The Department of ED RFP – ARM Companies are in Scramble Mode

Tim Bauer

Three weeks ago insideARM wrote about the latest developments in the Department of Education (ED) Debt Collection Services RFP. Now that the holiday season is over it is time to examine the impacts of that news. Interested companies are in full-fledged scramble mode.

Initial questions were due on December 21^st. Most industry people expect ED responses to those questions by mid to late next week, leaving just 1 week to complete a response to the RFP under the current timeframe. The current response date is January 22, 2016 at 5:00pm EST.

In addition to simply writing the response ARM firms are working overtime on related matters.

Sub-Contracting Requirements

The ED sub-contracting goals are spelled out in the RFP materials.

In addition to laying out other requirements related to subcontracting, the newly-released ED solicitation requires bidders to “list all subcontractors.”  It appears that this provision requires bidders to pre-select subcontractors and name those within their response.  Failure to receive a rating of “acceptable” in the plan to meet sub-contracting goals may jeopardize a company’s eligibility for a contract award.

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As a result, any firm looking to obtain an “acceptable” rating in the subcontracting goals is talking to any and all potential subcontracting possibilities.

Building the “Resume”

One important aspect of any RFP response is showing the expertise to handle the work. The ED RFP is no different. Companies serious about the ED RFP are looking to beef up their “resume.” The company resume can be enhanced by PEOPLE.  If you are an individual with significant Operations experience in collecting federal student loans you are in demand. Serious companies are looking for experienced talent. However, if you are an individual with such experience you would be well served to have an agreement with a potential suitor as to your fate in the event the company is not successful in their attempt to gain the contract.

Why the ED contract is important

A contract with ED (or a sub-contract with a company that gains the ED business) is still one of the most coveted contacts in the ARM industry.  For the successful company an awards will have a Base Ordering Period of five (5) years with a single, five (5) year Optional Ordering Period. That is significant. Additionally, in spite of the recent and expected future fee reductions, the ED work has been very profitable for companies. It will be profitable in the future. Finally, the volume (number of accounts and balances) of student loans continues to grow. The business is very desirable.

Risks – Front Loaded Costs and Expenses

Though the ED contract has historically been quite lucrative in the long run, there are associated risks.  Depending on a company’s current IT and physical security infrastructure there can be significant up-front capital expenditures required.

Second, because the bulk of the potential fees (typically 65-70%) are associated with rehabilitation efforts, revenue is delayed 9-10 months after initial work efforts on those accounts. Thus, the typical ED contract is not profitable until rehabilitation revenue begins in earnest. This is often referred to as the “ramp-up period.” During the ramp-up period expenses (primarily wages) will dramatically exceed revenue. As a result, the ED contract is not profitable during that ramp-up period.  A company must be willing to operate that segment of the business at a loss during that time frame.

Timing

insideARM has spoken to several industry “experts” on the ED business.  The responses to the RFP are due on January 22, 2016. Few are confident that date will not be changed.  The initial solicitation began in 2013. Two years later it was cancelled and replaced by the current RFP.

It is unclear how many responses ED will receive from this RFP. More than 40 companies had made their way to Phase II of the process before the initial RFP was withdrawn. One would expect a similar or greater number of companies responding to this request.

It will take time and effort to go through the responses.  We have been unable to obtain any consistent “guess” on the timing of any awards.

Finally, once any award announcement is made it is likely, based on prior history, that there will be protests filed by a company that did not receive an award.  Protests could delay the placement of new accounts for an extended period of time.