NCO’s OSI Purchase Helps More Than Just NCO in Government Markets

 
Nick Bernardo is president of Net Gain Marketing, which provides companies in the credit and collection industry with sales & marketing-related services, including government contract information and consulting services.

NCO Group’s announcement of its acquisition of OSI late last year and the subsequent completion of that transaction in February 2008 will surely reverberate throughout all sectors of the accounts receivable management industry for years to come. In the context of mergers and acquisitions within credit and collections, OSI is very much to NCO what Mobil was to Exxon—a long-time rival and competitor in a commodity market that had to eventually be taken on (or taken out, depending on your perspective), one way or another.

This transaction will result in much more than one less trade show booth at the big creditor conferences. One market where this will surely be the case, at least as much as any other, will be the government sector. From taxes to traffic fines, student loans to public utility and healthcare debt and beyond, the elimination of the second largest competitor not only in the industry but also in the public sector results in a big win for both NCO and, though unintended, for its next several largest competitors.

That is, if in fact the OSI name goes away. If history is any guide, the OSI brand will go the way of brands like Milliken & Michaels, FCA International, CRW Financial and so many others since NCO began its buying binge 14 years ago—a footnote in the history of the emergence of the industry’s largest, and—some say—best run company.

At the local level, which includes small municipalities and sparsely populated counties along with small colleges and the like, not much will change. For example, neither NCO nor OSI have shown much interest in going after contracts with buyers such as Genesee County in Mich., the City of Coppel, Texas, or Lackawanna County in Pa., to name a few entities that have sought to buy collection services this year. However, OSI’s Transworld Systems division has in the past dabbled in the public sector, implementing a contract in the past year with Polk County, Fla., in which the county will use the firm’s Green Flag Profit Recovery line to pursue delinquencies on a fee-per-account basis.

The real action happens in large state contracts, and this is where NCO stands to gain the most. The firm will pick up additional contracts in California, Colorado, Illinois, and Maine, to name a few. And NCO will benefit by having eliminated its largest competitor, especially on low-bid contracts where the only thing you need to do to win is bid the lowest rate and correctly interpret and follow the procurement rules.

Will there ever be another award like the State of Maryland’s primary tax collection contract, where the winning rate was south of 5%? Possibly, but with one 800-pound gorilla gone from the arena and only one remaining, the likelihood that another firm will go head to head in this fashion with NCO in the future (on a regular basis) is not very high, inasmuch as other firms simply have not shown the stomach to shave margins to the degree required by such contracts.

On multi-vendor, value-oriented contracts, where buying committees tend to be more sophisticated and have a greater understanding of the industry, tier two players are clearly the winners. In a world where NCO becomes a favorite just by showing up, if the buyer plans to pick at least two vendors and OSI is not there to fill the other slot, the rest of the pack stands a better chance of filling that (hypothetical) slot.

But NCO’s integration of OSI’s state contracts will not be without its challenges as NCO attempts to add new clients or retain some of the larger state and municipal 4contracts it either had prior to the acquisition or inherited as a result of it. As has been well documented in ARM industry media, OSI in January 2007 signed an agreement with New Jersey Attorney General Stuart Rabner (“OSI to Pay Nearly $2 million to Settle New Jersey Collection Contract Dispute,” February 7, 2007) stemming from charges that OSI gave illegal gifts to state employees, and employees had improperly invoiced the state.

OSI agreed to pay about $2 million in fines and restitution while accepting a condition it could not bid on state contracts for five years or even renew contracts it already held with various state agencies, including the State Treasury, the University of Medicine and Dentistry of New Jersey, and Montclair State University, among others. In return, Rabner dropped his prosecution of OSI.

While the agreement gave New Jersey latitude to enforce its provisions upon any eventual acquirer of OSI with a fair degree of discretion, as of this date it is unclear whether the state has or will enforce the provisions on NCO. Whether the state in fact chooses to hoist penalties meant for OSI onto NCO or not, legal ramifications are only one part of the equation. Other decision-makers in large states and cities may, unfairly or not, fail to make a distinction between OSI as a part of NCO and OSI as a discreet legal entity. And that could impair NCO’s ability to attract new state clients or even retain existing ones.

This says nothing of the quality of NCO’s services on government contracts. It usually keeps the ones it has and adds a few every quarter, more recently Austin Energy for primary placement utility accounts. In the end, the psychology of choosing NCO is not unlike the old expression, “No one ever got fired for hiring IBM.” The company simply has so much momentum in the market it would take much more than one especially vindictive state attorney general to throw this train off its track.

In Washington, D.C., the net effect of the transaction nominally enhances NCO’s position on Federal contracts. Long a stalwart performer on the U.S. Department of Education debt collection contract and well-positioned to eventually compete for an award from the Internal Revenue Service should the program continue, NCO’s ongoing rivalry with OSI was never really a direct threat to the former in the nation’s capitol.

If anything, OSI’s elimination from the competitive landscape helps other vendors at the federal level even more than it helps NCO—by creating one more slot on some contracts to be filled by another. In addition, the OSI acquisition adds entities like the Army & Air Force Exchange Service and the U.S. Department of Health and Human Services to NCO’s list of federal clients.

Nick Bernardo can be reached at Net Gain Marketing at 877.533.1680 ext. 701.