Episode 19 Powering up with a research informed strategy

The 10th edition of Kaulkin Report was just released.  This report has been an integral component of developing a deeper understanding of trends in the accounts receivable management industry. In this episode we’ll unpack the report Connect the Dots of opportunity in the ever changing economy and dive into the importance of data in strategic growth planning and much more.
Guests
Mike Ginsberg is president and CEO of Kaulkin Ginsberg, providing M&A and strategic advisory expertise to the accounts receivable management industry for since 1991. Mike is also co-founder of Topline Valuation Group, providing ARM owners and executives with much-needed technical, financial, benchmarking, and operational services designed to improve decisions at the corporate and operational levels.

John Hannan a driven, committed researcher particularly interested in analyzing data, for the accounts receivable management industry.  John is an integral part of the Kaulkin Ginsberg team.   
Since 1991, Kaulkin Ginsberg Company has been dedicated to advising owners and executives of outsourced business services (OBS) companies on how best to achieve their growth and exit objectives. Their client-centric approach covers almost every stage of a company’s lifecycle and enables them to maintain longstanding relationships as trusted advisors. Kaulkin Ginsberg offers an array of services to ensure that its clients’ needs are met, such as strategic consulting, transaction advisory and valuation services.

What you'll learn about in this episode

ARM market shifts to keep an eye on
Economic indicators and variables that impact the debt economy
The changing landscape of variable and fixed costs that will impact ARM profitability
Insight into debt segments including healthcare, financial services, credit unions, telecom, and cable.
Tips for using data to better know and understand your clients, and help see opportunities.

Additional Resources:

The Kaulkin Report

Transcript

Lex Patterson: 0:11

kindred force media Hello, everybody. I'm Lex Patterson and you're listening to fair debt. The 10th edition of the Kalkan report was just released. This report has been an integral component of developing a deeper understanding of trends in the accounts receivable management industry. In this episode, we'll unpack the report and connect the dots of opportunity and an ever changing economy and dive into the importance of data in strategic growth planning. And much more. Here we go. Hey, Mike, it's great to see you again, Lex.

Mike Ginsberg: 1:03

I really enjoyed the first time we did this. And thank you. It's always not only a pleasure, but just a real, real pat on the back to be asked to come back. And I appreciate that. How are you doing, sir?

Lex Patterson: 1:18

I'm doing great. I'm doing great. And with you this time, we have John Hannon. Hi, John. I like how you doing?

John Hannan: 1:27

I'm doing very well today. How are you doing?

Lex Patterson: 1:29

I'm doing great. I'm doing great. It's an honor to have both you guys on here. I you know, Mike's up Fair Debt veteran, if you will, season one episode 10 of fair debt he was on and we really kind of got to know Mike at a deeper level. And so John, I thought we'd kick this one off by maybe letting you tell us a little bit about your journey in the in the debt collection space?

John Hannan: 1:54

Sure. Yeah, absolutely. So I'll start the story with when I met Mike, which was actually when I was in college. Our firm Kalkan Ginsburg has a Research Fellowship, which is like a basically an internship on campus, where students sign up for a class and then they do a semester long project. And you know, they get that work experience that they can put on their resume. And I was part of that research fellowship when I was in college. And you know, Mike, and some of the other people at the firm came out, every week, we would get together. And you know, we'd learn things, we'd go through the project, we do work. And that was when I was introduced to Mike. And that was when I was introduced to collections as an industry, I had never really thought about it before, you know, didn't have anybody and no relatives in the industry and nothing. And that was when I was really kind of introduced to what the industry is like. So, you know, I really enjoyed my experience in the fellowship, I really liked Mike as a person. So, you know, when I graduated, and when I was, you know, looking for jobs, I saw that Colgan Ginsburg had this internship for the summer. And I was like, that's awesome. Let me apply. And I applied, I got the internship. And from there, I kind of parlayed that into a full time position, because I liked the firm so much. And I like the work that I did so much. And you know, I've been delve deep into the industry ever since. And I can tell you, you know, we're always working together every day. We're on calls every day where you know, chatting back and forth sending each other stuff. And I it's been a great time. I'm very happy with where I'm at. And I'm very happy that I was able to find out about Kalkan Ginsburg and about the arm industry through college classical. Thank

Lex Patterson: 3:35

you. So that's quite an interesting story. It's kind of the thing of Lacey Coleman that I was talking to on a recent podcast said, you know, this industry has a way of kind of capturing you and not letting you go. And it's a tight knit. It's a tight knit industry. And and, and so yeah, it's really good to hear that story.

Mike Ginsberg: 3:55

You know, Lex, I'll just, I'll just add one quick thing here. First of all, getting out of this industry is like the mafia, right? And, you know, the way you get out at first, and it's not usually a very good thing. So John, is not just the the only he's one of the few that I've actually hired through this fellowship program. So if you think about a semester long interview process, right, tremendous opportunity for us to find talent from the campus, but also to give back to my alma mater here, and so it's a two way street. We've had almost 200 students go through this program. And we're mate, we stopped it during COVID. And we're talking about re firing it and getting started again with it. But John, really, in Johnson exception in that he kind of wears two hats. One is from an analyst standpoint, he supports some of our client activities. But his biggest claim to fame is his research capabilities, and where we come in as first and third party Research. So when you talk about the report, which I know we're segwaying to, right now, that has been an evolution, we continue to fight the good fight of getting out information into this marketplace. But you know, when we struggle with third party research, we no longer struggle with it, because we have access to research capabilities that don't even exist commercially, but only exists for students. And people say, you know, ACC, boy, you know, Maryland leaving the ACC, to go to the big 10 might really have hurt you guys. And from a sports standpoint, I mean, sure, we, we think about that book. But from an information and research standpoint, big 10 is a lot better of a platform and a big platform for us to leverage. So that's where we get a lot of our third party data from I just wanted to say that.

Lex Patterson: 5:54

Well, it is a great segue. But before we get there to that, Mike, I wanted to just say that this is a first for my podcast for the Fair Debt podcast is the first time I've had more than one person join me on the podcast. It's usually one on one. So it's a milestone for fair debt. I wanted to I'm happy that it's with you guys. And I wanted to just take a minute and kind of celebrate that. It's a cool moment.

Mike Ginsberg: 6:20

It is a cool moment. Yeah,

John Hannan: 6:22

for sure. No, it's it's an honor. Lex Yeah.

Lex Patterson: 6:25

Yeah. So I always like to celebrate the milestones with that. So. But yeah, perfect segue into what we really want to talk about, we're gonna dive into the new call can report. So and if I understand this, right, in 2020, you released a state of the industry report, which was based upon data from several years prior, I believe. And so in comparing the data in that report, and the most recent report that you just released, I want to I want to dive into what story that tells about the industry today and what lies ahead. I mean, guys, what what are we seeing here? John, why don't I

Mike Ginsberg: 7:02

start with that high level question here. And just tell kind of segue to where we are today, compared to where we were just a couple of years ago. Probably the biggest thing in our industry right now is the change in regulations, specifically around reg F. Okay, people said that, you know, we saw it on the horizon, we saw that FDCPA was written in 77. It was way before, most of the technology advancement that we utilize today, emails, obviously, SMS, podcast you name it didn't exist back then. debt buying didn't even exist back then. As an industry, it's always existed in one way, shape, or form. But if you think about reg F, it defines things, it defines communications, it kind of creates this proverbial line in the sand finally, and makes clarity around certain points. So I would say two things kind of happened since then, the world in our industry has become intensely more regulated. As a result, we see the CFPB really going after a health care healthcare, specifically medical debt is something that we'll talk about today. The other thing too, is this small global pandemic came in and kicked this and every other industry right in the teeth. And but what we found about the accounts receivable management industry is, as I expected, very nimble, very entrepreneurial, and very capable of dramatically moving, almost on a dime. And in this case, it was the whole work from home model that we'll continue to talk about today. That didn't exist that we think has some permanence in this industry in a very productive way. Especially now when you're dealing with a labor market that is very, very hard to, to manage, for a lot of reasons. So I think the two big takeaways that I saw was obviously the global pandemic, but also reg F. John, what do you think were the big changes between, you know, back then, in addition to what we just said, what what do you think? Are there any other things that I might be? Sure,

John Hannan: 9:30

I mean, to answer your question, Lex, I think what the story that we're kind of seeing here is the resilience of the industry, in terms of the challenges that they're facing and how they've adapted to those changes. You know, Mike mentioned the global pandemic, which was, you know, a challenge not just for the arm industry, but for everybody. And the way the industry has taken work from home, which is something that they didn't really you know, wasn't really a thing before the pandemic in any you know, large capacity, you know, They took that really quickly they were able to adapt, able to get their collectors and their workers on this work from home model. And you know, now they're seeing the productivity of returns where a lot of agencies are looking to carry that forward, going into the future provided regulators allow it, which we'll talk about later. Yeah, no. And regulation, like Mike said, is another big thing with REG F, which we'll talk about, I think another challenge that we're seeing the arm industry face right now calm is on the economic front, specifically, right now with inflation, which we'll talk about later, as well, is a really big issue facing consumers. And that's going to have impacts for the collections industry. And they're going to need to stay on top of that, to, you know, succeed into the future. In terms of market segments, we're also seeing client market segments, we're also seeing declining placements in 2020 and 2021. That was a big challenge that they faced. And, you know, going forward, we'll be looking for the economy to more normalized, and for consumer demand to, you know, rise again, and for bad debts to rise again, which will, you know, result in rising placements. But, you know, through the pandemic through 2020, and 2021, collection agencies had to contend with these low placements. And they dealt with that through a variety of ways. They, you know, made their recovery operations more efficient, which allowed them to see increased recovery outcomes. So their recovery rates were high, which was great, you know, the way they utilize technology to make their operations more efficient in general, to cut costs, I think helped them through these, this era of lower placements. So you've really seen, you know, the collection agency really adapt, just like what we saw the great recession. I think what we're seeing here is the collection agency, you know, they got punched in the mouth, but they're dusting themselves off, they're getting back up, and they're stronger than ever now. Yeah, well,

Lex Patterson: 12:01

that's interesting. Okay, so let's dive into this a little bit, because there's a couple of things as I was reviewing the report, and I just want to clarify, because I want to make sure that I'm like, to me, there was a couple of things that jumped out at me. So a 3.9% predicted decline right off the bat, in overall in I'm speaking to, I guess, the consolidating market. And I think in the report, you guys predicted that declined to about 20 993 agencies by 2024, which is, wow, you know, when I think about Mike, you know, the heydays of where we've been. That number was, you know, four times at, at one point, I believe, you know, so that's a huge decline prediction there, we can maybe talk a little bit about that, a 1.3% decrease in revenue overall, since 2020. And I guess, John, that speaking to mostly and you're feeling the pandemic, maybe then with the placements being down, um, that kind of stuff. And then higher costs due to reg F that you mentioned. But I've also heard in talking to some agencies about some opportunity loss in right party contact, brought on by this, for instance, the seventh and seventh rule, which could go as high in some agencies as 20%, which is an interesting thought about that. And then, in addition to that, you know, the, the labor costs rising due to the great resignation, which we haven't really talked about yet. But, but that's, I think, playing a part of this too. So it's kind of a trifecta, I think of compliance, you know, and then the pandemic, and then the great resignation, hitting all kind of at the same time. And then finally, just to kind of wrap up my thought pure companies with fewer than 100 employees have seen almost a 40% decline in two years, which I guess speaks to the consolidation. So a lot of problems out there, whether it's pandemic, great residential. I don't know if it's pandemic caused in general or not. But there's a lot of challenges. We I think we can agree on that. But I guess my question is, you guys, is there a glass half full way to look at what we're looking at here when we see all this?

Mike Ginsberg: 14:15

Yeah, John, let me start with that. And a couple of things there as we unpack what you just said, there's a lot of a lot of parts there. First of all, this word consolidation. It's funny, and we've been at this now about 30 years in this marketplace over 30 years. I only recently started using that word over the last 18, maybe 24 months, Lex prior to that. There were a lot of activities that folks would say was a consolidation. But it really wasn't. There was the proliferation of private equity in the late 1990s into the 20 or Early 20 1000s. So between 1998 and 2008, that time period until the great recession. And even after that, as well as they were looking to either get out or grow their investments to private equity firms that were already in the industry after the global order, the great recession. The as I think about the consolidation word, what happened when a large business was sold up until very recently, 235 new businesses started. And these weren't just startup businesses lacks. These were strong startup businesses. Guys like Jim Richards would start a business, right. And Jim was a former president of the ACA and major CEO of a number of different businesses over the years. But just using him as an example, he would start a business. If we sold a business like Great Lakes up in Buffalo, which we sold a number of years ago, four or five new businesses in Buffalo would start up, Lex, it wasn't unusual that you had pockets of concentration in our industry, around the use large businesses in Texas Euston. It was GC services in Atlanta, it was nationwide. So it wasn't unusual that these businesses would would would change would would would sell or recapitalize, and for five of the largest managers and the most significant managers within these operations with spun off and start their own operation. You can count on one hand today and lop off five fingers, the number of startups that are existing in our industry today, okay, some small maybe Mom and Pop startups, but they're not getting the business that the larger players are getting. So the association's are suffering, the membership is lower than it's ever been, and you can't replace it with new members. So you better diversify or do something else. The number of players have gone down and this 100 person, you know, threshold, really the thing that people need to understand is the operating the profit and loss statement has changed dramatically. Back when we first started in this business, it was labor was the number one cost and closely second was rent, right? Well, labor is still a major cost, continues to be pressed a number of different ways. With virtually 01 employment, you deal with these things. And those that are in our unemployed, there's this great resignation that's going on and you start thinking about, you know, staff constraints. But also you start thinking about the p&l, you know, this better than anybody likes the cost of running these businesses, specifically the the technology, the privacy laws, the regulation, there was never a compliance line item. Now you look at all the costs associated with just compliance, and you're at a million dollar category very easily on up from there, you have staff members that never existed in the org chart, you know, that goes pretty deep. So you kind of think about how it's evolved over the years, the balance sheet is the same unless you're buying debt. But the income statement, the expense items have changed pretty significantly. So here's the positive thing. For those in the business, for the very first time, there's a line in the sand that actually exist as a barrier to entry never existed before. Back in the olden days, you could have a rotary telephone and a mouth. And you're usually very effective and making, you know, collections. Many, many stories on how these businesses started up and have grown over the years have become increasingly more sophisticated over the years. But when it gets down to it, there's still a need for a talk off. But these businesses have become increasingly more sophisticated. Ai back in 2020, everybody was talking about AI and machine learning. That's shut down because of this global pandemic. But it didn't go away. And now we think that that's going to have a major charge as well. So Is the glass half full or glass half empty? Those who are struggling, are struggling because of one fundamental reason. They looked at their business as a cash cow. And it was very profitable, making a lot of money with minimal investment in technology advancement and minimal technology. It was truly a scalable business through personnel. And these weren't fixed costs at all these are variable costs that you can monitor very, very appropriately, depending on the workload. That is no longer the case. Plus, and I think the big thing with the barrier to entry also is the clients, especially the large clients, the large banks, for example, will never utilize the startup agency, they just won't. And I don't care if that startup is someone with your pedigree lacks, they have requirements, it says three years, if you're not three years as an operating company, we're not placing an account with you. So there's these true barriers to entry that never existed before, that actually add significant value to the businesses that exist in the marketplace today. And as long as we're a capital economy, I think this is going to continue, there will always be a need for collection services. John, is there anything that you want to add or anything that, you know, that I might have missed on that point?

John Hannan: 21:03

Yeah, no, I definitely I want to echo that. barriers to entry are a big reason for why you're seeing declining numbers of agencies. Um, you know, we talked about compliance as a big one, especially, you know, in the post Great Recession era, where we've got the CFPB, which is a very activist agency, even the FTC has gotten on it recently, with their operation, corrupt collector, we're seeing them really clamp down on, you know, which, in a way as good, they're clamping down on the bad actors, and, you know, the industry, which is, you know, always a good thing, because, you know, you want to have a clean industry. And, you know, you want to have agencies that are doing the right thing, which the vast, vast, vast majority of agencies in this industry are doing the right thing. So, you know, they don't have to worry about that. But, you know, it just goes to show that if you, you know, take even one step out of line, the CFPB is going to come after you CFPB is going to come after you, the FTC is going to come after you, consumer litigation attorneys are going to come after you. There's a lot of you know, things that you have to think about, you know, it's really worthwhile to have somebody in the as a, you know, agency operator, that have somebody in the room with you a compliance expert, who understands what's going on, because there are so many rules now. And if you take one step out of line, you're gonna get the hammer come down on you. So that's really important. I also want to talk about clients, as Mike mentioned. And it depends on what market segment you're in. But for telecom, for example, the top three companies in that industry have 65% of the market share 65%, that's two thirds. So if you're not doing business with those three companies, you're missing out on a lot on the majority of possible business opportunities, and telecom. So that just goes to show how critical it is to do business with those top players. And like Mike said, if you know, you don't have all these credentials, you don't have a chance of getting in with those guys. So it's a very exclusive club. And that's why you're seeing these larger agencies that have that in that have that existing contract. They're feasting, and the collection agencies that don't have that end, they're struggling. So that's one thing that you're seeing, so

Lex Patterson: 23:18

the higher not only the barrier to entry, but the higher table stakes, if you will, for the industry as well. And, you know, sometimes I think, though, you know, like, traditionally, this industry was made up of that smaller, multigenerational, like when I was doing research a few years ago, in the sales department, that of the company I was working with, you know, it was, it seemed like, you know, we went through that phase that you're talking about Mike, where it was a lot of startup activity, lot of startups coming into the market really small. But then what's always been there that's been that nucleolus, if you will, in the industry, is that smaller? And I'm saying probably under 50, employee, multigenerational local business, I mean, sure, they might, they might have expanded and got licensing and all the states are in multiple states and multiple regions, but it was the smaller community company, if you will, that was very, very regional, very involved in that, you know, and it seems like it's a lot of those that are struggling. However, when I say that that's such a generalized statement, because I also know of companies that are in that very slot, less than 50. That have and I'm wondering if it has to do with mindset, because they're doing very, very well. They appear to be growing, they're in acquisition mode, you know, there's all these types of things going so, you know, let's maybe shift gears a little bit and talk about what do you guys think are the most vital economic drivers that are impacting the industry? What do you think where we're, where's this going?

Mike Ginsberg: 24:51

Well, we do that and John, I want you to spearhead that discussion. So I'm giving you 30 seconds to think about it. Sure. Lack So, let's let's let's go back that 50 person operation, let's not let's dive into that just for a second a little bit dear. My father in law used to say God rest his soul. Just follow the money, Mike, and you could figure out the answer just follow the money. Okay, well, in this world, follow the creditor, okay, and creditor will kind of answer the credit grantor will kind of answer many of the questions. Well, the companies that you describe that are doing well, today, I would say virtually all of them, if you look 10 years down the road, they would not be virtually all of them five years down the road, they may not be. But you look at these businesses, and the clients or the credit grantors that they service, for the most part, their small business that you're describing, anywhere from two to 50 to maybe 100 employees operations, depending on the market segment. Those companies were servicing really two asset classes very, very well, number one health care. And number two, state and local government, they didn't have the US Department of Ed contract or the IRS, not the federal. But in healthcare, there has just been a major consolidation, where the large hospital systems are acquiring and gobbling up physician groups and individual physicians at exorbitant rates. I just had a conversation with someone yesterday, in the northeast, some of the largest hospitals, like in New York, for example, have individually acquired 2000 physicians, you know, in less than a year, and brought these into their operation. And that's just one hospital. Look across the country. And you see this mad exodus from individual practices to large conglomerates of health care providers. And let me let me tell you, the fact is those small players are not going to win those battles against their competitors, they're just not the competitors offer more services they get in the revenue cycle, the cost structure is different. If they have long standing client relationships, and they see these changes on the horizon, they're gonna get a lot of value if they sold that business to one of these larger players. But if they continue to stand alone, their cost structure is going to increase. Last I checked, the client is going to pay less, not more, they're not inclined to increase rates. If anything, they arbitrarily say, hey, we'll cut your rate 10%. Right. And then in healthcare, you also have these middleware companies like our source, that are taking on these health care systems, news award systems, and providing not just accounts receivable, management services and collection services, but various other outsource services. So they need to get paid. So all of a sudden, in your client is no longer XYZ hospital system, it's our source or somebody's other companies. So in healthcare, there's a lot of moving parts there that need to kind of come together on state and local, the biggest thing is RFPs. At the state and local level, it used to be very long term clients. Very limited competition, and you might have 100% of that account, forever, really well, now that has changed to an RFP model, with a lot of state and local clients putting it out there. So these RFPs are being responded to by larger players with more resources and capabilities at lower rates. What used to be in the higher you know, teens and 20% are now in the single digits in many cases, and the low teens. So these are driving forces that exist, adapt, if you adapt these businesses who do adapt, who are utilizing technology advancement to combat these costs. Number one, and number two, are effective communicators, not just with the creditors, but with the consumers as well. It's essential that these companies understand how to communicate, and who to communicate with not just with the credit grantors, but with the consumer. And the consumer is not just going to get on the phone and talk to a collector. What they're trying to do is communicate through these devices, you know, and through texting and SMS and social media and all these types of things. But if the agency is not investing in that technology, they're going to be left behind. Yeah, that's my point. This industry has been built on entrepreneurialism, and what I hate is that this entrepreneurial spirit is in essence being pulled out, it's becoming a heck of a lot more corporate than it's ever been before. So that that's a challenge that I think is going to continue. The now let's talk about the economic side.

John Hannan: 30:14

Absolutely, yeah. So I can, I can start off on that. Um, so I think there are three big economic indicators, drivers that are really important to look at right now. Two of them are indicators that you would just want to be looking at, you know, normally, because they're super important to the collection industry. And then the third one, which spoiler alert, it's inflation. It's less important in some instances, but right now, it's a really hot button topic. I'm sure everybody's read about it in the news recently. And obviously, it's going to have a big impact on collections in the short term. So I definitely want to cover that. But first, I'll cover unemployment and consumer confidence. So unemployment is one of the most critical economic indicators to our industry. And it has a sort of multifaceted effect. So on the one hand, when unemployment is low, consumers have jobs, they have financial security, their demand for credit is going to increase. And so they're going to be taking out loans, they're going to be going on trips, they're going to be spending a bunch of money. And that's generally good for the collections industry, right? Consumers are more indebted. So you know, that's first party work. And then they're also you know, they're taking out a bunch of debt. So they're more likely to default on their loans. And there's just a general volume of loans out there, that they're gonna, you know, gonna go default anyway. And so that's more business opportunities for collectors. On the other hand, if unemployment is high, then you know, consumers are struggling, and you know, the loans that they have taken out, they're going to be less likely to pay. Well, we've found in our research is that generally, the low unemployment is better for the collections industry. Because when unemployment is high, and people don't have that, you know, financial stability, they don't have any money in their bank accounts, you know, they might have defaulted on their loans, but they can't pay back those loans anyway, even when the collectors come calling. So you know, that's, and that's exactly what we saw during the Great Recession, right? Where, you know, ton, you know, credit card charge offs were massive. But when collectors were going to collect that debt, consumers just didn't have the ability to pay because they didn't have jobs. So generally, when times are good, when unemployment is low, that's when we really see the collections industry really profit. So looking at unemployment in today's world, so at the beginning of the pandemic, when you know, stuff hit the fan, as it were, unemployment really, really skyrocketed higher than it had ever been on record to 14.8%, which is significant. And that was in April 2020. But thanks to government stimulus efforts, yeah, we really saw that metric drop really quickly. You know, today, today, in February, for example, February 2020, the unemployment rate was 3.8%, which is about where it was pre COVID. Well, so the thanks to the government stimulus, we've really seen that unemployment number drop. And, you know, like I said, That's great for the collections industry, in some respects, right. Like I said, theoretically, consumers are have jobs, they're more willing to take out loans and stuff. But what we've seen in today's market is, now that jobs are so plentiful, job openings are higher than they've ever been, there was something like 11 million job openings in February, it was crazy. Consumers are in, you know, workers in general, are using that flexibility to quit at higher rates than we've ever seen. So now, we see this, not just in the collections industry, but in every industry. It's a struggle to hire and retain workers, you know, you're going to have to higher offer higher wages and more benefits, to retain people and to hire people. And that drives up costs. So that's something that you know, we're calling the great resignation. It's still continuing right now. Who knows when, you know, things will start to calm down and things will start to normalize. But because this has been going on for a couple of months now, but this is something that collection agencies really have to look at, you know, to make sure that they can actually hire the people they need to hire, they need to look at, you know, what makes sense for their cost structure, and how much they can actually offer. So that's something that's ongoing that we're having to look at.

Mike Ginsberg: 34:48

John, before you talk about consumer confidence levels or inflation, let me just add with regard to labor, like I said earlier, lacks labor was As and continues to be the highest cost within these operations, right. So, while it benefits the consumer, and they're if they're working right, and unemployment is low, their confidence level, which Donald's speak to their ability to go out and spend, charge up their credit cards, there's new business out there, whether it results in placements or debt to be purchased, it really depends, but it's definitely an increase in the business. The other side of it, too, is then the flip side is the collection agency. And debt buyer, they're struggling to maintain their own staff, let alone hiring new people, they have state requirements that start them at $15 an hour to pay these individuals, all of a sudden, the government is dictating how you have to pay your staff to be competitive, right. So in collections is a double tough business. And if they're given the opportunity to work elsewhere at $15, and then you compare it to collections as a starting position, 10 times out of 10, they'll probably take the other position, or one of those show up for the collection business and or sign up for the collection business and never show up, you know, on their first day of employment. So So in comes this work from home solution, where these agencies now can be a lot more competitive, and they can tap into markets, like you could hire somebody from New Mexico last collection skills to work your operation in Pennsylvania, you'd never had those abilities before, because you had to relocate those people if they were willing to relocate, and you have to pay for those expenses. So I think there's a benefit to those companies that truly understand the importance of the staff, and are catering to the staff. But those that took, you know, an advantage of strong word, but took it lightly in the past realize how critical it is to get that component of their business. Right. Yeah, yeah.

Lex Patterson: 37:08

Key key point. And again, it's that it's that mindset, if you will, you know, have this as an opportunity, and it's a problem be solved. Because definitely that that whole there is a there is a problem, I think with the whole hybrid remote concept of work when it comes to the debt collection space, you know, and you've got to realize that you're competing with a lot different job market today than you were even, you know, a couple years ago. So excellent point. Yeah, appreciate that.

Mike Ginsberg: 37:42

Well, and that mindset that you just said, What an excellent, excellent word to use or expression to use, because a lot of owners in our business much like probably other industries, but we know this industry, they feel comfortable training, hiring, managing, from within an operation, within the confines of the walls within that operation, to move that to a virtual platform, is not for everybody, right? And in certain states, you know, may still require work from home or give the employee the opportunity to do what they want me to do. But at the end of the day, the owner operator of these businesses, and the executive might have the mindset that if you're not in my office operating, I can't manage you. I can't train you. I can't control you. Well, that is a mindset that some have forcefully went back to. And others are moving.

Lex Patterson: 38:40

Yeah, not to mention, Mike, the, you know, a lot of these brick and mortar they it's been a brick and mortar type of a situation, right? They own a lot of them own the buildings that they're in. So it's a commercial property equation as well, you know, they need the bodies in the thing to justify the rent that they're, you know, and that's a whole shift too. So some things to think about there. So yes, thank you.

John Hannan: 39:04

Yeah, no, I just wanted to jump in to and say that, I think from like an employee standpoint, I think it's going to be interesting of these businesses kind of figuring out who's comfortable with what, you know, some employees are really comfortable in the work from home model where they can, you know, sit in their room or sit on their couch, and you know, they can bang out whatever they're working on. And in some cases, they're even more productive than they were before the pandemic. And then some employees, that's, you know, they really prefer being in that office, face to face. You know, they just like going to work and then coming back, and then it's out of sight out of mind. And that's what works for them. And so, and I think you're seeing a lot of collection agencies kind of figuring out alright, well, we'll have some people who are full time worked from home, some people full time in the office, and then everybody else there'll be on a hybrid schedule, whether it be in the office, three days a week and working from home two days a week and kind of playing around with that. See what works And, you know, figuring out how to get the most out of their employees to work from home.

Lex Patterson: 40:04

It's funny, John, I read, I read an article recently that said that, that, that mindset or that thought that you just said about some people really liking to be in the office, and some people really like liking more to be remote and, and left alone and that type of thing, that the ones that really liked to be in the office, a big majority of those were the managers. You know, which makes sense because there it is harder to manage in a remote world, right? You've got to you've got to check in but not checkup. But you don't want to make them feel like you're micromanaging. Yes. But you also have to keep a really close eye on productivity. And so, again, technology, I think, can play a role in that as well. So okay, let's segue then into the next piece that you want to talk about there.

John Hannan: 40:54

Sure. Yeah, no, I'll talk about consumer confidence for a little bit. So consumer confidence is another economic indicator that's really important. It's really a good Bellwether, of where consumers are going to have consumer spending, and where their mindset is on, you know how much they're going to actually go out and spend, which you know, can lead to them taking on more loans, which can lead to you know, delinquencies and then business for the collections industry. So consumer confidence right now is really, really low. Actually, according to the University of Michigan consumer sentiment index, which is run by the University of Michigan, they send out a survey to consumers gauge their, you know, take their temperature on how they're feeling about their financial situation. It's as low as it's been since 2009, at least on the last in February, this last reading, and which is very concerning. And that's driven primarily by inflation, which I'm going to talk about in a little bit. But I think looking at this consumer sentiment numbers right now, you know, you see a lowest since 2009. Since the doldrums of the Great Recession. That's really scary. But I think we can look at it as something as very, like short term, I think, of, you know, the sentiment index is it goes up and down and up and down. You know, just a couple of months ago, it was really trending upwards, and, you know, reaching the point of where it was pre pandemic. So I think, you know, with this inflation scare with the war on Ukraine, which we'll also talk about as related to inflation. I think consumers are a little bit spooked right now. But hopefully, we'll see that number start trending up again, that's definitely something though, that, you know, collection agencies are going to want to look at going forward, see where consumers at right now, are they really, as you know, depressed as they were in the Great Recession, or is this just something that's transitory, though, you know, pick right back up, so definitely something to look at. So I think that's a key point is how, you know, we as an economy deal with and also how the federal government deals with it, as you know, the arbiter of the economy, I think that's really going to drive whether this is just a blip. Or we're really in a point where consumers are really depressed for the long term. As right now, inflation is as high as it's been since the 80s. Now, not quite that high. Luckily, the reading this past month was a brown 6%. And personal consumption expenditures, inflation, which is the measure that the Federal Reserve uses to measure inflation. And the 80s, it was around, like 10, and 12%. So we're not quite at that level yet. But we're higher than we've been since then. So it's very concerning. And a lot of that is driven by, you know, runaway consumer spending caused by the stimulus separate from the pandemic, you know, giving people direct checks, gooses, their bank accounts, they go out and spend, you know, things starting to open back up. So people have been shut inside for a whole year. Now, these restrictions get lifted, and now people want to take trips to Europe, they want to go to Florida, they want to go everywhere, right? So that's goosing a lot of spending. And you know, as people spend more, we see inflation go up as well. Another issue is like chains. You know, when you're trying to ship things from China to the US, you know, there's these bottlenecks that are being formed through restrictions and whatnot. And that's really, you know, driving up the price on the supply side, for, you know, that's translating to what consumers are seeing in the grocery stores and at the fuel pump. And the final thing that's really using inflation right now is, unfortunately, the situation in Ukraine where, you know, we've levied all these sanctions on Russia and, you know, that's impacting natural gas that's impacting oil that's impacting, you know, Russia exports, a lot of precious minerals too. And all of those inputs are, you know, now that's really stymied because of the sanctions and that's disrupting everything. So it's kind of As configuration of inputs that's really, you know, causing inflation to go haywire right now.

Lex Patterson: 45:08

So it's, it's an interesting, it's an interesting thought of, you know, because you've got the the last pandemic, the, the worst pandemic and the 20s that we had that led into the roaring 20s or the, you know, the 1912, Spanish flu, and then we had the big rebound of the roaring 20s. You know, will it? Will it be that? Or is it going to be a repeat of the 1980s? You know, where we hit into this other area? And, you know, the funny thing is, is there was different I think, indicators there, too, because I remember buying a house in the 80s interest rates, they were Adjustable Rate Mortgages, I would think I started out playing span something like 13%. So, the Fed had a lot of room on dropping a rate where we've got a far different picture there. But what do you guys, what do you what are your thoughts? I mean, if I'm going to put you on the spot a little bit is what are your thoughts as you've studied that you guys have run through this a few times? And, and maybe the differences between the different segments that you've done? What are your thoughts? Or do you think it's a blip? Or do you think it's, do you want to go out on that limb or not? Well, you're sure, yeah.

John Hannan: 46:21

We're gonna we're gonna prognosticate, we're gonna wire this directly into the into the Fed

Lex Patterson: 46:26

reserves. Right. I hope they're listening. Right?

John Hannan: 46:29

They're listening right now. Exactly. No, I think it's going to really be interesting to see what the Fed does with this, where they've kind of they've got these two options, right? Where they can either raise rates, or they can keep rates the same or lower them. And really, it'd be just keeping rates the same, because we're already at that zero interest rate level right now. So, obviously, when there's inflation, the first thing that people say is, oh, well, you gotta raise interest rates. You know, that's what we did in the 80s, Paul Volcker. And that's, you know, what the Fed is looking at right now is raising those interest rates. You know, curtailing consumer demand, curtailing businesses willingness to invest money, because now the cost of borrowing is more expensive. And that's, you know, a really quick, if painful way to, you know, kind of curtail inflation, but painful that I just said, that's the operative word, right? Because we're in a really delicate position in the economy right now, right? We're coming out of this pandemic, you know, we're at this inflection point where things can either really go off, or we can go right back to where we were at the start of the pandemic, where people are getting laid off on mass. So I think the Fed is really thinking about, well, if we raise rates, then consumers are going to be put under this burden, right? They're going to have to pay more for borrowing. They're not going to borrow as much, they're going to spend less, and that's going to hurt the economy. What if we don't leave inflation unchecked, then people are going to not spend any way because prices are going so high, they can't pay for anything? Yeah. So they're really in a catch 22 right now. I will say they, the Federal Reserve just had their meeting a couple of weeks ago. And they are raising the federal funds rate, which is the benchmark interest rate. They're raising that by point by 25 basis points. And they're considering raising it again in May by 50 basis points. So it sounds like they're going to go the route of raising interest rates, aggressively, curtailing inflation, and hoping for the best when it comes to consumer demand being reduced from higher interest

Mike Ginsberg: 48:34

rates. So So my son and I are investing in real estate. And he comes to me today and he says, you know, we have this potential mortgage here, but instead of them wanting four point something percent, they now want six point something percent. And I said to him, sign it 10 times that a 10. If it's under 10%, we're fine. Right? But his mindset is, oh, my gosh, it went up 2%. Well, you're right. 13% was 20%. And if you remember the gas lines, and you remember the things we dealt with Back then it was just, it's different, but it's the same it's mindset. At the end of the day, I think it's important that we talk about this expression, hierarchy of debt. Hierarchy of debt is a triangle and at the top is dependent all where, you know, people pay what is the most important area of payment for a consumer. It used to be, well, I gotta make sure I pay my car, my car payment, well, okay, because I gotta get to work well work from home kind of negates that. And, you know, during that two year pandemic, I might have used my car 1/100 of the time that I used it previously, right. So that's changed. housing, people have gone from this mentality of it's the American dream to own to, why am I going to own maybe I should just rent and be more nomadic I, I could rent a car, and I can move it from point A to point B and not own it, you know, I can get a scooter the same way and I don't have to own the scooter. And I could rent into their 30s. Now kids are not buying they're renting. And the rental market has gone way, way up at this point. So maybe it's not, you know, paying the rent, or the mortgage is the number one thing anymore, it has been the credit card, you know, because I put everything on my credit card, that's the number one thing I better pay off, because maybe the interest is pretty high, or I want to keep my credit card, you know, and be able to continue to use my credit card. So I think we need to watch that hierarchy of debt right now and see where that plays out. Going forward. But people need to remember, this isn't just economic, it isn't just client, we're talking about the generational change. Our kids grew up with technology that we did not grow up with, they can communicate differently, they're looking for different channels to be effective to be able to pay off their debts, and they never want to talk to a creditor or a debt collector, you know. So I do think that that's something we have to pay particular attention to going forward. But these catalysts for change, and these economic indicators that John just spoke about, I would like for every CFO who's listening in this conversation, or every owner that's listening to this conversation to tell their CFO to factor in these economic variables into their forecasts, because many of them just don't. But those that do need to pay particular attention to these variable and fixed costs, because these things are going to change abruptly. And also very quickly as they try to operate their business.

Lex Patterson: 52:08

Yeah, which pumps the question that I wanted to ask you, you guys is do you have any, like, ideas or tips for it's because you guys have been doing this report for how many years? Mike?

Mike Ginsberg: 52:20

Well, the first one that I wrote was in 19. And I wrote it, that's why it was so good. In 1992 1994, I wrote a letter, we called it the coffin report. But I basically wrote a letter to our following. So we've now done 10 General renditions of this up to where we are currently. But the point is on these reports, they've evolved to something that that we think is critical, we're going to continue to do it and try and figure out the best way to provide information to this industry. But you know, things were so much different back then. So the first report was handwritten, just a note to our clients. And then we started actually investing and using resources to write these reports. And then along the way, we launched inside arm came a little bit different on the report writing thing and providing news and information through that channel. But what's old is new again, right? Like the hula hoop or the pet rock? Well, yeah, and

Lex Patterson: 53:26

the part that I wanted to ask is, so you've got all this all this experience? And, and you know, as they say, you know, information is power, right? And do you guys have any tips or ideas or things, maybe you could share that go beyond? Because you provide this data out? You provide it to the industry? Are there are there and I know a lot of people use it for strategic purposes and planning. And they look they read the report, and they're trying to gauge and banter back and forth, just like we've been doing on this call. But are there things beyond that, that agencies could use this data and try and help their businesses with? I mean, have you got any ideas on that, you guys?

Mike Ginsberg: 54:10

Yeah, John. As I think about that, one of the things that we did in through research was gather information on particular market segments. We must have 10 to 12 market segments, property management, some components of health care, commercial lenders, FinTech, you name it. Commercials a lot different than consumer. But one of the things that we provided that people just I don't understand why they don't want to utilize it is no your client. When I say that is in a market segment, if you specialize in health care, what are the large systems, the hospital systems, that debt profile look like? Right, and what do the large banks look like and where are they things changing. And if your salesperson has that kind of data, as they go to their client and sit down with the client, then they'll know what questions to ask them. So part of it is old school, this zoom kind of conversation, kind of negates the need to necessarily get on plane with the people that you know, and people that trust you and whatever, but set up a call and look at their financial position right now, and have that conversation with the other side saying, what's keeping you up at night? On these things? These are the things we're seeing and how are you combating these things. Part is old school and part is using the information. And we have a lot of information. I don't want to make this self serving. But I don't understand why people don't utilize that and have their salespeople because sales is ineffective. Otherwise, today, people aren't going to conferences like they used to. And they're certainly not going to conferences to try and, you know, hire a bill collector necessarily, they're learning about technology or information or peer to peer networking and stuff like that. Sales has become so much harder. So one of the takeaways is use the information, whether we provide it or somebody else does. Have your salespeople do some research on the clients and the prospective new clients that they want to service. Yeah.

Lex Patterson: 56:22

How about you, John, any any thoughts? Takeaways?

John Hannan: 56:27

Anything? Oh, sure. Sure, yeah, no, I'll just echo what Mike said, you know, we have and there's a lot of information out there, there's a wealth of information about these client market segments, you know, looking at not just revenue and number of firms, but, you know, bad debt trends, and, you know, accounts receivable trends in healthcare, and telecom and cable, and financial services and credit unions, all those markets. And that's really useful information, you know, not just to, you know, go to the clients themselves and start conversations, but to help you when you're in the boardroom figuring out, alright, what's our strategy going to be? Because if you know what your clients market looks like, it's a lot easier to figure out well, we can probably do this, but we probably can't do that. So I think I would definitely echo Mike, when I would say that, that client market data is very, very useful.

Mike Ginsberg: 57:22

The other thing that I would say Lex is, is important to is know about somebody's emerging markets, and learn about these emerging markets. Okay, because there's going to be real needs when it comes to recoveries that may not exist yet today. So investing in the future of E commerce, for example, okay, people say you now, ah, yeah, Netflix, they'll just turn it off. Well, here's the thing, they don't want to turn it off. Because the customer cost is so significant, that they would rather give it to you for free than to lose you as a potential client. But they too have collection needs and they have contact management and customer care needs. These companies have this technology and this sophistication, much of which just lies dormant, they don't even use it. Well use it for these purposes, too. You have the technology, you've already made the investment in technology. These emerging markets might require you to use them a little bit differently. put your thinking cap on and figure out the best way to utilize what you've already invested into. And if you think about fintech. Fintech is an outgrowth of banking, right? Conventional bankers don't like FinTech and they're going to try and lobby against certain things associated with it. But if you look behind the scenes, many traditional lenders are already getting into fintech. So here's what they're gonna do. They're gonna use their capabilities. The managers that used to manage vendor relationships and debt collectors for large banks. They're being employed that by FinTech follow your relationship, leverage your existing relationships in your previous relationships, because chances are pretty good, they're going to end up somewhere else. And if they've used it before, they'll probably use it today. You just have to find them.

John Hannan: 59:15

And I was gonna just to add on to that when it comes to these emerging markets, like FinTech and these FinTech firms, the early bird gets the worm, right. You know, right now, while it's really early, while the technology is really nascent, and these companies like Lending Club, don't really know exactly what they're doing with collections. It really pays to get in there early. And to be you know, that first or second or third collections vendor that builds that relationship helps them start up their collections apparatus. And then you're in there, because the only direction they're going right now is up these FinTech firms. So you know, if you get with them early, you know, 10 years down the line when they're doing tons of business. You're in there you already have that really internship. And that's going to go back to your bottom line, and you're going to be real happy. So I just wanted to emphasize maybe

Mike Ginsberg: 1:00:05

this is a parting shot comment, but I will say this because I think it's so critical today. If the employee 100 employee mentality, you could try and hold on to the way things work. Or you can adapt and change, right? But but see the writing, understand what's going on around you, and make an informed decision. And the informed decision might be, you know, what, I don't want to invest in the future. Well, that's fine, start thinking about succession planning or closing down your operation. And that's the brutal reality of it all. If you don't want to make the investments to be competitive in today's marketplace, that's understandable. We'll step aside and let somebody else who was willing to do that, okay, and operate within those conditions, benefit from what you've created, because there's still value in your operation today. But tomorrow, there may not be that value. And by the way, that 50 person operation should follow John's lead, and get to know these FinTech companies, and get to know some of these e commerce, e commerce companies, because that might be a catalyst for substantial growth within your own operation. Okay, but you got to take the chance, a lot of folks like this low hanging fruit, you know, I'll go after this. Because, you know, it's, it's there, it's proven, I get it. But those that have a bigger picture kind of mentality and looking out into the future, could be extremely competitive. And I'll just say this barrier to entry is a good thing. And as long as we're a credit driven economy, there will always be a need for these services. 100% always a need. So people who are out there preaching gloom and doom. They don't they don't understand the complexity, but they certainly don't understand the opera tunity ease that have been created in this marketplace for them and others who want to capitalize on it. Wow. Yeah. Well,

Lex Patterson: 1:02:06

I know you guys don't, Mike, I know you like you mentioned, you don't want to be self serving. But as I think about this, and we talk about those different segments, and whatever, if I want to learn more, I guess we can put some stuff in the show notes, too. But how do they go about getting some of that data and having a conversation with you guys.

Mike Ginsberg: 1:02:24

So one thing they could do, visit our website, www.kaulkin.com. And within that website, there's information that is up there that they could download free of any charge, okay, all reports free of any charge, the data we're talking about, we're not charging them to utilize it. Okay. So download a report, see what you think. Right, call us, we'll schedule a call free of any charge. If you add us to the team, we could figure out the ways to do that economically in ways that work for you. It's not all about buying and selling businesses anymore. I and our team spend a lot of time in owner operated boardrooms, virtually for you know, in many cases, face to face, at least historically, molding and shaping strategy. And that's really what this whole thing is about. With information, you have a better chance. It's not foolproof, there's nothing that's foolproof. You know, the only foolproof thing is the Jets will not win a Super Bowl anytime soon, I can tell you that. That's that's for certain you could take that to the bank. But other than that, there's no guarantees in life. So take some chances and what you're doing capitalize on it, if you don't enjoy what you're doing, get underway for people who do.

Lex Patterson: 1:03:44

Well, that's awesome. I think we're gonna wrap on that. I want to hit you guys with one last question though, just to kind of Yeah, please, a little bit. So how, and we will round robin this and we can? I don't know, we'll maybe John will let you go first on this one. But how are you different from your pre pandemic self?

John Hannan: 1:04:05

So just like in general, or

Lex Patterson: 1:04:07

yeah, just what's what do you feel is different about you today that that's changed pre than pre pandemic?

John Hannan: 1:04:15

Well, I think for me, personally, I think I value my interpersonal relationships a lot more. And I did value them before the pandemic, of course, but after a year plus of, you know, not really being able to see people I just have so much more of an appreciation for, you know, when I go out and I hang out with my friends and stuff, and like I see them face to face and I can talk to them and it's just like it's so much more fulfilling than just sitting at home like doing nothing and even you can even you can get on Zoom calls and stuff but it doesn't it doesn't really replace the face to face interaction with you know, the people that you care about and the people that you love. So I would say I'd say that's a big difference for me of you know, just really like appreciate getting what I have,

Lex Patterson: 1:05:02

yeah, yeah. Yeah. Right, Mike, how

Mike Ginsberg: 1:05:05

about you? It's the word efficiency. I used to have an office and my staff would come to the office, and I'd go to the office, and that's where we would congregate and do work. And it's kind of nice not having an office anymore. We went 100%, virtual at the end of January. And, and I could say that, honestly, we didn't use the office at all since March of 2020. So to give you a sense, almost two years of grandma, well, that goes away. And we're going to actually pivot. And we've already started doing this where, you know, our clients benefit from that too, because our overhead has gone down. Right? So we don't have those commutes. We don't have those kinds of things anymore. I for one, and I'll say this, even when I was in college years ago, and over the 30 years doing this business. I always like going to the office. Now I don't I like working from home. It's an adjustment. But it's the efficiencies have increased so substantially. I'm not just talking about the commute, living in the Washington DC metro area, the commute sucks. It's terrible. There's nothing good about it. Yeah. Okay. But I'm not just talking about the commute, because we figure that part out, we would, you know, would adjust accordingly. I'm talking about efficiency, if I need to talk with John, I don't need to get up. In fact, when we were in our offices, we didn't get up. You know, we did. We went on teams, and we talked to each other, one office next to the right, so usually an efficient model, but it's become more efficient. So I think you need to adapt, to thrive, not to survive. If it was about surviving, I wouldn't be in this business. We want to thrive, and we want our clients to thrive. And I think Information is power. But also, you know, we've learned over this pandemic follow the science, right? There were those who did, and there were those who didn't. And look where that got him, right. So you kind of think about it, we could learn from our own mistakes, gather good information, make decisions, don't make regrets. Don't don't look, you know, you could look back, but you can't change that. But you can learn from it, and then apply it to the future. And it's easier said than done. This is a complicated business with a lot of moving parts, and a lot of headwinds, as they say, but it also at the end of the day, it's a very lucrative, profitable and growing industry. And you just need to find those pockets where you can make the most impact. Yeah. Well said. Well, you guys,

Lex Patterson: 1:07:52

I always learned so much when I come on with you guys. I really appreciate you being on the call with me today. And let's do it again soon. Hmm.

Mike Ginsberg: 1:08:00

Absolutely. Thank you. And thank you for including John this time, because honestly, he's the brains of the operation. He's the guy who understands the data better than anybody in our industry. So he was a

Lex Patterson: 1:08:11

great addition.

John Hannan: 1:08:11

Um, ya know, thank you for having me, Lex. It's always a pleasure to talk to you so.

Lex Patterson: 1:08:24

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