Monday, 31 October 2005 09:00

Analysis of the financial crisis in the CR industry

Written by Dick Strom

"The Hidden Financial Crisis In The Collision Repair Industry," an article written by D.J. Styles (penname) (Autobody News, 6/05), presents an insightful account of some of the practices that have rendered the collision repair industry increasingly profitless, practices which the author contends also led to the recent collapse of the consolidator M2 Collision. 

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Shops understand that through various forms of mismanagement many independent repair shops that once flourished will falter and be forced out of business. But with the supposed capital, business savvy, and influence with insurers that most of us associate with consolidators, it's unthinkable that a large franchise or consolidation of shops, with all their connections, could fail.

In the above mentioned article, to which I refer here, Styles reminds us that, "Literally thousands of body shops have closed in this last year, and several thousand more, including other consolidators, are on the verge of a financial restructuring, or worse… (in large measure because) the business practices of a few converging entities have created an economic reality that will no longer supports the operation of a collision business that complies to all of the required standards. Worse yet, many of the obstacles to profitability are creating an environment that will not even support repairs performed to pre-accident condition."

Insurer interference

Styles is right on target in describing how increasing insurer interference in the collision industry has caused a state in which "…it is not the ugly backyard body shops that are not complying with the industry standards, and therefore failing. Ironically, the hardship is borne foremost by those that do comply - the independently-owned and professionally-operated collision repair businesses that provide repairs according to pre-accident standards. The cause and effect is a shocking essay of lying, cheating, stealing and deception on a massive scale!"

He lists sources of problems that, cumulatively, have contributed to the financial crisis in which most collision repairers find themselves:

• Inaccurate information that has been spread far and wide by the influence peddlers.

• Ineffective industry leadership which has left the illegal, unethical, and illogical business practices shrouded in a camouflage of deceit and ignorance.

• Purchasing agreements that lock shops into dead-end deals that result in no profit and poor performance.

• Insurance practices that coerce busi-ness into illegal and fraudulent activities.

• Mandatory systems used to bill and manage that are biased and tilted toward the buyer, leaving the seller with inaccurate information and inadequate compensation.

• The above has resulted in collision repair businesses operating on low to no margin, not even covering cash-flow, in many cases.

•This has resulted in the devaluation of collision repair businesses to the point they are worth nothing, from which organization after organization, with their mandatory products and services, siphon the last dollars from the shops.

Misinformation abounds

How often, at a trade function or exposition, such as NACE, have we heard tool vendors spout off absurdities such as, "Your lowest paid employee can set up and measure any vehicle on our frame rack, and do it in just 15 minutes!" We may fume at this outright lie in his enthusiasm to sell tools or products, but the real damage these mongers do is in sowing such lies to the many insurance representatives who pass by their booths that, giving them the benefit of the doubt, are looking for ways to cut the costs of repair and possibly don't know any better.

Multiplied vendor lies and/or misinformation soon become that from which insurer estimates are compiled - to the shops' disadvantage. Such misinformation by tool suppliers, paint and material vendors, crash parts suppliers, crash data program compilers, loose-lipped association and industry "leaders," and the like, have set the stage for serious insurer hacking of shops' estimates.

Styles gives a typical example: "Numerous presentations by leading vendors and consultants wanting their 15 minutes of fame at industry events have been filled with inaccurate information that has helped to hide the crisis. At several CIC meetings and industry advisory group meetings, erroneous facts were shared that… insurers and vendors in the audience take as gospel, and make critical judgments and demands based upon it, leading to a further erosion of profits and business value."

Styles points out that such misinformation presented in a recent database and estimating system advisory meeting attended by insurers and vendors, incorrectly led those in the audience to believe, "…the average operating overhead of the body shop was approximately 25%, and therefore the shop (in the example presented) made reasonable profits. However, if the correct information were used, it would illustrate that the average shop's overhead is nearly 36%, and therefore the shop would have an operating loss!"

He continues that in another CIC meeting a poorly informed industry consultant stated, in so many words, that the decision to repair or replace a panel or part is based, not upon the most appropriate and proper method of repair for the vehicle, but purely upon the most economical method. Such misinformation is a great disservice to the honest exchange of communication between insurers and shops.


Paint programs

Additionally, paint company programs supposedly designed to help shops make profits and produce better repairs often spread misinformation and foster alliances that are more detrimental than good to the collision industry. PPG's LYNX Network is one that, having wreaked havoc in the glass industry - in diminished shop profits, increased dependence of that industry on DRP-type networks, and the like - is presently developing the same in the collision industry (read "Through the Looking Glass… Head First?" (BodyShop Business 2/05). In my opinion, when their past record is scrutinized and all the facts are weighed, it's quite a stretch to believe that the primary purpose in venturing into networking, PPG-LYNX being one such, is to make shops more profitable.

To prove his point that "Shops have lost their profit one line item at a time, and one department at a time" Styles points out that while the sale of crash parts makes up a greater percentage of the repair ticket than ever before, insurer pressure to use a much greater number of used and imitation parts of diminished parts-profit for shops, capping, and such practices, has increased cycle-time, rental car costs, greatly complicated the repair process and, in the end, also increased insurers' costs of repair.

Paint and materials take a hit

Shops' paint and related materials profits have also taken a hard hit. DRP contracts and insurer interference in our business have severely stifled paint-related profits. In my shop, we have chronicled that PPG-Ditzler paint-related materials have risen around 8.5% each and every year - nearly 1% per month - for nearly the past two decades. Meanwhile, insurers continue to press for continuing the archaic use of a paint material multiplier based on a severely deflated hourly labor rate (that is seldom allowed to be raised), which labor profit margins, according to experience, are far lower than they were even a few years ago.

Insurers have also stretched out their payment-to-shop policies, stretching them often to a month or more, leaving shops scrambling for capital to cover monthly expenses, while the insurer collects more interest on the money they owe shops. And the collision industry is disadvantaged to most other industries in that we can't even depend on a consistent flow of work, making it difficult to keep key employees and pay bills on time.

Styles points out that one of the biggest failures for collision repairers is that of "set door rates that apply to all shops in a market area, regardless of the shop's compliance to the default standards within the industry. These do not reflect better services, faster processing, additional equipment, higher standards of repair, additional training, equipment, or even higher customer satisfaction."

Deducing the obvious - that shops would profit more, under the present system of reimbursement for services rendered, by not investing their money on any of the expensive business practices and standards, since all local shops are paid the same regardless of their excellence or lack thereof - he concludes, "(Though) Communism has failed everywhere else, it is alive and supported by insurance company practices in the collision repairing industry… The ridiculous estimating and door rate surveying practice has added time, complexity and enormous costs to the estimating process, but has not resulted in accurate estimates, or a lower or higher overall estimate on the same repair… many industry experts have suggested that the estimating process is the single largest cause of the inefficiencies and extraneous costs related to the repair and claims process. It is also seen as the single biggest obstacle to change."

Styles continues that "Rumors suggested that before their demise, M2 was offering some insurers a 15% kickback or rebate in exchange for continuing to steer work their way… Their willingness to work at below real cost fits the description of "dumping", a practice that is illegal and the basis of the numerous trade wars between competing countries."

When certain Direct Repair-type shops work for free, or close to it in an obvious attempt to smoke competing shops, the ripple effects are also felt throughout all independent shops across the country. One shop's attempt to gain volume for discounted prices is used by insurers to leverage all surrounding shops to comply, if these want to continue doing business with these insurers. The net result of this downward spiral is that good shops turning out quality repairs are forced out of business, along with insurer-compliant shops and consolidators such as M2 that have initiated and perpetuated the downward spiral. The end result can only be a diminishing of the mythical "industry standard" of repair, and a slack attitude toward ensuring vehicles are repaired accurately, with safety as a prerequisite.

Some third-party administrators are busily establishing networks to attract insurers for enormous quantities of cut-rate work steered to the collective doors of certain network shops that play their game. Various entities of the OE are beginning to play the same stupid game with us, as are those who produce the estimating systems we use. Whether such arrangements are legal or not, which remains to be determined, hasn't hindered their ever-increasing razing of the collision industry.

Enforce the consent decree

If the 1963 Consent Decree were enforced, according to its wording this still enforceable document would render, among other collision industry maladies, all collision databases and their related estimating systems illegal and unusable. Though each of the current estimating systems caution that they are nothing more than a general rule of thumb for compiling general estimates, and not to be taken as absolute, these have become in insurers' hands a tool to tweak, manipulate, and otherwise use to their own advantage, at their own will, to force compliance of the many shops that don't know any better… and in turn, to reduce the profit margins of all other shops.


Ironically, insurers must understand that though they have gone to great measures to severely limit their payout for repairer services, the Property/Casualty arm of the insurance industry can't continue to exist without shops to repair vehicles. And, for the record, though insurers have put on a great poker face in such insurer-owned shop schemes as Allstate/ Sterling, they have no intention or inclination of expanding any farther into the unprofitable world of collision repair than they need to keep independent repair shops "barefoot and pregnant."

Enough blame to go around

I certainly wouldn't presume to lay all the blame on insurers. Like Judas of old, insurers just hold the moneybag. They don't produce any physical product; their purpose in existing is simply collecting premiums, reimbursing policyholders and claimants when a loss occurs on calculated risk, and making their investors happy. The control that most insurers exert is in their ability to create a monetarily competitive atmosphere that influences shops to pit themselves against each other in various crooked ways. And in this field of control, insurers have become masters. The real culprit, though, the one that has the power to deliver the collision industry into the 21st century, is the shop.

Here's a perfect example of how insurers, behind the scenes, pit certain shops against others: Recently, we got fed up trying to reason on an intelligent level with a certain insurer robot which has been attempting to take our estimates back into the dark ages. Still compliant enough to work for what we consider a reasonable labor rate rather than estimating in dollars (something which very well may soon change), this insurer rep who has admitted to us that his sole motivation for hacking our estimates is promotion in his company, refuses to pay a penny over what we were charging years ago. For the record, other insurers willingly pay up to $6 more per hour than this one. He hacks every line item we write, and refuses to pay for many of the "reasonable and necessary" items needed for a quality repair.

We invited other local shops to join with us in a face-to-face meeting with representatives of this insurer and their local agents (to inform them what their company is doing behind their back, and how this affects their relations with their insureds), and try to create a workable solution - something that would benefit all local shops. But only one other shop seems interested in participating.

One DRP shop we were hoping would join with us in this effort - the one owned by the still active past-president of our state Autobody Craftsman Association - declined, stating he couldn't because this insurer was one of the many DRPs he depends on. Of course, he isn't losing any money from this insurer, since he writes his own estimates, inspection of which is infrequent at best, being their DRP. But every estimate written by non-DRP shops like ours is critically checked by this insurer, and compared to whatever low standards the local DRPs will limbo before they play the funny-time game.

It is past time our shop dropped out of ACA-WA. This past year I dropped out of SCRS, and our many years of membership in ASA is on the ropes in my book, for lack of meaningful support of shops like ours. It sickens me to think of the many thousands of dollars and countless hours of time we've wasted in these so-called repairer associations that have all along encouraged their members to take part in insurer relationships that pit them against those of us who refuse to prostitute ourselves to insurers through DRP contracts. These don't have the best interest of my shop, or even of the true collision industry, at heart.

I will, however, keep my membership in theCCRE (the Coalition for Collision Repair Excellence) (www.theccre.com, 1- 877-700-7743), the only pure, strictly repair-related industry, national coalition of shops in existent. The CCRE has been and is continuing to accomplish things that are turning the tide on the downward spiral of collision repair as usual. If you are fed up with where your industry "leaders" are taking you… or aren't taking you… join up with the CCRE, and take your part with the many other shop owners who are making this business profitable again.

Dick Strom, Modern Collision Rebuild, 9270 Miller Road, NE, Bainbridge Island, Washington 98110; (206) 842-3621; e-mail: moderncol@qwest.net.