What is your primary method for keeping score of your business performance? Like the rest of the world, it’s probably your accounting system, your financials. It’s the same way for everyone. Whether you’re in a 20 Group or just casually share information with friends, it always comes down to the same things: sales, gross profits, overhead costs, etc.
But there’s something about the process that’s a little misleading. You know what I mean. It’s when you hear someone talk about some number that sounds great, but you’ve been to that person’s shop, and so you really know the deal. You know the work is either questionable or the people are miserable or whatever. You know the shop is really not as good as the numbers sound, and in some cases, it’s the other way around – the numbers are worse than the shop appears to be. The point is that the business numbers we use somehow don’t always accurately reflect what we know about a business, maybe even our own.
By the Numbers
Financials have been used to keep score for businesses for centuries, and here’s what we know about scores: They’re used to indicate a winner or loser or position among a group. These scores are a snapshot of the past and inspire some sort of goal or target for the future.
But there are two potential problems when you look at numbers this way. First, since these numbers represent historical outcomes, derivations of these outcomes aren’t represented. In other words, how you actually calculated the number isn’t shown. This is like driving by looking in the rearview mirror – turning the wheel by noting where the car previously was, and hoping you don’t hit anything in front of you.
This is dangerous and inefficient, but financial folks are taught that this is exactly how you make changes to a business. Materials margins are too low, so let’s find cheaper paint (impossible to know if that’s a good decision).
Second, and most importantly, the system of scorekeeping used in the collision repair business has been borrowed from folks playing a completely different game.
When you look at the history of accounting, you’ll find that the need for recordkeeping came from the earliest businesses that had the primary function of either making or selling things. The recording systems we use today are primarily derived from these types of businesses, retail and manufacturing.
Let’s take a look at these businesses for a moment. In manufacturing, what’s important is 1) how much they can sell and should sell (predict sales), and 2) how much it costs them to make these things. In retail, it’s very much the same, just one level down the chain and closer to the end user: 1) how much can they and should they sell, and 2) how little can they pay for these things (costs of goods sold). Both businesses also have to deal with their overhead expenses.
When it comes to scorekeeping, these businesses look a lot like a simple math equation: A + B = C, or sale plus cost of goods = profit. In this scoring system, improving your position looks very much like changing one or both of the variables, sell more, cost less or both, so that the outcome (profit) is increased. It’s simple math, but there is a danger because how you go about changing A or B isn’t represented clearly enough to ensure it will always have a positive effect.
For these retail and manufacturing businesses, this model works. If you look at these businesses’ value propositions, you’ll see that they match. For these organizations, their “value” to the customer looks like their ability to provide the right goods in the right way, at the right time, for the right price.
Much of what you have to do here to effectively deliver this value is based on changing costs. The financial records these folks use look like revenue (by category), cost of goods sold (by category) and overhead costs, ending in remaining profits. Pretty familiar, right? In fact, this is exactly the same system we use in collision repair.
Who We Are
Now let’s look at who we are. First, do we make things? Second, do we sell things? Well, kind of, I guess, but we are not a retailer. We only sell the things we must purchase (parts, paint, etc.) to be able to do what we do, which is fix cars. So unlike a retailer or manufacturer whose success stems from improving the ability to sell more and pay less, our improvement comes from cultivating our ability to fix. In that, we have quite a few different things that are critical to our success.
Whereas a retailer must market to consumers to convince them to buy its product, we’re in an “as needed” business. The entire service business, in fact, is based on this principle. We can’t predict the demand because it’s caused by many different factors. We honestly don’t know what the conditions that cause accidents will be like next year or even next month. In fact, for nearly every one of us, the entire revenue we’ll take in next month is tied to consumers who don’t have a clue they’re about to get into an accident. We’re in a prepare and respond business.
It’s true that great marketing can better prepare us for work that may come in, but as many shops have shown and many marketing people know, getting all that volume to the door does not directly lead to better business performance. In many cases, things only get worse. The real key is to improve our capability to fix, and that doesn’t necessarily mean fixing more cars but fixing them more efficiently.
So how does this tie in to financials and scoring? The point to consider here is this: If you’re using a scoring system that’s designed for retailers and manufacturers, and you’re neither a retailer nor a manufacturer, how can you possibly get any better or win?
What’s the right way? It’s hard to say. Truthfully, no one has yet created financial recording methods that specifically apply to the service industry, let alone ours (on a largely accepted scale). Just as important to note is that financials shouldn’t be used to create improvement anyway because they don’t show you the real problem. The profit and loss statements and balance sheet formats that exist today and are used by most of us are wrong and worthless in our business. Stay tuned for another article from me someday on what the future of collision repair accounting looks like.
Personal Productivity Index
Let me introduce you to a productivity index I’ve created. I define it
as “the amount of resources required to produce a specific amount of
value.”
Start by figuring out your amount of resources. This includes all the things required to perform the “fixing.” I define that as:
• Cost of labor (Payroll + Benefits + Employer Taxes)
• Cost of Tools/Equipment Used
• Cost of Energy Consumed (specifically in the fix area)
• Cost of Space Used (fix area)
This is not just cost of labor but the true amount of cash spent to be
able to provide the value that your customer is requesting. The reason
you must include tools, energy and space is because you could improve
your “productivity” by purchasing new equipment or using more energy
and space, but in the traditional measure of labor GP as a reflection
of productivity, these costs would be missed and the real cost would be
hidden. The opposite is also true: Labor costs could increase, or
energy costs decrease, or any combination and productivity could
improve.
Next, define the “Value” produced. Again, the thinking says “fixing the
car” is what we’re paid for or where the customer sees our value. So
total sales or revenue is not the important measure. If they pay us to
fix the car, then really what they’re giving us is cash for our “fix”
labor plus a handling fee for buying the parts, materials and sublet
we’ll buy and pass on to them. Again, because we’re not retailers, our
customers don’t come to us to buy parts materials and sublet, they come
to us for our ability to fix their cars. These other items are just
coincidental and need to thought of that way, as long as you believe
our value is in our ability to deliver the right repair at the right
time for the right price. All this really does is put your thinking in
the right frame of mind so you can focus on improving your business.
Here’s the math for measuring value:
Total labor sales = Labor sold + profit from parts, sublet, materials
The last piece is pulling this all together in a simple workable
format. The measure calls for a specific amount of resources for a
specific amount of value. How do you specify? Start with value. There’s
a relationship between an amount of labor your produce (call it an
hour’s worth or a specific dollar amount) and the amount of parts,
material and sublet profit (on average) associated with that unit. For
example, for every $100 worth of labor, you may have 20 cents of parts,
sublet and materials profit. You can easily figure out your number, but
it becomes a factor that the labor unit is multiplied by (in the prior
example, 20 percent).
Here’s an example:
Cost of Resources
Cost of Labor (full) – $1,500 day
Cost of Tools – $400 day
Cost of Energy (shop) – $200 day
Cost of Space (shop) – $400 day
Daily Total – $2,500
Value Produced
Labor sold today – $3,000
Profit (parts, materials, sublet) factor 20% – $600
Daily Total – $3,600
Value (minus) Resources / Value = Profitability Index
$3,600 – $2,500 / $3,600 = 30.5%
So what does this number do? Well, it’s a little like the old GP
number, but it includes a lot of the old overhead costs that better
reflect what it costs to get the work done. It takes the focus off the
top-line sales number which, because of the largely variable mix of
parts sales on jobs or by seasons, is not a good indicator of
profitability.
A Better Way
The problem lies in the practice of using the commonly accepted A + B = C financials as a collision repair business’ score. The goal remains to improve the score (outcome), but the execution detail (information) is missing. Unlike the retailer-manufacturer, controlling price and costs of goods gives us no competitive advantage. We’re only better than our competition when we improve our ability to fix cars. This is our value to customers. They pay us to fix their cars, not sell them stuff. I’ll define our value to the customer as “our ability to provide the right work, at the right time, for the right price.”
Looking at out typical financials, how do they tie in to tracking our ability to deliver this? For example, look at the measure of gross profit (GP). This is clearly an important measure to total business profitability, but does improving GP improve our value to the customer? Does reducing our cost of labor to increase labor GP better provide the right work at the right time for the right price? Does reducing our cost of parts, materials or sublet do that? The best answer is only maybe. You just can’t directly tell. The point is that your accounting system doesn’t carry much information about real improvement opportunities, just data about how much money you made. Since the goal is always to make money, too often this information is used as a rearview mirror in which most gaze, attempting to steer their organization toward success.
What’s a better way? First, break the problem down:
Q. What are we trying to do?
A. Better serve the customer so that we generate more cash.
Q. What do they want in exchange for their money?
A. The right work, at the right time, for the right price.
Q. What measure can reflect our ability to do this?
A. It’s something around our ability to be productive, to be readily available to do the work, to do the work in the proper way and to do it very efficiently. It’s a measure of real productivity. What’s needed is a measurement that reflects the specific amount of resources required to produce a specific amount of “value.”
How often do you or your stores chase a revenue number, only to find the chase led to poor profitability decisions? Most important is that now you have a true number that ties specifically to our ability to fix. It doesn’t matter where you stand against your competition, but it does matter where you stand against yourself. If this productivity index is understood by your entire team, and isn’t simply a reflection of how much you spend on labor, your entire team can get behind the concept of continually creating organizational improvement.
Everyone can see what affects this number; they can be part of making proper changes to the work so that when executed, the entire organization gets better. For the first time, a relative organizational number exists that everyone understands and feels responsible for. It’s a perfect starting point and reference point for continual improvement.
Seeking Improvement
In our business, improvement isn’t reflected in our ability to sell. There are a whole lot of shops out there with huge top lines that aren’t making a dime, and old accounting methodologies are the culprit. They just don’t present the right information. For us, the key is in understanding the resources required: value produced ratio. When we begin to improve the ability to fix cars, or our productivity, we begin to better serve the customer.
Remember our value proposition: “The right repair, at the right time, for the right price.” As we better serve customers in this fashion because it’s specifically focused on what they want, the result is a much more profitable and sustainable business.
So what does this say about the future? First, as lean organizations move their focuses internally to the things that they can truly control (not the available volume of work but how effectively they produce the existing work), they’ll begin to set new levels of productivity performance. Every industry that has successfully implemented lean has experienced a 300- to 400-percent improvement here. That means that these shops can produce three or four times the amount of work as you with no additional expense, or can produce the same amount as you with three or four times less cost.
Trust me, this is happening right now. If you’re a technician and you’re thinking about the old flat-rate system and going to where the work is and where the cash-in model has legs, think again. In a few years, as more shops finally “get it,” your ability to crank out work at the old flat-rate, high-cost method will quickly become a major liability to an organization, not the benefit it is today. The only place for you will be the unprofitable, old fashioned piecework environment, and the math shows that kind of business can’t compete much longer.
When things feel out of control, they usually are. There’s one simple solution: Stop trying to change what you have no control over and focus on what you do have control over. You must begin by facing inward and asking, “What’s really wrong here?” Next, stop accepting that what you know and have been taught is correct. You must begin to question everything – there’s absolutely nothing to lose. Ask yourself five questions:
1. Where are we trying to go?
2. Where are we now?
3. What are the obstacles we must overcome?
4. What’s the next step we’ll take?
5. When can we go see what we’ve learned so we can ask these questions again?
All you can control is you, and those who understand this will win. We must stop becoming more like each other and start becoming more special and individual. If we don’t create the future, the insurance industry will do it for us. The future can be a win for all parties, but we have to take the high road and create in spite of the insurer-driven adversity we face. Start changing today.
Contributing editor John Sweigart is a principal partner in The Body Shop @ (www.thebodyshop-at.com). Along with his business partner, Brad Sullivan, they own and operate collision repair shops inside new car dealerships, as well as consult to the industry. Sweigart has spent 21 years in the collision repair industry and has done everything from being an independent shop owner to a dealership shop manager to a store, regional and, ultimately, national director of operations for Sterling Collision Centers. Both Sweigart and Sullivan have worked closely with former manufacturing executives from Federal-Mogul, Morton Thiokol and Pratt & Whitney in understanding and implementing the principles of the Toyota Production System. You can e-mail Sweigart at [email protected].
