The Results of the Department of Education Unrestricted Contract Raised More Questions than Answers

December 23rd, 2016

Earlier this month, the U.S. Department of Education (ED) Office of Federal Student Aid (FSA) announced the results of the lengthy and controversial procurement process for the coveted “Unrestricted Category” of the Debt Collection Services contract. Seven ARM companies were awarded the contract, raising more questions than answers for industry professionals. Mike Ginsberg discussed the impact of this procurement process with Federal Government contract expert Randy Kamm, Principal of Collection Quotient Consulting. The following is a detailed account of the questions that were raised and their conclusions. If you would like to confidentially discuss this important topic, and the impact it may have on your business, please notify us at hq@kaulkin.com.

Now that the procurement process is finally over, why do you think it took so long?

Theories abound as to why it took nearly three and a half years to complete the procurement. This procurement reminded Randy of that old saying: “Time kills all deals”. His view is that a combination of factors led to the drawn-out and frustrating process for all parties involved, including PCAs and ED personnel.

  • A Paradigm shift occurred. The conventional wisdom three years ago was that ED’s Federal Student Aid (FSA) debt management service had a game plan to retain most firms and add a couple new PCAs, but that plan got overtaken by changes and events outside of ED’s control. Three years ago, ED had a stable and tenured network of experienced collection agencies. ED knew defaults were increasing and it had to become more efficient. Back then, there were indications ED was planning to select “the best of the best” PCAs; PCAs who had demonstrated solid overall performance during the last contract. Many believed ED would select most of its current vendors while adding a few new players to augment capacity, stimulate competition and infuse more of a customer service focus. Given ED’s more than 30-years of experience (and relative autonomy) operating its debt collection contracts, FSA’s game plan seemed like a pretty straight forward and low risk approach for managing its growing inventory. But, events and circumstances outside of ED’s control forced changes, not to mention significant delays, to ED’s debt collection management approach and plan.
  • Impact of CFPB and other watchdogs: We cannot overestimate the impact of the CFPB and other public interest groups on ED decision making over the past three years, not to mention Congressional scrutiny. Other factors: Increased criticism of ED’s administration of the loan programs by consumer law and public advocacy groups; the media’s drumbeat about increasingly historic levels of student loan indebtedness; and the debate about loan forgiveness as a public policy also caused ED to slow things down.
  • ED’s lack of internal resources: Federal budget sequestration affected the staffing resources ED had available to manage a highly visible and complex procurement process. In addition, vacancies in key FSA management and staff positions led to gaps and voids in decision making which further contributed to delays. I have to believe also that successive rounds of protests and lawsuits created lots of extra work for ED, further contributing to delays.
  • GSA Schedule vs. Open Competition: For whatever reason, ED chose not to continue utilizing GSA Schedule contractors, as it had for more than three decades; it instead moved to a full and open competition. This resulted in a multitude of offerors that required additional vetting.
  • Evaluation Factors kept changing, resulting in cancelation of the first solicitation and reissuing of a second procurement: The first solicitation (ED-FSA-13-R-0010), issued in July 2013, essentially used ‘capacity’ as the sole evaluation factor. Using capacity alone resulted in dozens of qualified PCAs being identified, and ED had no objective way to narrow down the list to a manageable number of PCAs to include in its recovery network. The second solicitation (ED-FSA-16-R-0009), issued in December 2015, was broadened to reflect quality service and past performance evaluation factors; which gave ED more flexibility to select its collection partners. Each time a federal agency cancels and reissues a procurement, that agency must start over from the beginning, consuming time as it reallocates already limited internal resources to ensure it’s following all federal procurement rules and requirements.

Are you surprised by the number of participants chosen?

We anticipated that the number of large participants would drop from ED’s 2009 contract that engaged 22 PCAs (17 large and 5 small PCAs) in our recorded podcast back in October. ED had telegraphed earlier in its Q&A’s that it wanted a smaller, more manageable network. At one point, ED even stated it wanted only 7-9 contractors. Just as in other collection markets, such as financial services, creditors over the past few years have been reducing the size (and cost) of larger networks. In retrospect, it actually should be no surprise that ED was seeking the same kind of control it was observing in other collection markets.

We were more surprised that ED selected 11 small businesses for the restricted procurement back in late 2014. Will all of the small firms be able to accommodate the anticipated volumes while maintaining both financial results and compliance? If you combine the 11 small companies plus the 7 large PCAs, ED’s network is just slightly smaller than the 21 combined companies it had on the 2009 contracts.

48 companies responded to the RFP process. Looking at the types of companies that participated, why do you think ED chose the winners?

Due to the factors described above, it appears that ED returned “back to the future’ by largely selecting incumbent firms with a known ED track record. Even though many observers felt ED was initially looking to identify larger capacity firms and introduce some “new blood” into its network, it ultimately chose to not select other offerors with differing strengths and capabilities:

  • Large, highly compliant, non-student loan PCAs and collection law firms, many of whom were seeking to diversify their service lines following significant reductions in other collection markets (i.e. financial services, mortgage, auto)
  • BPO and Customer Care organizations with proven customer service models
  • Small business PCAs (and subcontractors who had grown from small to large businesses over the course of the 2009 contract)

ED selected PCAs with whom it was familiar and had a solid customer service track record with ED. ED did not necessarily select the ‘top recovery’ performers, nor did it introduce any ‘new blood’ into its network mix. As part of the second procurement in December 2015, ED scrapped its traditional Competitive Performance and Continuous Surveillance (CPCS) financial performance model in favor of a new Contractor Performance Monitoring Evaluation (CMPE) scorecard. The new model is weighted 60% to borrower satisfaction and call counseling compliance, and 40% to dollars collected, a reflection, we believe, of the impact of CFPB and other program critics on how ED managed the debt collection contracts.

Aside from the number of awards made and who won or lost the procurement, is there anything else affecting ARM industry providers that stands out about the overall procurement process?

Yes, the number of small businesses that appear to be the big winners in this process. ED selected 11 small businesses in the earlier restricted award back in late 2014, up from only five firms in the 2009 contract. Both the restricted (small) and recently awarded unrestricted contracts require significant subcontracting with small businesses for core collection functions. Both large and small contracts require prime contractors to utilize small business subcontractors for up to a third of the contracts’ value. Each prime is responsible for meeting specific small business utilization rates for disadvantaged, women-owned, HUBZone, service-disabled, and veteran-owned subcontractors. We can foresee where each prime contractor, in order to meet subcontracting requirements, may bring on as many as three or four small business partners. And, because of the potential size and sheer magnitude of this new contract, we can also see where some of the prime contractors might decide to mitigate some of their risk and reduce costs by expanding subcontracting networks to also include other large PCAs, some of whom were not awarded new contracts, but who have existing infrastructure and workforce to help manage ED’s contract. We could see the 18 large and small prime contractors add as many as 60 or more other private collection agencies to help recover these debts, further reinforcing the importance of this contract within the ARM Industry.

How will protests and lawsuits affect the process?

Given the controversial history surrounding this procurement, some observers believe protests or lawsuits might result in the throwing out of this decision and reissuing a new solicitation, forcing a third redux. Although the courts may have a say in the outcome of any lawsuit, we do not think ED will redo the procurement a third time. It’s important to remember that the government has a 95% winning record on defending itself in protest actions. Secondly, post-award (vs. pre-award) protests are much more difficult to achieve. ED also has the authority to invoke and take action when it is in the “best interest” of and “most advantageous” to the Government. Therefore, we’re not sure protests or lawsuits will necessarily change the results. We can foresee, however, where ED may add an additional PCA or two, based on the specific underlying principle of an individual protest or suit. There is precedence for this in previous ED contract awards. We have to believe that the size of the default portfolio and further delays recovering amounts in default will result in ED moving forward with the network it has identified.

Looking forward, when do you think first placements will be made and what do you think the initial volume of accounts will be? 

At this juncture, we believe ED will make every effort to implement the new contracts by April 2017, when the five extension contracts expire. With six of the seven awardees being incumbent contractors, we think ED made its life a little more manageable and efficient as it implements this new contract. As for the projected volume of accounts, that’s a huge question mark. Some data indicate that ED’s total default portfolio now exceeds $100 billion. If so, reliable sources are projecting each contract could represent 750-1,000 seat operations – a significant opportunity for the winners and their subcontracting networks. These kinds of numbers are sure to further transform the ARM Industry, through consolidation, acquisition and/or subcontracting.

Another indicator of volume is how much volume has been going to the five extension and 11 small business PCA’s over the past several months. Although volumes have fluctuated month to month, there are reports that extension firms have received dumps ranging from 40,000 to 75,000 accounts per month, totaling more than $1 billion for each extension agency. Small business PCAs are receiving from 10,000 to 25,000 accounts per month, depending on their individual ability to accept capacity.

Comment on the agencies that were awarded the extension on the past contract and if you think this will end sooner than April.

We discussed this important consideration and assume ED will continue to place volume with the extension agencies, but ED has not indicated its plans at this point. We understand ED will hold an initial implementation meeting with the awardees in the near future, where this will undoubtedly be a question. According to the terms of their prior contract, we also assume the extension agencies will be permitted to retain and work existing inventory for the foreseeable future.

With the volume of student loans outstanding, are you surprised by the stipulation that the total estimated contract amount is not to exceed $417,100,002?

“Estimated Contract Value” is a confusing and misunderstood term. Our understanding is the government uses a standard formula to derive this figure. It represents an amount the government expects to pay per contractor over the term of the contract, in this case a five-year term. It is not an annual or cumulative value. Based on the $417 million listed in ED’s award notice, the total cumulative contract-wide valuation for all seven contractors would equal approximately $3 billion over the first five years of the contract. Given the size of the older outstanding inventory, which equals about 2.5 million accounts, many believe the estimated value listed in the award notice is a low figure.

Although the award notice states a value, in the past ED has regularly issued “contract modifications” that increase the total value. Given ED’s growing inventory, and the historical placement record over the past several years, many believe the actual value will easily exceed $3-billion on a contract-wide basis over the five year term. ED’s historical and estimated revenue and placement totals over the past few years seem to indicate that the value will exceed the initial estimate:

ed-performance

With the Treasury contract expected to be awarded in Q1 2017, do you think there is any correlation between the timing of this award and the ED selection process?

Three out of the four existing Treasury contractors were not selected by ED for this new contract. Could it be that the four current Treasury (or future) Treasury contractors eventually receive ED inventory through an expansion of the much discussed Treasury pilot program? It’s still too early to say, but each of Treasury’s contractors have substantial ED experience. As Treasury seeks to expand its role as the nation’s “chief debt collector”, it will be interesting to see if and how student loan collections are transitioned from ED to Treasury. All of this suggests that collection opportunities with the federal government will only continue to grow, providing a new strategic marketplace for the ARM Industry.

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