Congratulations, You Just Got an 'F'
Tell me what's on your mind, Mr. Consultant?
Well, one thing that's been bothering me for years, and I've been in this business for many, many years, is that dealers are satisfied with only 30% market penetration in the fixed operations category.
What do you mean by that?
Well, based on what the average dealership's potential is out there for service business, we are getting only 30% to 31% of that available market. We are literally giving the bulk of it to the mass merchandisers: oil changes, exhaust work, batteries, coolant system services, transmission services, brake work and the like, services which can be very profitable.
Wasn't it the case that, at one point, the dealers had everything?
Exactly. When we started there were no other mechanics available; and then after WWII, some independent shops started up. I guess it was disgruntled mechanics who left the dealerships and put up their own shops. Back then, a vehicle was quite simple, so it was not difficult to get started; not a lot of special tools, not a lot of investment in training, not a lot of investment in parts. I can remember people talking about the days when there were two clutch sizes on a Chevrolet. There were only two sets of points and when you went in to get sparkplugs, all you had to ask for was the big ones or the little ones. Today, vehicles are quite sophisticated. There are many more diagnostics. Technology has been trying to give the business back to us, but we roll over and play dead and let the mass merchandisers continue to take it away. If dealers took the approach to new car sales that they are taking to service and just gave away 70% of the new car sales potential without a fight, they would be bankrupt. We have a tremendous business available to us in the back end that we don't even bother going after.
So at one point we had all the business. How is it that we ended up losing it?
Some of my clients have flat-out told me, and this is a quote, "I didn't want the maintenance business. I wanted the real mechanic work." They wanted the very difficult, precision work, not the oil changes and the one-hour transmission service. They wanted the 30-hour engine overhauls and the 12-hour transmission overhauls, the larger jobs. They were easier to handle. You didn't have to write as many repair orders, the service advisers didn't have to call as many customers, you didn't have to be really punctual with the customers because they knew their cars were going to be tied up for a lengthy time. The newer repairs that are being done on a car, because of the technology, are short-term jobs that roll over very quickly, which means a larger volume of paperwork, a larger volume of customer repairs, a larger volume of calling back customers to let them know their vehicles are ready.
Would it be fair to say that most of the dealerships want the work that is easy to manage and don't want to mess with the work that's more difficult to manage?
I get that feeling, but there's more to it than just that. Many service managers and directors feel that way. They want the "easy" work. It's just human nature. We have geared up for the high-tech, highly-skilled repairs over the years. For whatever reason, we have just flat given up on oil changes and the like because we never got into it profitably. We would not hire the lower-skilled technicians and manage them as the mass merchandisers do to make that work profitable. We kept and we wanted to hire only high-skilled mechanics. The manufacturers kept insisting that we spend a ton of money on training and bringing high-skilled people into the dealerships, so we basically ignored the maintenance business for a long time and now it is gone. But we must look at it. One of the "problems" is the manufacturers building better vehicles. With the manufacturer's warranty work going down, there are fewer repairs on vehicles, so that high-skilled work is disappearing, or at least shrinking. We're going to have to learn to swim in the same pool as the mass merchandisers are swimming in and make a profit at the same time.
Another thing that has never made sense to me is if there's been a shortage of mechanics for years and years, it seems to me that this maintenance-type work would be a great grooming ground to bring in people with little or no skills or experience. Have them work in that department; as they are working, offer them the ability to train and move up. Have dealers not seen that opportunity?
It is an opportunity that has been ignored. Number one, there is a lack of "baby boomer" people coming into the workforce; but also, we have not attracted the lower-skilled guys to go into the maintenance business and grow through the maintenance business where they can make a living as they learn and then grow into senior technicians. We flat out have not done that. We have gone after those senior technicians only, rather than also go after the entry-level guys and train our own. What's happened is, the only way we can get the seniors is to buy them from somebody else and pay them a premium to come to work for us and then we're stuck with a price up so high for those seniors who do only the type of work that is disappearing, or at least, shrinking we have a dilemma. We have high-paid guys and less work for them; meanwhile we've not brought in the lower- skilled guys to do the mass merchandiser kinds of jobs. At the same time, we're not training future A and B level technicians. I repeat, really quite a dilemma that we're in right now. When a vehicle leaves the manufacturer production line, 80% of the work that will be done on that vehicle in its lifetime is going to be maintenance work.
It sounds to me like the railroad companies who didn't see themselves as "transportation companies," they saw themselves as "railroad companies." Transportation changed and they missed the boat, the plane or the truck or whatever else they could have gotten into at the time. They were the leaders in the transportation field of their day, but they decided instead of keeping up with progress, "we're not in that business." It sounds like dealers, in many cases, have done the same thing. They don't look at themselves as transportation providers. They want to sell a car and they want to do only a certain type of service work on it and after that you can go out and get it done on your own.
Correct. Because the profit's always been in the front end. In the back end it's going to be smaller, incremental dollars, but it will accrue over an extended period of time to a substantial amount. There is a classic commercial that Fram made years ago, where a mechanic holding an oil filter says, "You can pay me now or pay me later." Basically what that says is, "If you're going to drive, you're either going to pay to maintain the vehicle or you're going to pay more to repair the vehicle"; this is exactly the opportunity that has been missed. We have gone after new car sales and used car sales so heavily, and ignored the fixed operationwhich by the way includes body shop. We're in a dilemma with the dot-coms that are coming on, trying to sell cars directly. And if that happens, then our big profit up front is going to dissipate. It may not disappear, but it's going to shrink. We already see that shrinkage in gross profits up front.
We've looked at how we got to where we are; I think we all know where we are today. What do dealers need to do to correct this?
Well, number one, we need to get our customers knowledgeable about our back-end operations. The manufacturers have suggested strongly over the years that the customer be given an introduction, from the sales department to the service department and that it be conducted extremely well. Most dealers have totally missed that boat. If there's anything I agree with on the manufacturers, it's that.
I remember the day when Sears used to have people all over the store who would help you get what you want, walk you to a cashier and then a cashier took your money. It took a while, but eventually all those up-front people disappeared and all they had was cashiers. You had to go find what you wanted and then find a cashier at a cash register who was willing to take your money. Now, if you go into a Sears store you will find that they have people back roaming the aisles again, helping you find stuff. What I'm saying is, we've got to roam the store and make sure that our salesmen, when they sell the vehicle, new or used, introduce customers to service. When F&I leases the car, they need to tell the customer that there are maintenance requirements that have to be met or they may be charged a penalty. A lot of people feel these are negatives, but they are not negatives if you realize that 70% of gross profit that could be made in the service department is basically being turned away simply because we don't even bother to ask for it.
I can also remember the day when a fixed operations manager was told, "Don't worry about making a profit in the back end. Just keep the customers out of my office." And that statement was made by a dealer. Today, we need those profits. We can't run a department that's not profitable, but we still look at the dealership as if it were five separate businesses. And it is five different businesses, but they are five totally-integrated businesses and we have to accept them - new, used, service, parts and body. So number two is, we have got to look at those five departments as one entity, not the new car department as separate from the service department. We have not held our salesmen accountable for introducing the customer to the service department. We pay them the full commission whether they introduce the customer or not. We're paying them to do half a job and to leave off half the potential gross profit. It can't be overemphasized that today there is more gross profit available in fixed operations per vehicle than there is in the sale of the vehicle in the first place (except for some extremely high-line cars or specialty vehicles). If we don't do something to tie those departments together, we're going to lose that profit.
I think over the next five years we'll see dealers finally start to understand that their greatest asset is their customer base. Whether it be from software that's available, or from margin compression in new car sales, or from a myriad of other technological advancesthey're finally going to understand the value of their customers. Hopefully that will get them to understand that, not only do they need to pick up some of this maintenance business, but they need to be everything to that customer over the life of that vehicle.
Well, the business may be given back to us because of the technology of the automobile. Because of the skills needed to repair them, because of the equipment needed to diagnose the problems, because of the technology of the business, it may be given back to us. These electric, hybrid gas/electric vehicles with super high mileage, are unique. If we get to the point where we go to full electric vehicles, that's giving the business back to us. The other thing we've got to remember is that the manufacturer could any day say that maintenance is part of the price of the car and you will provide maintenance to that customer for a set fee.
You mentioned the importance of not looking at it as "five separate businesses," but as five interdependent businesses...
Correct.
Can you give us a little more detail of what should be done to tie them together?
We have habitually paid in semi-pay plans at the dealership. Everybody is saying we need to be paying salary pay plans and I don't agree with that. We still need to pay for performance. This is what the management gurus are saying. Dr. Deming, prior to his death, said that you pay for performance. Peters is saying pay for performance. If you look at corporate level executives, they are paid for performance. We need to espouse the fact that we are integrated businesses. The service department prepares a car for the new car department to sell. If it's not prepared right, the service department hears about it. The new car department sells the car and they casually say, "Oh, by the way, we've got a service department out back in case you need to maintain the car or if you've got warranty problems," and many times doesn't even mention the fact that we have a body shop back there. Because they're not paid from that, they're totally ignoring the introduction to potentially more profit than was sold at the front end. We've got to address the pay plans, but we've also got to address our mission statements within the dealerships and our vision statements and even more basic than that, as dealers, we've got to look in the mirror and say, "I want a fully-integrated dealership. I do not want to simply give up 70% of my gross profit potential in fixed operations." It starts at the top, as always; but then we've got to convince our managers that we're serious about it with some kind of integrated pay plan. There are a number of them out there, but some kind of integrated pay plan is essential.
How would an interested dealer get more information on appropriate pay plans?
Well, there are a number of books out on pay plans, and there are some new pay plans out there now. This may seem self-serving, but I would suggest that they call some of the consultants and talk to them that I like. Find out what's going on. There are two interesting pay plans out there right now. One of them ties the salesperson to any future work done in the service department. Not a big percent, but it helps to get their attention, to get them to go back and walk the customer to the service department. They get paid an incremental amount on every dollar that customer ever spends servicing that car. Another pay plan is paying the technician based on the variable skill work that he did that week. Variable pay based on variable skill work is a "brand new" old pay plan from the 60s. It didn't work back then because it was so difficult to manage, but today in the age of computers, it's not difficult at all. It tracks gross profit along with the skill level of work so that as the skill level goes up or down, it will track it. It also allows the service department to be very competitive in its pricing to the customers and to be able to hold onto their high-skilled technicians.
Okay, let's say that I'm a dealer who's reading this article and I'm convinced that I need to do something differently. Give me a three-step process for turning things around.
First, in any problem-solving you've got to recognize you've got a problem. The first step is to determine what is the degree of the problem. So first you must recognize you have a problem and believe me, you do. Your service manager may try to convince you that you're clicking along at maximum efficiency, but you're not. Second, you've got to decide what you want to do to correct that problem. Is the problem too much overhead? Is the problem not enough maintenance business? Is the problem a service advisor who is not taking care of your customers? Is the problem that your service advisors are not selling on the service lane? Most of the manufacturers' service advisory programs teach customer relations and how to listen to customers and understand what they are saying; but they don't get into how to sell on the service lane, emphasizing asking questions about maintenance and the like. They do not get into that. So the first step is recognizing you have a problem, second is to define the problem that you have and then the third step is to decide what direction you want to go. How much of this can you do on your own? How much is your manager or managers willing to do on their own? If they cannot handle that step, then bring in professional help from the outside.
Let me ask you a wrap-up question here. Of the dealers you're familiar with, what would you give them as an average grade?
If 60% is a passing grade and they're doing 30% potential market penetration, they've failed. In the body shop, if 60% is a passing grade and they're doing 30-40%, which is the norm in body shops, that's a failing grade. There are many body shops that are running 70-200% market penetration.
I think the crux of the whole problem is that most of the failing dealers are unaware they even have a problem. Of the dealers that you are aware of, what do you think they would give themselves as a grade in their fixed operations?
Probably a "B" or "B+" because they are in the black and not in the red.
Therein lies the problem: They think they're doing a pretty good job. The problem is they don't understand they are actually failing.
Correct. And my question to them is, "If you could make a profit selling new vehicles sales with 40% planning potential market penetration, how long would you sit there and accept 40% and consider yourself making an "A" just because you were in the black? You are making a profit, but barely making a profit. You've learned to make a profit with 30% potential market penetration and you're patting yourself on the back about how good you are, when in reality, you're giving up 70% of it to the mass merchandisers. That, to me, is an "F."
That's an "F."
Absolutely.
This interview was conducted under the condition of anonymity so as not to offend or embarrass any past, present and/or future clients, friends and associates of the interviewee.
