Current Issue

Back to ARA Magazine

Part of the Problem – Part of the Solution

PARTNERS IN REPAIRS

Abstract car and many vehicles parts (done in 3d)

The possibilities of partnering with collision repairers and insurance industries.
By Chris Daglis

 

After giving a presentation at a repair industry event in Melbourne a few years ago on the benefits of using more alternative parts in the repair process, a prominent repairer approached me to challenge me on my theory.

“How are we supposed to make money if insurers force us to use alternative parts and take our margin away?” he asked. “We make our money on the discounts we get on new parts and we don’t want insurers to get any of that!” he stated angrily. I calmly responded, “John [let’s just call him John], “what if I could show you, and the insurers you do work for, that you can both get what you really want – you make more money on parts while delivering a better repair cost for the insurer?”

Let’s just say that John is now a strong advocate of both recycled and quality aftermarket collision parts and runs a very successful collision repair business across multiple sites.

A well-structured alternative parts model and pricing strategy makes incredible sense. No funny money, no smoke and mirrors and no magic tricks. It is founded on common sense, open and transparent communication and a willingness to do things differently. That’s right, change. Like anything though, we all need to build the solution and change together, for the greater good of all participants in this industry.

But Why Change Anything at All?
Repairers and insurers have made good profits over the years, so why is there a need to do anything differently?

What would Henry Ford or Steve Jobs think about this type of thinking? They did not accept the status quo as the way of the future and changed the world because of their foresight, ingenuity and willingness to find a way to do it better.

If Henry Ford wanted to improve the mode of transport by tweaking the existing model a little, he would have tried to find and train faster horses. No, he changed the game and we all have him to thank for making the change he did. Most importantly, he understood that he needed to drive change, rather than seek approval, “If I had asked people what they wanted, they would have said faster horses” – Henry Ford. There are times when we ask, and there are times when we do. Now is the time to lead and drive the evolutionary change.

And Steve Jobs? He didn’t want to make a better phone, he invented the ‘iPhone,’ three existing technologies in one – the mobile phone, mobile internet/email and the iPod all in one. He didn’t make a small change to a product, he revolutionized industries.

Every now and then, industries are in need of wholesale change if they are to enter their next phase of growth and development. Not small tweaks or adjustments, but real game-changing innovation. The collision, insurance and parts industries are at this critical point, and we are in this together. They are not mutually exclusive, in fact the performance of one directly affects the others. Trying to change one part without the support of the others is not going to achieve the desired outcome.

Of course, it is easier to do nothing and hide behind the need to act or invest, or to believe that the demand for our products and services and historical profits will grow at the same pace we have experienced in the past. Then you have the market leaders who want things to stay exactly the way they are and prescribe to the philosophy that if it is not broken, there is nothing to fix, so why change? Sure, this is an option for those that wish to take this path.

Let me remind you of industry leaders that took this view – Xerox, Kodak, Blackberry, Motorola, Ericson, Nokia, Sony Walkman. All household names and leaders in their segment only 10 to 15 years ago. I asked my children (17 and 15 years old) what they knew about these companies a couple of weeks ago. I got this response: “What is a Xerox machine?” and “Are you serious? You used to load a CD into a portable player and listen to it on the go? What about if you wanted to listen to different artists and share the playlist with your friends?”

We will look back at the changes over the next 10 years as a time where our industries changed. We will see new industries and sub-industries develop, while others will disappear. There will be new household names, while others will be slowly forgotten or become irrelevant. Insurance will not look the same in 10 years’ time as it looks today with the advent of collision avoidance and driverless car technologies. Consequently, the collision repair and parts supply industries will also change – there will be winners and there will be losers.

So back to John’s experience. John has worked closely with his work providers and with his parts supply chain to develop a model whereby all three parties achieve the outcome they all want. As a result, John has differentiated his service offering from most other collision repairers and created a great value proposition, all the while increasing his volumes and margin at the same time as reducing his average repair cost.

The Secret Sauce
Stop right there. I know that you are thinking that this is not possible. That thinking will restrict your opportunity, so stay open minded and at least give it a chance. No this is not a typo and Yes this is possible, so let’s start to think and act differently!
It turns out that the thing that we are so protective of, the secret sauce, is not such a secret after all. You see, on average, 45 percent of a repair cost is in parts. This is a large proportion of the value of every repair and herein lies the opportunity.

Insurers will Incentivize Repairers to Optimize the Parts Mix!
Repairers make a considerable margin on their OE parts purchases. Traditionally, they have made more when using OE dealer parts than on any other part type. As a result, insurers asking them to use alternative parts* at a reduced price and margin for the repairer is not often well received, and understandably so. Why would you want to use a part that takes money out of your pocket?

But let’s just test the logic here from an insurer’s perspective and how incentivizing the repairer will increase uptake of alternative parts, and the benefits to all stakeholders of doing this – even the OEM’s!

I’ve written a bit on the benefits of the repairer and insurer working together to optimize the mix of parts used in the repair process and notwithstanding that all parties need to do their bit to make this work (which will form part of future articles), much of the opportunity hinges on repairer incentives. The beauty is that by paying repairers more, the insurer will actually save money. In fact, it is this anomaly, this conflict in “logic,” that has challenged insurers over the years and to a degree I understand it. However, if the use of alternative parts does not grow, and the insurer simply pays the repairer more to use what they are already using, then in fact the cost of parts will increase.

The Success Story
Between 2004 and 2011, I was doing work with one of the major insurers in Australia. Recycled parts usage was low, less than six percent of the repair cost and this insurer wanted to increase usage and benefit from the overall cost savings that were forecast at $1 million for every one percent increase. The pricing model we developed incentivized repairers to use alternative recycled parts and delivered a savings of at least 25 percent of the OE list price every time a recycled part was used. We did the numbers and on paper the logic worked, the model was sound. The question was would repairers embrace the strategy and use more recycled parts?  You could say it was the million-dollar question.

Within six months, recycled parts usage among the participating repairers doubled to over 12 percent and in some regions spiked to 24 percent. An extraordinary outcome – driven by the fact that there was a win in it for all participants.

But there were other benefits that came with this model:
• We systemized the process to the point where the assessor/adjustor did not have to intervene at all.
• The repairer was enjoying the commercial benefits of the strategy so much that they could not get enough of these parts (of course, we made it easy for the repairer to source quality parts, at the right price).
• Supplementary charges diminished and so too did calls from irate policyholders who were previously primed to question the use of anything but new parts.

Today, I am helping insurers review their current models and supporting their efforts to build new models to take them into a more sustainable future, all the while winning repairer’s support – yes contrary to many taking the traditional confrontational approach, we can all work together for mutual commercial benefit. So, let’s look at a simple example that demonstrates what I have said above. For the purpose of this I have assumed that;
1. The repairer currently enjoys a discount of say 25 percent off the list price (for some makes high for others maybe not, but a line in the sand).
2. The repairer charges the insurer the full list price when using the OE dealer part.
3. The OE list price for the example used is $1,000.
4. The price of the recycled alternative part is 45 percent of the OE list so $450 (this is a solid average).
5. Insurer incentivizes repairers to use recycled alternative parts by allowing a margin of 30 percent of OE list price.

This demonstrates how all stakeholders can benefit from a better parts mix and although the OE’s may feel that this will lead to less sales for them, it will lead to more repairable vehicles, which they will benefit most from. It is in everyone’s interest to achieve this outcome, including the consumer who ultimately pays for increased repair costs in the form of increased insurance premiums.

As I stated earlier, what the industry has failed to recognize is that co-existence is not only possible it is, in fact, crucial to the future of the repair, insurance and parts industries. The mix of parts in any repair is what we need to focus on. The above model incentivizes all to participate in this future of commercial and environmental sustainability.

Impact of Vehicle Technology
Technology in vehicles is changing daily. Every day, we see articles in trade publications that talk to a new development that supersedes that which was released only months earlier. This is both exciting and, at the same time, problematic, with some vehicles with upwards of 200 computers, many of which are located in accident zones.

For the insurance industry, vehicle technology advancements are causing them some cost challenges as well as some uncertainty. It is requiring insurers to challenge traditional approaches to repairs and will drive significant changes to their legacy business models and most likely to their parts policies, which we are already seeing some large insurers acting on. This will require all stakeholders to better understand the future and play their part. Automotive recyclers have a significant role to play in this and will need to become more proactive.

At a presentation by CCC in September 2017, it was established that in the U.S.:
• Auto accident claims increased after the GFC and have now begun to stabilize with the expectation that, in time, it will trend down due to the collision avoidance technologies aboard new vehicles.
• Although new technologies will take a few years to filter through, it is already evident that vehicle design changes are driving an increase in repair costs.
• New vehicles are showing the largest repair cost increases.
• There will be fewer but more expensive repairs.
• Total losses as a percentage of total claims are increasing and reached 18.8 percent in the March 2017 quarter.
• With every vehicle redesign or new series, the cost of many commonly used parts has also grown.

Insurers are now looking at their parts policies and how they can enable the use of quality, safe and where required, certified parts. This will include some high value, technology components that have been tested, scanned and certified for sale/use that would otherwise not have been possible without certification. In doing so, not only will insurers manage their costs better, they will by default grow the opportunity to incentivize repairers to use these parts and share in the commercial benefits.

You see, if we are able to use more recycled parts and certified parts, many vehicles that are currently deemed as uneconomical total losses will actually be repaired. This would be a wonderful outcome for repairers, insurers, automotive recyclers, alternative parts distributors and OEM’s. Again, another anomaly, right? How can the OEM’s benefit out of more alternative parts used on vehicles? Well, they make up the majority of parts used in the repair process and most probably always will, so they will therefore be the ones with most to gain out of enabling the repair of more vehicles rather than having them total loss.

Overall dialogue with insurers indicates both an appetite and genuine willingness to drive this type of change. The rising cost of repairs (the need), coupled with a clearer view of what is possible (the opportunity) means that insurers will look to incentivizing the use of alternative parts, be it recycled or certified. What is required next are supply chain and the changes it needs to make and play its part in enabling the opportunity.

For over 10 years, Chris Daglis of PARTnered Solutions has been the leading independent advisor to major Australian insurers on alternative parts strategies. He is a leader respected for building models that support positive cost outcomes while growing parts margins for collision repairers. He has an unrivaled understanding of the key drivers for all stakeholders and an ability to build strategic solutions for insurers, repairers and suppliers that guarantee mutually beneficial outcomes. You can reach Chris at chris.daglis@cdps.com.au, on mobile +61 411 743 560 or at www.cdps.com.au.