Common sense tells us that if someone is selling a product that costs “X” amount of dollars to produce, with a consumer market that will only pay “X” amount of dollars for their product, then at some point the product would reach a cap on the amount of profit it would be able to produce. Without expanding their market by selling more of their product or by raising their prices, they must at some point reach the ceiling on their profits.
Picture the insurance company as a business that sells apples. They just sold 1 million apples at a profit of 50 cents per apple, netting $500,000 dollars. Now if the apple company wants to make $1 million, they would either have to sell twice as many apples – or make $1 profit per apple. Raising the price will price themselves out of the market. So, in the past, the approach has been to lower the cost of the apples they purchase by negotiating a better purchase price, creating larger profits.
Now, imagine that the collision industry as the apple growers. We need to sell our apples, so we’ve lowered the price of our apples to where there is nothing left to give. Now our apples are being sold for less than it costs to produce them. Things have become so desperate that many have conceded to selling rotten apples to some insurers who are happy to buy them.
As long as the price is right, insurers will try to pass it off as a good apple. When the policy holders realize that they received rotten apples, the insurers pass the blame over to the growers, saying they’re not our apples, we didn’t grow them.
What has worked in the past for the insurance companies will no longer work in the future. They can no longer use the same cost cutting methods to guarantee their profits. As shop owners, we are desperate to hang on to what small profits we have left and can no longer concede to additional discounts. Times are changing and insurer’s profits will be something that will diminish unless they find another way to generate their increased profit. If we cut our quality and sell customers rotten apples, we will be the big losers.
We hear about running “lean” and lean is good, but what is my purpose for going lean? I can only cut wages and processes so much until my product gets compromised. If I am running leaner, it should be to put more profit in my company, not to guarantee the insurer’s profits. At what point will the insurance companies realize that they have bottomed out; there is nothing left to cut. Maybe their profits have maxed out. I have heard it said that the insurance companies will continue to take and take until we say no. I believe this is true.
In the past, insurers increased their profits by cutting their costs and moving many expenses over to our side. The DRP system today has saved insurers billions of dollars by reducing their cost attached with handling a claim by over 50%. DRPs are a good thing for insurers, but not always a good thing for the repair shop.
There used to be two types of shops – those with DRPs and those that wanted them. Things are quite different now. Many top shops are becoming choosy with whom they do business. We will no longer cut our costs unreasonably or be forced to compromise the quality.
Many shops are drawing the line as I have. If a shop continues to cut their quality to save the insurer money, at some point the customers will become unhappy. Then the insurer will take this opportunity to drop the shop from their program and it will be too late to salvage what little reputation they have left.
In 2005, I found myself with 9 DRPs. We were so inundated with DRP processes that we forgot about our customers. We were watching our reputation go in the toilet and there was little we could do. We were so concerned about cycle time that we were more worried about how we looked on some report than what our final product looked like. The pressure level was over the top and our profits were decreasing. Our shop repaired so many cars that we couldn’t imagine we weren’t making money. We believed the insurers were our partners and they were all good to have, the more the better.
After running some numbers, we found that we were not making any money on two of them and the third one was barely turning a profit. I decided to rethink my relationship with these DRPs (the biggest losers, speaking of profit) and within two years I had three less DRPs. My sales dropped from 7 million to 6 million but my profits were up – not substantially but up nonetheless. My company was easier run and things were instantly better. Our labor rates increased $7 per hour to those companies same companies. Cycle time wasn’t even an issue because we no longer showed up on their reports. Things were definitely better.
We continued to move ahead with our business plan and started treating the customer as our customer, the insurance company as a valued client, and we began to rebuild our reputation. We still have some DRPs that are easy to work with, our sales are back up to over 7 million and our CSI is at 9.76%. Our reputation has been completely repaired.
The squeeze is over for us. Even though I really value those remaining accounts, I’m not afraid to part company with any of them who might ask us to do something that is unreasonable, like compromising the integrity of a repair or failing to recognizing the Procedure Pages.
Their old tactics will no longer work because there is nothing left to give. It may not be cost effective to argue over 3 tenths of an hour, but, as the old adage says “Give them an inch and they will take a mile.” I’m certain that if I allow them to get away with anything, they will try to take advantage of me. I will never allow this to happen to me again. I offer an honest repair and great customer service. If they don’t see the value in this, then shame on them.
If the insurers want to see their profits continue to go up, then they need to find another avenue. Maybe it is time that they start lobbying for a price increase, or start searching for new business. Maybe they should cut back on their TV advertising or try “Going Lean” themselves. But it is ridiculous for them to think that they will be able to cut more and more from shops to reach their profit benchmarks. There is just nothing left to cut.
We must start using common sense in regards to our dollars and cents. We forego our better judgment when it comes to estimating our vehicles. We’ve even tried calling our estimates a series of different names like damage analysis, visual damage inspection, and so on. No matter what we call them, our estimates need to make us money. You cannot remove everything profitable from your estimate and stay in business. Why would you want to?
In business for over 29 years, Lee Amaradio, Jr. is the president and owner of “Faith” Quality Auto Body Inc. in Murrieta, California. With 53 employees, he attributes his success to surrounding himself with good help, with some of the best office staff and techs in our industry. Amaradio has been in this industry long enough to see the handwriting on the wall. He feels that now is the time for us to unite as an industry before it’s too late. He can be reached by e-mail at firstname.lastname@example.org.