Tuesday, 31 May 2005 10:00

Hidden financial crisis in the collision repair industry

Written by DJ Styles

Following are excerpts from a book that the author says will be published this summer: "Wrecked!" - a "tell-all" book about the collision industry. The author promises the book will explore innovative solutions and alternatives for shop owners to consider as a means of improving their probability for financial success.

The facts presented and opinions stated are those of the author and not of Autobody News.

Presented here are a few edited excerpts from the book that discuss how the industry got to the situation it is in today.

In light of the recent collapse of M2 Collision, where 27 shops in California closed their doors over a weekend, many are questioning the economic viability of other consolidators and collision repair businesses in general. Unfortunately, the M2 story is not isolated. 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.

Based upon several years of uncontrolled dumping, unfair competitive pricing practices, and illegal steering, the collision repair industry is now in an economic crisis. Unlike past cries by independent repairers, this financial crisis is not just a reflection of a maturing market or an evolving industry.

One could theorize that the fact that thousands of collision businesses are closing their doors due to an inability to earn a living is the natural order of survival of the fittest. However, upon closer examination, one may find that the business practices of a few converging entities have created an economic reality that will no longer support 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.

Industry experts point to the obvious fact that there is an oversupply of repair outlets for the amount of work available as the root cause of the current crisis. Many even welcome the pending implosion of the industry and the collapse of thousands of collision repair businesses. But, before a hasty conclusion is drawn, we must find out if it is, in fact, the survival of the fittest or if the burden is unfairly and selectively afflicting other segments of the market.

Upon close examination, one can see 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 facts are hard to find and the cause and effect is a shocking essay of lying, cheating, stealing and deception on a massive scale!

Inaccurate information has been spread far and wide by the influence peddlers. Ineffective industry leadership has further left the illegal, unethical and illogical business practices shrouded in a camouflage of deceit and ignorance. Purchasing agreements lock shops into dead-end deals resulting in no profit and poor performance. Insurance practices coerce businesses into illegal and fraudulent activities. Mandatory systems used to bill and manage are biased and tilted toward the buyer leaving the seller with inaccurate information and inadequate compensation.

The end result of all this is that collision repair businesses by and large are operating on low or no margins, not even covering cash flow in many cases. The businesses have been devalued in the process to the point they are worth nothing, while organization after organization with their mandatory products and services siphon the last dollars from the shops.

Insurers control

Insurers are doing their jobs well - saving money and increasing profit margins and stock value for their shareholders. The same cannot be said for the body shop team! During the last five years of recession, insurers have had the upper hand in the negotiating process. The excess capacity represented by 50,000 shops and a decreased demand based upon lower claims allow insurers to negotiate from a position of strength. They are able to gain ridiculous concessions from desperate repairers based on the premise of directing work their way. This, of course, is invisible to legal authorities in most states that have anti- steering laws.

Repairer businesses that grew with the market of the late 1990s found themselves with large capacity and not enough business to fill it. Adding insult to injury, the best shops have learned to repair and process vehicles faster and more efficiently complying to "cycle time" demands. The net result is that they have even greater capacity and a greater need for more work. To fill their large or multiple locations repairers have had to cut deals or phase out. They have also had to compete with consolidators that have been willing to repair for concessions of over 10%.

Rumors suggested that before their demise, M2 was offering some insurers a 15% rebate in exchange for continuing to steer work their way. Unless they had found a secret that was never revealed, they were already working at a loss. Their willingness to work at below real cost fits the description of "dumping" - a practice that is illegal and the basis of numerous trade wars between competing countries.

It took nearly seven years for M2 to finally hit the wall. During the years they worked for free or at a loss, thousands of independent shops that were not part of M2 had to comply with similar rules, concessions, pricing and payment demands, slow payment, alternative parts and more. The negative economic impact was not isolated to the party that instigated the bidding war.

Probably the most ridiculous business practices of insurers are their counter- intuitive requirements. Some insurers want work brought in on Mondays and out on Fridays to avoid rental costs over the weekend. This practice could not be more counter-productive for shops and workflow, as well as customer satisfaction.


Another example of insurers' foolish business practices is how some want parts repaired versus replaced in an effort to lower their costs in one area. Simul-taneously, they complain that the cycle time is not faster - obviously neglecting the fact that repairs take longer than replacement!

Still, another example of insurer illogical business behavior is the requirement to install used and aftermarket parts that - more times than not - cause major delays. But that is not even the worse part of that scenario.

Consider that while they demand or at least encourage shops to use a greater and greater percentage of used and aftermarket parts, they put a cap on the profits that can be earned and eliminate any incentive the shop may have had to use them. It might make more sense if the insurer was saving money by capping the profits a shop could make, but they don't!

The real story of insurer control and the threat to collision businesses is their ability to direct or steer work. The very fact that they can make an agreement with a shop to direct work is proof of their questionable actions. In most states, it is against the law to steer the work. Insurers claim they are giving the consumer choice and use careful work tracks to ensure the insured and claimants go where they want. This includes use of rental cars and so much more.

Insurers' ability to steer the work allows them to negotiate from a position of overwhelming strength. According to some interpretations, their practice is illegal from more than one point of view. Besides anti-steering laws that seem to be unenforceable or perhaps not enforced, these practices clearly violate Fair Trade Practices (FTP). FTP laws strictly forbid actions that set prices, pay different prices in different areas without a differential basis, interfering with the normal flow of buying-selling, using deceptive wording or other practices that unknowingly influence consumers toward one business versus another, and doing business on a selective basis related to a grouping of business. These practices are all considered illegal and actionable, but so far have been virtually ignored by the courts and tort lawyers.

The impact of the insurer's ability to influence the consumer is enormous. Unless they have an alternative means to influence the consumers on a local basis (consumer marketing and customer retention), the shop is essentially helpless to gain volume if the insurer does not turn on the spigot. They in turn do not need to turn on the spigot without quid pro quo or mutual consideration. This would be an old-fashioned arrangement above reproach if it were not illegal! Regardless it is the way business is done in the collision repair and claims industry in 2005.

Recently, many insurers have been reducing the total number of shops with which they have a referral or preferred arrangements. What criteria will they use to select those to remain on their program? Will it be a surprise if this starts yet another round of concessions, reduced income or additional costs for the repair business?

Another more disturbing trend is the ability of insurers to leverage the shops influence in their favor. The obedience of the so-called independent body shop is nearly endless once they become dependent on the volume from the DRP. In California, insurers have pushed for the passage of several bills that would be disastrous for shops, using their leverage to keep their "vendors" silent and compliant, even those in leadership roles. Shop owners operate in fear of reprisal. They could be wiped out if they took a stand that an insurer-partner thought to be inappropriate.

Accepting that there is a crisis

Only after everyone in the process accepts the fact that there is a hidden financial crisis in the collision repair industry can corrective action be taken. Everyone must face this reality and acknowledge their contribution. Then and only then can the crisis at hand be honestly and accurately explored and solutions discovered. Perhaps, it is time for a collision and claims industry intervention instead of another convention!

The author, DJ Styles, describes himself as "an industry observer for over 20 years providing undercover exposés on various aspects of the collision industry."