it would take three to four weeks for my case to be assigned to a collector. When you've waited as long as I have, three to four weeks makes you think, Oh no, not this again. I thought when the agency got my application package, it would call, at least acknowledge me. I have yet to get a call saying, "Here's what we'll do." I don't expect the service to explain every step it's going to take, but I do expect it to give me a general idea of what will happen. I would have wanted someone to give me a timetable, some kind of update each month. I'd probably be interested in using the service on a permanent basis. My ex-husband needs someone to give him a little prod each month. I don't want to go to court every year. I have no problem with the contingency fee. But Jones's agency should wait to take the $35 application fee until it accepts the case. Whatever the guidelines are for turning people down, they should be made clear. You've got some desperate people out there -- you've got to let them know where they stand. I was worried Child Support Services would take the $35 and say, "Sorry, your case is uncollectible." The company's customer service needs a lot of work.

Last updated: Dec 1, 1992




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