Wednesday, 30 June 2004 10:00

Dropping DRP relationships: the profitability of independence

Written by Dick Strom

As a guest speaker at the North Dakota Auto Body Association Annual Convention and Trade Show recently, it was humbling to note that North Dakota, with a fraction of my state's population and one-forth of its collision shops, had better attendance than did the state of Washington. I found these shops refreshingly positive about their future. I spoke about why shops should seriously consider getting off the DRP-train, and how to do it. Here are some of the highlights of that presentation. 

DRPs - a not-so-bad idea gone sour
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An industry leader's paraphrased comments chronicle where direct repair went bad: "I was working as a staff adjuster with Farmers in 1974-75 when they introduced their 'Preferred Shop' program, and I participated in setting it up. At the time, because of fraud on the part of certain shops, I was convinced this preferred shop program was a good idea. And shop concessions were minimal.

"But the big problem came when, after requiring 'Preferred' shops to leverage expensive equipment and facility updates, insurance industry 'bean-counters' began leveraging their influence, first by requiring junk imitation parts. In my opinion, Preferred Shop programs were a good idea that went bad - bad because of insurance industry bean-counters having 'baited' the shops into financing massive expansions, and then 'leveraging' their position with the shops for the exclusive benefit of improving insurers' bottom line."

Insurers will never, ever place your best interests in front of theirs! Why? Because insurers' core objective (saving money) couldn't be farther removed from your core objective (making money). Work with insurers when you can do so without compromising your integrity and reasonable shop profits. But getting too cushy with them has cost shops dearly, and squeezed many out of business.

One good result of Allstate-Sterling is that many DRP shops have been slapped into reality by the crassness and callousness of this insurer (to date more than ten states have proposed legislation to curb this abuse), and the understanding that other insurers will go the same route if A-S makes a go of it. Faithful PRO shops are having their work diverted to Sterling facilities.

• The visibly shaken owner of a large Midwest shop, heavily leveraged for years into Allstate-PRO work, recently told me that though they had faithfully catered to this insurer, since Allstate recently opened a Sterling facility nearby, Sterling was hauling jobs out of their shop (three good Allstate jobs that very week) to the Sterling facility.

• The only remaining shop in a small Eastern Washington town is experiencing the frustration of having local collision-damaged vehicles shipped 180+ miles round trip to a mega-shop. If these practices haven't yet happened in your locale, count on it: The many shops that have heavily invested in floor space, tools, and employees to meet insurers' promises of increased number of vehicles at reduced costs to insurers can't help but wonder "When will the axe fall?"

An Auto Body Association of Connecticut (May/03) article, Labor Rates Rise-DRP On Decline, states in part that shop owners who in the past had signed DRP contracts with several insurance companies seem to be reanalyzing that thought process.

As one shop owner put it bluntly, "Why sign a DRP contract agreeing to give parts discounts, pay for all rental cars in some cases, and do the job for a lowball labor rate when I can do the same job, negotiate for a higher labor rate, retain all the parts profit, and not have to pay for rental cars if the repairs are delayed?"

The article continued, noting that a large New Haven county shop with 13 DRP contracts, after realizing reduced profits due to insurer restrictions in those contracts, sent out 10 contract termination letters, which immediate resulted in increased gross and net profits for the shop. The article concluded, "Many other shops seem to be making similar changes by removing DRP arrangements that are not profitable, (instead) doing their own creative sales marketing to maintain good business volume - a trend that makes good sense."


8 reasons for dumping your DRPs

Though this may seem like a strange time in the history of collision repair to consider dumping your DRPs, consider what plodding along in the same steadily deepening rut will cost you in the future. Many shops, having terminated their DRPs, are running very successful businesses, while drastically reducing their exposure to liability. Consider the costs of Direct Repair:

• DRP relationships promote insurer control of the repair industry (Duh!).

• DRP relationships enable insurers to pass their liability on to shops (Have you had a competent contract attorney review your DRP contracts? Many shops that have, at attorneys' advice, dropped out of liability-laden DRPs).

• DRPs promote fraudulent cost-shifting in the name of "cost-containment" (How else can shops recoup insurers-imposed cost-containment losses)?

• DRPs are divisive to the collision industry.

• DRPs undermine free-enterprise/ restrain free-trade (The big insurer lie is that Direct Repair actually promotes free-enterprise… Yeah, right!).

• DRPs promote shops' doing insurers paperwork - DRP = "Do R Paperwork" (Survey findings: non-DRP = 2.5 hr paperwork/job; DRP = 4 hr. paperwork).

• DRPs promote more expensive payouts for insurers. An experienced insurance appraiser's comment: "Its pretty much a given for all in the insurance industry, except for the empty suits in the HOs, that DRP shops cost more than non-DRP shops.

So why do insurers continue to promote Direct Repair? First, every other insurer has them, and no one wants to be the odd man out. Then, there are lots of execs that really believe Direct Repair saves them money (upper levels of management are far removed from what's happening on our level).

Also, the HOs depend on statistics to tell them what they want to hear - and stats only say what those compiling them want them to say. Then, there's the mentality of the corporate executives thinking about their careers, not wanting to risk being seen as 'not a team player' by peers. Finally, control is a factor at some levels."

• DRP shops are begging to be hit with serious RICO Act violations. Some sharp attorneys are presently researching the relationships shops have with insurers, pursuant to bringing RICO (Racketeering Influenced and Corrupt Organizations) actions against DRP shops and their insurers. If you doubt this, ask yourself why insurers are writing hold-harmless clauses into DRP contracts, placing all liability on you? (A May, 04 LIABRA article is titled, "Doctors' Right to Sue Insurers for Racketeering is Upheld in Florida Court).

And DRP shops that are hauled into court can expect non-DRPs to be their worst enemy; most non-DRPs view DRP as having stolen untold jobs from them through insurer steering. And don't plan on arguing that you were forced into a DRP (you did so of your own volition). And count on insurers pointing out that you are the collision repair expert, that they only write the checks. So, where does all this leave you?

Keys to shop independence

In the words of a California shop owner, "DRP shops technically have no customers, because if their insurer-partners drop them, there go all their customers to a competitor. All they've really gained is lifetime liability." Because insurers sold jobs for DRP-shops, breeding insurer-dependency, many shops greatly reduced their advertising.

So, increased education of, and marketing to consumers is an absolute must for shops kicking the DRP-habit. One shop owner that went independent told me, "I was on Allstate's PRO program from 1991-99 along with other DRPs. I did what all DRPs have to do - hired additional shop and office help, bought additional equipment, and all the other expenses. By 1999 I'd had my fill of Direct Repair, and dropped them all.

"Since then I've been spending 5-7% on marketing consumer awareness. Computer-tracking everything, 1998, the year before we dropped our DRPs, we had our highest sales but our lowest profits ever. It became obvious this disparity resulted from our contracts with insurers, because the year after dropping them our gross profit and sales increased 4-5%, in spite of the fact that the number of vehicles we repaired had dropped 7%.

"Dropping our DRPs is the best thing we ever did for our business; now we get paid for towing markup and storage, plus a multitude of line-item operations insurers had denied under our DRP contracts."


Get creative in marketing to customers

• Christmas cards, birthday cards, anniversaries, get well soon… You have some of this information on past customers, in your computer. Overwhelm them with thoughtfulness.

• Create ways to get folks through your doors. An independent shop's suggestion: "We look for ways to get people through our doors to sell them on our services. Car rental is one $50,000/year service we provide that keeps our office doors constantly swinging. Most shops don't realize that rental cars are additionally a great way to manage unexpected delays; if the fault is ours, we can turn their rental car into a loaner."

• Create and distribute to everyone passing through your office an attractive line-item card of "additional services" you provide. Ours are attractive, in color, were created and printed in-house, and cost only pennies. And they sell our services like crazy.

• Shop anniversaries. Whether yearly or every 5 or 10 years, promote this event in your local newspaper and business journals. Several of our local supplier businesses have agreed to supply many give-aways for our anniversary this year. Buy a large sheet-cake, soft drinks, candy and nuts. Show potential customers around your shop, sell them on your services, your reputation, and your friendliness and desire to serve them.

• Webpage. This is a must in this day and age. Ours is still under construction.

•1-day/year free oil changes, head- light alignments, bulb replacement, whatever - with any donations given to charity. A local supplier is providing all parts for free.

• Sponsor ball teams, swim teams, plays, horse-clubs, library, performing arts - use your imagination!

•High school scholarships. Our shop name is given a moment of undivided attention by an auditorium full of parents and teen drivers each year at graduation time. Cost? A $300 scholarship for a young person continuing in secondary automotive industry education.

• Contact customers to inform them of automotive updates and service bulletins that affect them. Again, you have computerized information on who owns what kind of car.

• Press releases. Local newspapers and business journals love to print who you just hired, what you just purchased, etc. Press-releases are free, widely read, and keep your name out in front of everyone.

• Inform potential customers of their insured motorist rights. These pamphlets cost little, and inform folks that its their right to use the shop of their choice, that they only need one estimate, etc. Purchase them from your state collision association.

•Write an automotive column for your local newspaper/trade journal. Yes, you can write an informative column that will generate publicity for your shop. The response from mine has been great. Tell them what to be wary of, how to deal with insurers, what's new, what you love about this industry, whatever. It's free advertising, editors love consumer-information pieces, and your shop becomes a household word.

• Advertise in your local Chamber of Commerce newsletter and Val-Pack.

• Do public relations canvassing. Periodically visit insurance agents, automotive service provider businesses, parts houses - anyone and everyone who knows people in need of the services you provide.

• Diversify. It's amazing how many collision repairers can't seem to think outside the box.

•R un a squeaky-clean operation. Honest, above-board relations impress your customers and are not forgotten.

• Seek legal means to stop insurer anti-competitive practices. The Consumer is the key. Without consumers, insurers go broke. Insurers dread the wrath of consumers, and punitive class-action lawsuits hang their dirty laundry out for all to see.

• Network with other non-DRP shops. There is a wealth of strength, great ideas that work, and support, in networking with other independent shops.

One excellent source of independent shops is the Coalition for Collision Repair Excellence (theCCRE) www.theccre.com. CCRE sponsor-members are dedicated to creating an open and competitive collision repair marketplace based on top quality workmanship, rather than on pseudo insurer relationships.

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