One of the largest issues looming over the fast paced trend of collision repair facility consolidation is the impact of consolidation on repair facility relationships with insurance companies. Will insurers find increased leverage in the dealings with body shops? Will they take DRP one step further, pushing even more volume through a smaller number of facilities? Will insurers take a financial stake in collision repair operations?
Or, will collision repair centers find themselves with increased bargaining power due to their increased size and domination of individual markets across the country? What price will size have on independence? And, will the publicly traded collision repair consolidators of the future be able to manage the competing demands for profit from their shareholders and low-cost from insurance and individual customers?In this month’s installment of our in-depth examination of consolidation, INSIGHT will examine these questions and what they portend for the future of the collision repair industry.
The largest concern for many collision repair facility operators looking at the consolidated future of the industry is how the elimination of their smaller competitors will impact their relations with insurers and the relationships their more successful competitors maintain with the insurance industry. That’s natural enough.
Shop operators that plan to grow their business to assure their success are decidedly mixed in how they view consolidation’s impact on repairer-insurer relations. As illustrated in the TrendLine Survey detailed in the May issue of INSIGHT, a slim majority believes that consolidation will have a positive impact on their relations with the insurance industry- increasing the leverage they have to negotiate fair reimbursement levels for the work they perform.
As the chart on this page indicates, fully 44 percent of respondents indicated that they believed the balance of power would swing to repairers as the number of companies doing collision repair declined. Those respondents that believed the insurance industry would receive the negotiating benefit of industry consolidation were a close second at 35 percent of respondents- nine percent less that those that believed shops would gain in the process. Another 26 percent, still a sizable number, believed that consolidation would have no affect on their ability to negotiate.
Those that believe that shops will benefit at the expense of insurers may be thinking of the experiences of practice management firms in the medical industry. Many medical practitioners, upset with the level of control lost to insurer PPO and HMO insurance plans, have banded together under one corporate roof.
Practice management firms, some of which are publicly traded, seek to bring the majority of available doctors in a local market, sometimes as high as 70 percent of available practitioners, into one business. By doing so, they improve their ability to negotiate favorable reimbursement rates with insurers.
Typically, the doctors that are acquired by the practice management firm receive stock and employment contracts to continue performing their work as if nothing has changed. However, the practice management firm takes over responsibility of administration and billing- freeing the doctor to practice medicine.
This same model has been evidenced by automotive sales consolidators such as Republic Industries, to grow their businesses.Collision repair consolidators will follow suit in many cases, acquiring existing businesses in a local market and standardizing operations, both technical and administrative, to as great an extent as possible.
The other side of the coin- the side that concerns the 35 percent who feel insurers will gain the upper hand in negotiations, is that collision repair consolidators hoping to assure their growth may "sell out" to insurers for referral business. This argument is nothing new to the collision repair industry, having been targeted at direct repair program participants for years.
Unlike the medical profession, that has a high level of regulation covering the training of medical technicians, the collision repair industries point of entry is much lower. Insurers are banking on this to keep competition among potential consolidators at a sufficient level to contain prices.
Shops that seek increased volumes of referrals may indeed offer additional incentives to potential insurance clients. But, any discounts will still have to be paid for at the expense of profits. The end result being that shops will have to raise the productivity bar to pay for any increased "marketing" expense associated with discounts to insurers. And this is where the true benefit to insurers lies.
The primary benefit of collision repair facility consolidation will be increased productivity. This increased productivity will occur at both the repair facility and in the insurer’s claims management operations.
The larger, top-performing collision repairers hold a substantial edge in productivity over their smaller, less professional competitors. This edge in productivity provides the top performers with greater profit potentials. INSIGHT research shows that the Top 25 percent of collision repairers have labor gross profit margins averaging 65 percent- fully 15-20 percent higher than the rest of the industry. This greater profit production funds growth for these facilities and provides them with the ability to invest in new repair and administration technologies that can further increase the productivity gap.
The increased productivity and profitability also provides these facilities with an increased ability to absorb discounts to insurers while maintaining profitability.
Closer ties with insurance companies will also provide many consolidators with the ability to further productivity gains by increasing their facility utilization rates. Larger collision repair facilities and factory-type repair operations will be achievable with more stable insurance relations. In addition, facility planning and geographic distribution of repair facilities can be improved through a more thorough understanding of insurance company client base.
By concentrating repair volume into the highest productivity repairers, insurers will reduce many of their costs such as rental expense and the cost of claims handling and appraisal that are driven to the shop level- aided by computerization and developments in electronic commerce systems.
Insurers face many challenges from consolidation that could adversely affect their business. The potential decrease in competition detailed above is a primary concern for insurers that could increase repair costs.
Also, competition among insurers to align themselves with the highest-quality, lowest-cost repairers has the potential to provide a competitive benefit for those insurers who move the quickest to align themselves with the top producing collision repair facilities.
Finally, a large concern for insurers will be the ability of the consolidators that they align themselves with to provide consistent, high-quality, high-CSI repair service. As with DRP plans, insurers typically guarantee the satisfaction of their insureds who choose the preferred vendor of the insurance company. Poor shop performance will have a negative impact on the insured’s satisfaction with their insurance company.
While this concludes INSIGHT’s series of articles on consolidation, the story is far from complete. Consolidation is in its infancy and will continue to play an important role in the industry for years to come.
Reprinted from the July 1997 Issue of Collision Repair Industry INSIGHT.
© 1997 Collision Repair Industry INSIGHT. All Rights Reserved
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