I recently ended my direct-repair relationships with two major insurance
companies, each of which brought me gross sales of more than $1 million per year.
You heard me right. That’s $2 million annually I gave up.
Why? Because I could no longer afford to work for them.
It’s time for a change – especially when it comes to direct-repair programs – and that change starts with us.
Becoming a Numbers Cruncher
In the beginning, DRPs were great. We all wanted them, and we were lucky to get them. They helped us build mega-shops and attain success as shop owners that was never before possible. We gloated in our success and became the professionals we always wanted to be. We had more work than we knew what to do with and all was good.
We were so happy that we were willing to do almost anything to keep our DRP partners happy. So when they asked for something more, we were more than willing to give them whatever they wanted.
This trend continues to this day, only now the contracts have become very one-sided. It’s all about what we can give – never about what we get in return. We need some serious changes to our present DRP relationships, but I believe they can be fixed if both sides are willing to work at it.
However, I believe the only way to change things will be for us to force the insurance companies’ hand. Insurers have a good thing going, and they’re going to need to be persuaded the same way a labor union persuades a large employer. We need to unite as an industry.
Insurance companies don’t create claims; they process them. Accidents happen all by themselves. And lower labor rates won’t create work. We have a shrinking market, and working cheaper isn’t going to solve this problem. DRP contracts are going to gravitate to the shops that can handle a large volume of repairs. Too many shop owners think that if they work cheaper, they’ll be handed some huge contract. This will never happen. State Farm proved this by cutting their program in half in some areas. They realized that they were doing 90% of their repairs in 60% of the shops on their Service First program.
So before we can get the insurance industry’s attention, more shop owners need to become numbers crunchers. Look at your profit margins. As shop owners, we need to change the way we think, educate ourselves on our state laws and use these laws when necessary. We need to switch our focus from more cars to regaining control. We have to become better businessmen with profit-driven guidelines.
When an insurance company asks you to participate in a labor rate survey, put your current non-discounted rate on the survey. Don’t think that by showing a discounted rate you’ll somehow get more work. It will only establish the guidelines you’re allowed to charge on the cars you do get – and force other shops in the area to work at a lower rate too.
We continue to do whatever the insurance companies want, and it has come back to bite us. Look at the early years of DRPs. Our discounted labor rates used to be only $2 less per hour than our door rate. Insurers paid us $5 for the photos, let us repair the vehicles using our judgment and processed their own totals. I remember those days. Now my discounted rate is $11 less than my door rate, I’m told how to repair the car and who to order parts from, I process totals for free, pay rental bills and finance them with my accounts receivable, etc., etc. All because we were willing to agree to anything for more cars.
A contract needs to be beneficial to both parties. Our current DRPs aren’t. They’re one-sided, in favor of the insurance industry – and we only have ourselves to blame.
Don’t get me wrong. I’m not anti-insurer or anti-DRP. My shop is DRP-driven, but it’s also profit-driven. All of the work in the world means nothing without profit.
We have got to establish some boundaries with insurance companies. We need to cater to the insurers that want quality and are easy to work with, ones that allow us to maintain a reasonable profit margin. We should write fair, honest estimates with fair labor times. We should help them retain their customers by giving them the best service possible. And we have to educate our customers – the vehicle owners – through advertising and communicate to them who the best insurance companies are. We also need to take a stand against any insurer that wants us to perform a substandard repair.
We must lose the attitude that we need to maintain our DRP relationships at all cost.
As I said, I’ve halted my DRP relationships with two major insurance companies that each brought me gross sales of more than $1 million per year. I found that with one company, I had paid about $60,000 in rental bills last year and the demands were only getting worse. Now I’m getting paid $45 per hour from them instead of $33, and even though we’re now doing substantially less for this company, I’m making more money. It sounds strange, but this account required a full-time manager and took a lot of man-hours to maintain. This insurer processes its own totals now and pays storage of $40 per day. Cycle time isn’t an issue, and their adjuster is in my shop every day. Their loss!
The other company is also a very large insurer that supplied a huge volume for us. But it just kept getting harder and harder to make a profit. Things were very tight with no margin for error. I wrote them a letter requesting a raise, explaining why we required a raise and discussing how I hadn’t received a raise in three years. They responded by telling me that they didn’t think it would be possible to give me what I was asking for. When I said I couldn’t afford to continue without the raise, they removed me from their program. The rate they pay me went from $36 to $45.
Naturally, they’ve started steering customers away from us, so I’ve started a new advertising campaign to attract customers from both of these companies. We’ve become salesmen again instead of order takers. We sell our customers on the value of picking us as a repair shop.
My approach may seem extreme, but I assure you that more cars will never mean more profit. I still cater to the seven other DRP accounts I do have, even though I may be forced to drop one more if we can’t come to reasonable terms. If I do, this will make room for more work from the companies that are easier to do business with. I refuse to repair vehicles in a substandard way just to generate a profit.
We survived before DRPs, and we can survive if we decide to drop some of them – provided we do it as an industry. The insurers save a lot of money with DRPs, and they’ll continue to save more and more – unless we put
a stop to all the concessions.
So what am I suggesting? In
addition to becoming better business people, we would also benefit from creating a reasonable, standardized DRP profile – one that’s the same for every company. For example:
- DRP rates should be discounted no more than 10% off our door rates across the board. (California S.B. 1492 by Senator Jackie Speier suggests this.) And every time we raise our door rate, we automatically raise our DRP rates.
- A claims processing fee should be charged at 1.0 hour per estimate to include all photos and uploads. This is a bargain when you consider what an independent adjusting firm charges.
- LKQ parts should be marked up 35% (this equals a 25% discount off list if OE parts are to be used, plus a 2% handling fee because of the extra time involved with the ordering process). If I buy a LKQ door for $100 and mark it up 25%, I make a $25 profit. If I buy a new OEM door for $100 that was marked down 25%, I make $33 profit. I had to invest $100 to purchase the LKQ, but I only had to invest $75 to purchase the new OEM door, although both doors sold for $100. There’s a big difference between markups and markdowns.
- We should do only one LKQ search and document it with a reference number. Our time is valuable.
- If any LKQ part is received unacceptable, we should be able to order OEM and not be required to
lose time waiting for another LKQ part.
- Insurers should reward us on the percentage of LKQ parts we use with a bonus incentive.
- Aftermarket parts shouldn’t be used unless the customer requests them and understands what he’s getting. If A/M crash parts are used, we should mark them up 35%.
- Every vehicle should be torn down and a complete estimate uploaded to the insurance company. The insurer should review any photos and have a maximum of 24 hours to respond before repairs are started. After repairs are started or completed, no labor adjustment should be allowed.
- Setup and measure are two separate procedures. Setup is installing the vehicle onto the frame rack, and measuring a vehicle is installing a measuring system under the vehicle for the purpose of measuring the structure.
- Setup should be 2.0 hours at frame rate, and measure should be 1.5 hours at frame rate (to guarantee the vehicle got measured correctly). A computer printout would be required to get paid.
- Frame replacement should always be at mechanical rate (since it’s a mechanical repair). Some DRPs are pushing that this be done at body rate.
- Blend times should be adjusted on a case-by-case basis, and partial paint time should be eliminated. We all know it takes more time to blend a panel than to paint it, and there’s really no material savings.
- Paint caps should be eliminated (they’re illegal, at least in California).
- At no time should any shop be required to repair a vehicle in an unprofitable manner. Just as contractors add overhead and profit, we’re entitled to a profit on every job.
- Each vehicle should be repaired to the vehicle manufacturer’s specifications so as not to diminish the value or warranty to the consumer. OEM certifications also should be required, which would force shops to a higher standard.
- High-dollar vehicles should be repaired at a premium labor rate and not the standard DRP rate. These vehicles are more costly to repair with a more demanding customer.
- Cycle time should be 2.3 hours per day (according to our industry surveys) with all circumstances considered. Only when the shop is undisputedly at fault should it be required to pay for any rental reimbursement (we don’t collect the rental premiums). Many DRP accounts are holding us to their 4-hour per day cycle time. This means if you take the total labor hours on an estimate and divide it by 2.3, the number you end up with is the total days allowed – i.e. the estimate has 23 labor hours on it, and you divide it by 2.3, coming up with 10. This would allow 10 days to complete a 23-hour repair without any abnormal circumstances. But insurers have created the 4-hour per day cycle time guideline not based on any real-time studies from our side.
- We should get bonuses when we deliver vehicles under the expected cycle time. (Say $2 per hour?)
- Wash and clean a vehicle for delivery is part of the repair process and we should charge .5 hours for this procedure. This is a separate department and costs money to operate. I can’t take my car anywhere and get it washed for free.
- We should be paid 2 hours at body rate to process total loss vehicles. They take hours to estimate and process, not to mention the free storage.
- CSI is a serious issue in our industry. I’ve never been able to match the insurers’ CSI with my own in-house numbers (mine are always much higher). I believe we should be able to dispute the insurer’s numbers and adjust accordingly.
- We should be rewarded for an above-average CSI in the way of a bonus incentive.
- All shops should be certified and classed with an A, B or C rating in terms of facility, equipment and certified training. Labor surveys should use this same profile when determining rates for any area. This would correct current market surveys and allow insurers to raise an individual shop’s labor rates based on its certification without having to raise everyone’s. This would reward the best shops – since we’re all very different in terms of equipment and quality – and would encourage other shops to step up.
We’ve Got to Do Something
DRPs are here to stay. They save the insurance
companies millions of dollars, and they expedite the claims process for us, as well as the consumer. Insurers are only taking what we allow. We need to quit acting like things will change by themselves. They won’t!
Start today by saying “no” to anything unreasonable. Start by selling your jobs and promoting your shop. Insurers won’t be able to keep the work out if you start selling your shop to the general public.
Insurers need us. We’re processing their claims for free, we do quality repairs and we keep their customers happy. This is a winning situation for them – they’ve decreased their overhead while we’ve increased ours. It’s time we realize that we’re only bound to them by these one-sided contracts, which state that either party may terminate this agreement any time for any reason. This includes us.
What if tomorrow every shop in the nation cancelled every DRP contract with every insurer? Why not?
We’ve been brainwashed into thinking we need these DRP contracts to survive, yet these contracts, as they are, actually may be our demise.
I could write an estimate tomorrow without any DRP contracts, and I could put a vehicle through production without any problems. On the other hand, I know that if DRPs no longer existed tomorrow, insurance companies couldn’t function without hiring lots of people and opening claim centers nationwide to process their claims.
My point is this: I know fair and reasonable compromises can be made. These issues can be worked out, although I believe we may have to create a crisis to get insurers’ attention and to make them believe we’re serious – like discontinuing some of our DRP relationships. Sometimes this is what it takes.
As for me, I’m trying to unite the industry nationwide, starting at the local level. I’ve been e-mailing other shop owners, and I’m getting a lot of responses asking for advice. I’m telling them to refuse to pay for anything unjustified that the insurers demand and to refuse to give freebee concessions like partial paint time where damage exists. I’m telling them to stand up for themselves, to say no, to learn and use the insurance laws and to use the P-pages. I’m trying to teach them to be numbers crunchers. It’s too soon to tell the long-term effect, but I’m hopeful.
I’ve also started an advertising campaign to educate the consumer. I’m posting my labor rates in these ads so other shop owners will be aware of what my rates are (it’s perfectly legal – and wise – to know what your competitors charge). I’m also presently only catering to the best insurance companies and refusing to work for the substandard ones.
My contingency plan includes the use of a marketing company – to help counter the steering from my lost DRPs – and body shop consultant Ken Webb. Webb has convinced me that the numbers don’t lie. Either a job is profitable or it’s not.
I’m also meeting with the supervisors of all of my remaining DRP accounts and making my concerns known, along with requesting reasonable rate increases. Although I’m presently standing alone, I’m hopeful that other local shops will join me once they understand what I’m trying to accomplish.
We can change the way DRPs are being executed – if we stand together.
Are we willing to unite so we’ll have the strength needed to make these changes? What price are you willing to pay? How serious are you about preserving the long-term health of this industry?
Writer Lee Amaradio Jr. is the president and founder of Faith Quality Auto Body Inc. in Murrieta, Calif. His 32,000-square-foot state-of-the-art facility employs 65 full-time employees and does $7 million in gross sales. In business since 1979, Lee attributes his success to having a great team of quality people supporting him. Lee says that he “sees the handwriting on the wall” and believes that “now is the time for us to reclaim our industry, before it’s too late.” He can be reached at [email protected].
Become a Better Business Person
Too many shop owners still say they “fix cars” for a living, when what they actually do is run a collision repair business. You can put out quality work, but that doesn’t translate into profits. Shop owners need to become better business people. Period.
Attending business development and management seminars offered by paint vendors and other industry sources is a great place to start. To help you hone your business skills, consider the following resources:
CIC Seeks Industry Input on DRP Standardization
The author of this article isn’t the only one thinking about how to standardize DRPs. The Best Practices Task Force of the Collision Industry Conference (CIC) is also seeking industry input on DRP standardization. The task force was formed to address the possibility of developing suggestions for standardizing Direct Repair Program (DRP) practices in order to simplify the administration of these programs in the shop. Currently, the task force is only focusing on the administrative tasks associated with DRPs. While each program has specific administrative requirements, the task force believes that there are tasks common to all of the programs that could be standardized and shared by multiple insurance company programs.
The task force is seeking input from both the repairer and insurance communities. The CIC has placed downloadable questionnaires on its Web site to gather industry input. Repairers are asked to list some of the administrative tasks required of them that they feel could be standardized. The task force understands that it may not be possible to standardize all administrative tasks, but even if some standardization were possible, it would have a positive impact on all involved: repairer, insurer and customer. Examples of items that the task force feels could be standardized include the number of photographs required by the insurer, the requirements for customer communication, etc. To download a questionnaire, insurers should visit http://www.ciclink.com/insform.pdf and repairers should visit http://www.ciclink.com/crform.pdf.