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Is State Farm’s New DRP Good or Bad for the Industry Long Term?

Point CounterPoint

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Bill Denny, Owner
Bill Denny’s Body Repair
Havre De Grace, Md.

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OPINION: Bad

State Farm’s new agreement is bad, bad and bad for this industry! I can’t believe anyone would sign it! From my perspective as a business owner, any time you make concessions that can affect the bottom line in a negative manner, you should gain either a market advantage that will grow your business or a volume advantage that would erase any concessions made in the agreement. This contract grants neither.

State Farm’s new program guarantees nothing to your business. They’re not going to guarantee cars to the door, they’re not going to guarantee volume. What the program does do is allow State Farm leverage to establish ‘prevailing rates’ and ‘market practices.’ It also allows State Farm to share control of your business because of the concessions you make to them.

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The indemnification part of the agreement is downright scary and one of the worst ones I’ve ever seen in a DRP. The way this is written, if there ends up being [inherent] diminished value on the vehicle — [the type of DV caused not by improper repairs, but by a wrecked and repaired vehicle being inherently worth less than one that’s never been wrecked and repaired] — you could be responsible to pay it. Whether or not State Farm will enforce that is a horse of another color. But they could. This is something you should discuss with an attorney. I think if you talk to one, he’ll ask you why you’d even consider signing it.

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In my opinion, what State Farm is after here isn’t leveling the playing field. They’re interested in saving money. That’s the bottom line. And there’s nothing wrong with that.
This agreement may force shops to re-evaluate their current DRP programs, but I feel that very few shops will eliminate any of their programs. As we all know, State Farm makes up about 20% of the market. Most shops will not risk losing that market or giving up any other DRPs in today’s challenging workplace. So rather than go to their present DRPs and use this as leverage to eliminate those concessions and price rates, most of them are just going to go ahead and give them to State Farm.

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State Farm will then use those to establish ‘prevailing rates’ and ‘market practices.’ As in the past, most other insurers will follow State Farm’s lead. Once that happens, those ‘prevailing rates’ and ‘market practices’ will be used to negotiate in every shop in the marketplace, regardless of whether you’re on that program or not.

That’s always been the way it’s happened, and we’re seeing it more than ever right now. We have all insurers, not just State Farm, doing that. They come in and say, ‘I’m not paying the shops in your area for this, so I’m not paying you for this because this is the prevailing market practice here. If I’m only paying them $7 for a tube of caulk, I’m only going to pay you $7. I don’t care if you have an invoice that says it cost you $22.’


That’s ultimately what they’re after here — to gain better control of the marketplace and to save money.

I don’t blame State Farm for asking for what other insurers are receiving. Not only is that fair, it’s good business. And this agreement has afforded us the opportunity to change who controls our destiny. But since most shops won’t leverage this to eliminate previous concessions, it won’t drive up labor rates or eliminate concessions. It may do just the opposite.

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State Farm isn’t to blame — we are. They’re playing the odds, and when has there ever been a more opportune time for them to play? This industry is more fragmented now than in any other time in our history.

State Farm is simply taking advantage of the new mindset in the owners and operators of today’s collision repair facilities. The new-generation shop owner (or manager) is driven mostly by ‘cars to the door’ or the ‘top line.’ They don’t look at their bottom line. They feel that if they can capture the car, they can make money.

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I think this change has been brought about by a couple of things. We have a faster pace today in life in general; everybody wants their cars back quicker. It’s all about turn rate, getting the parts on time. Everything’s rush rush rush. Twenty years ago, you didn’t have that kind of pressure in the shop.

You also had a better relationship in the marketplace with insurers because they weren’t under the gun to just look at the bottom line. They were more interested in repairing a car properly than they are today. I’ve had them stand in my shop today and say they don’t care how it gets fixed — that they’re only interested in what it costs. They say they don’t care because, ‘That’s your responsibility. You’re the one making the repair. Why should I care how it gets repaired?’

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And that’s the problem with these programs — we’re 100% liable for the repair once we make it. That’s why it’s hard for me to understand why anyone would sign a contract like this that basically puts all the risk on you when they’re making most of the profit.
At one time, I was heavy into DRPs. I probably had 60% of my work from DRPs, but that’s gradually dwindled down to about 15 to 20%. Most of those we gave up on our own because they changed their programs.

When we got involved with these programs 10 to 12 years ago, most of them were service-oriented. They were about processing the car quicker with better service to the customer. They were driven by positive repair experiences. But that changed because, little by little, they came in and started squeezing.

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About two years ago, I gave up a major DRP worth about $900,000 of work after the insurer had a complete turnover of managers. One of the new guys walked into my shop and told me I needed to trim $400 off my average severity. I said, ‘Well, whatever it costs to fix the car properly is what it costs.’ Severity is determined by mix of work. If you’re doing a lot of hard hits like we do here, there’s no way you can do that.

Six months after that turnover, we sent in a letter and resigned from the program. It didn’t hurt our business. We were able to fill the shop with other business. And we didn’t lose it all; we still do quite a bit of it.

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This type of thing has gradually happened with most of the DRPs. We still probably have four to six DRPs, but they’re very small, service-oriented companies. I’m not anti-DRP, but I’m against any program that’s price-driven — and State Farm’s new program, in my opinion, is price-driven. It’s not presented that way or sold that way, but State Farm is a lot smarter than we are.

[As far as the argument that this program will force shops to become more efficient], that’s not going to happen. The truth of it is, if you look at most of the good operators in this industry, they’ve already squeezed all the efficiency out of the process they can. Allstate is finding out for themselves right now that they can’t fix vehicles as cheaply or as good as we could.

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I know that we’ve spent a lot of money here becoming more efficient over the years. We have all the latest, greatest equipment — fix it as fast as you can. Generally, the holdup in the process for us is the insurance company. They’re the ones who want to stop — if you have a supplement, we have to look at this, we have to look at that. Some of the stuff they look at doesn’t even bear a trip out here. It almost borders on harassment sometimes: ‘If you’re not going to fall in line with what we want, then we’re going to make it tough for you to get this car through your shop.’ That happens all the time. They may not admit it at the Bloomington level, but it certainly happens from the regional level down.

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I also don’t see this program helping to eliminate [hack] shops from the marketplace. I think the only thing it’s going to do is cut a lot of shops out of the DRP process. State Farm has already said that the reason they’re doing this is because they want to deal with less shops. But they’re also saying in the same breath that they’re not going to steer cars. If both hold true, how is that going to change any of the numbers
If anything at all, what squeezes shops out of business is lack of work, not a program like this. Most of the reason there’s a lack of work today is the excess capacity in the industry itself. A lot of shops have just gotten a lot more efficient over the years and can process a lot of work. When I got in the business, a million-dollar shop was an extremely large shop and unheard of 30 years ago. Today, that’s probably an average shop.

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[When this program was first introduced], it was really an opportunity to change who controls this industry. There’s no question about that. And I think there were a lot of people with positive outlooks on it. In fact, I had a lot of people tell me this was the greatest thing that ever happened because now they’re going to leverage this against these little programs and get rid of the discounts. I said, ‘Well, if that happens, I’ll be sorely surprised, particularly in this market because I don’t know of anyone today who is willing to give up any work.’

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I’ve talked to a few shops in different areas of the country that said that they went to the smaller companies and said, ‘Look, we’re not going to give you these concessions, but we’ll give you this and this because you’re that small and we can do that.’ But in most cases, that was a DRP that might offer eight to 10 jobs a year. So, in that case, [if the smaller insurer didn’t agree to the changes], they could afford to lose that DRP.

There will be cases where State Farm’s new program does help, but I think they’re going to be far and few between. Shops are afraid of losing anything today. Most businesses I know of are struggling to get cars in. I don’t care what your history has been in the past. The only shops that are very busy right now are the ‘price-takers’ — those that accept the price at which the insurance company is writing for. Those shops are extremely busy.

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There’s always going to be exceptions to this. There’s going to be areas of the country where there aren’t a lot of shops, and there aren’t a lot of choices for people. Those areas are obviously in a better bargaining position than somebody who has a shop on every corner. But I think if you look at the majority of marketplaces in the country, they’re eventually going to be hurt by this program.


Dan Bailey, President
CARSTAR Corporate

Overland Park, Kan.

OPINION: GoodDan Bailey, President
CARSTAR Corporate

Overland Park, Kan.

OPINION: Good

The over-capacity in our industry has been an issue for quite a while now. There’s way too many shops fixing cars that don’t have enough training, the proper training or the proper equipment that are still out there repairing vehicles. I think these shops take work away from legitimate repairers, and they’ve been doing it for years. If you look more specifically at State Farm, there are hundreds if not thousands of shops that, because of the three to six cars a month they get from State Farm, are still surviving — and it may be the only reason. I don’t want to see anybody go out of business, but if people haven’t stayed up with the technology, equipment and proper training, then it’s just the way it is.

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This is going to accelerate the shrinking of our industry, probably to where supply and demand come more in line with where they need to be. I think State Farm’s new agreement will reinforce the need for greater efficiencies and filter out the uncommitted shops.
The insurance industry has had to bear the financial burden for a long time — they’ve been paying for all these inefficiencies. The shops that aren’t going to be able to [repair vehicles correctly and efficiently] are going to be left out, and the over-capacity is going to right its size by just the law of economics on this deal. I think the State Farm deal just accelerates that happening.

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In the end, the efficient operator will become more in demand, which will bring supply and demand in order, as well as pricing. When supply and demand gets corrected, pricing corrections come along with it.

If at some point the number of stores decreases to where we have enough supply, then our stores could be open seven days a week, either two or three shifts. Most of the shops in this country are open five days a week, 10 hours a day. So we have to charge a lot more than we’d need to charge if we had enough supply to operate our stores seven days a week, 24 hours a day. Shop overhead is what it is — whether you’re open five days a week, 10 hours a day or 24/7, your land and facility cost the same. We need to leverage that like GM and Ford do — they have a set fixed operating cost.

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We could become a lot more efficient than we are today. There are people standing around today waiting for another car to come in. The industry will tell you there’s a shortage. The reason there’s a shortage is that there are too many shops. You’ve got technicians in shops today who are producing 30 hours of work a week who could be producing 80 hours of work, but they aren’t because they don’t have enough volume in their stores. There’s over-capacity.

I think it’s going to be a tough two or three years, but in the end, the shops that do invest in training, education, equipment and technology are going to be rewarded. Is it harder for a small shop to reinvest in its company? Let’s say you need to reinvest $30,000 a year. If you’re running a $1 million store, that’s 3% of your sales. If it’s a $3 million store, it’s 1%. So as a percentage of sales, it costs smaller shops more.
But I don’t think this is about small stores or big stores. It’s about people who decide to get better at running their business and become more efficient. In order to do that, you have to invest in training and education of your employees, in the newest, fastest, most efficient equipment and in technology, because you’ve got to be able to measure your own results, your own key performance indicators. You can’t depend on someone else to do that for you, like the insurance company.

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I don’t think State Farm really cares what the final repair costs in the end, as long as they’re not paying more than somebody else. They just don’t want to be at a disadvantage on pricing their policies. If it costs them more to get their vehicles repaired than it does some other insurer, they’re at a policy-pricing disadvantage. I’ve read a lot, listened to a lot and met with a lot of people at State Farm, and I’m convinced that they’re sincere about just wanting to get the same price as we’re giving somebody else — no better, just the same.

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I don’t think any insurance company’s intent is for a shop to perform a poor quality or unsafe repair. I think it’s the way it gets interpreted — because they’re trying to cut cost, trying to gain a competitive advantage on selling more policies. From the home office to how it trickles out in the field, the same message gets interpreted differently. So someone in the field then goes out to the shop and says, ‘We’re no longer paying for this and this’ — when the real goal may have been to try to cut claim cost because the industry average is $2,500 and this particular insurer’s is $2,680. They want to cut their cost to get in line with the industry average, but by the time it gets to the street, it’s become, ‘We’re not paying to cover the car anymore, for corrosion protection, etc.’

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[I think State Farm’s new agreement is good for the industry because] by correcting supply and demand, pricing models will become more defined and cost shifting will be eliminated. Those shops that can conform to the needs of the insurer and consumers will be more likely to dictate tiered pricing based on the ability to deliver a predictable outcome to an insurer. More volume, better pricing.

As repairers, we do need to keep a close eye and hold State Farm to what they’ve said: ‘We just want a level playing field.’ A level playing field is fair, and I don’t have any problem with that. One of the concerns I have with the program is that they’ll come back wanting more discounts, saying ‘Joe’s Body Shop down the street here is offering 5% cheaper or 10% cheaper.’ That could be an issue.

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We cannot continue to be our worst enemy by offering discounts below best pricing. Stores have got to know how much to charge to make what they think is an acceptable profit level. You’ve got to know what your cost of doing business is before you can step out into the marketplace and offer any price — regardless of whether it’s discounted or not. Those who can’t afford to offer the discounts are most likely the shops that are inefficient and don’t know their numbers.

[As for the new agreement shifting more expenses to the shops], it’s like anything else. This is a very competitive environment, and having add-on services like [total loss estimates and storage fees] given away as a loss leader is like restaurants giving free refills or hotels offering free high-speed Internet access. Retailers regularly sell goods way below cost to attract customers and then generate profits on other items in the store at better margins. Very few insurers are willing to pay for total loss valuations. State Farm is one of the only companies I knew of, up until this new agreement, that paid for total loss. It’s like everything else — you set that expectation, the company pays for it and, when it goes away, it kind of hurts.
As for the storage fees, the majority of DRP shops in this country aren’t charging storage for a certain number of days. Sometimes it’s 15 days, sometimes 20 or 30. Your property is valuable and that storage space is valuable, so these shops are going to move that car rapidly unless something falls through the cracks. If there’s a legal matter and a car needs to stay on your property for an extended period of time, I’m pretty sure from what I’ve been told that State Farm would make an exception and pay you for that. But 99% of the time, these cars are going to be out in just a few workdays. So really what you’re doing is giving something away to get volume and to grow your business.

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State Farm is the largest supplier of collision business. I think they insure one out of every five autos. They’re simply exercising their right as the nation’s largest auto insurer to get the pricing they deserve. Quite frankly, it’s taken them longer than it probably should have to reach this point, and now that they’re asking for what shops have been giving to other companies, many shops initial reaction has been to get rid of their discounted programs in an effort to charge State Farm a higher price. Even though 30 to 40% of their monthly business could be from State, they still want State Farm to pay the highest price possible rather than offer them a discount for being the largest supplier of work.

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Why do people go to Sam’s Club once a month? So they can buy cheaper. That’s all State Farm has done. ‘I’m the biggest insurer, and I’m your biggest customer.’ They aren’t asking for a discount; they’re asking for the same price you’re giving someone else. I can’t see anything wrong with that.

Now if they ask for more than that, then they’ve crossed the line. But I think some of these shops that don’t know their cost of business are probably going to get rid of some of the DRPs they’ve been giving concessions to for years so they can still charge State Farm the highest rate. It’ll be interesting to see how that all plays out.

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The shops that understand their numbers, supply and demand, efficiency and economies of scale, will prevail. Better, faster, cheaper is what both the insurance industry and consumers are demanding. Shops simply need to figure out how to deliver this.

If we can get this supply and demand correction, pricing will be fair and shops will be able to make a good bottom line. But we need enough supply to fill our shops. Right now, there are too many stores. State Farm’s new agreement accelerates getting that correction done.

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