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Letter to the Editor
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August 2007 Issue

Still Under Review

Views on State Farm’s Select Service Program vary widely one year after its nationwide roll-out began.

It’s been about a year since State Farm began the national roll-out of its new Select Service program, and although it was not the topic INSIGHT planned to address in this month’s issue, it clearly is among the subjects at the forefront of many shop owners’ minds.

In conducting interviews on a variety of subjects with about a dozen shop owners in early July, every one of those shop owners brought up the State Farm program either to talk about how it was impacting their businesses, or to ask what we are hearing about it around the country.

That interest was a good indication, we felt, that it was time to again assess, as we did a little over a year ago when the new Select Service was operating in just four test markets, what impact the program is having on the industry.

A split decision

Overall, our interviews seemed to indicate that, as is so often the case, collision repairers are split almost evenly in terms of enthusiasm for the program. About half (all on the program) seem to view it as positive for their operations. And about half (including some on the program but many who are not) hold a more skeptical or negative view.

Gil Grieve is among those who, although on the new program, do not see it as a particular big change for their businesses. Grieve, the owner of Concours Body Shop, which employs 46 people in Reno, Nevada, has not seen any increase in State Farm business since the program rolled out in his area. He acknowledged, however, that weather and other factors may be contributing to an overall decline in his business this year.

He did, however, see that State Farm’s staff in his area appear to be busier.

“We see more State Farm estimates written by their outside people come through than we had in ten years,” Grieve said.

He believes there are still a large percentage of vehicle owners who are not interested in a shop recommendation from an insurer, and so with no shop in mind – or if they choose a shop that is among those that are not part of the new Select Service – staff appraisers are having to prepare the initial estimate, something that happened less frequently under Service First.

The “best pricing offered” requirement of the new State Farm program also did not impact Grieve’s business because in 2004 he discontinued most of his company’s direct repair agreements with insurers, other than those with State Farm and AAA. Because he was not giving parts or labor discounts to other insurers, he did not have to extend such discounts to State Farm.

That is actually one of the better parts of the program, Grieve said, because it has forced some shops to reevaluate the discounts they have been offering other insurers. He has actually picked up one more DRP – again, without offering any price concessions – with a carrier with which he previously had not had a great relationship. That insurer, he said, had been “blown out” by another shop when the carrier would not pay the higher rate for which the shop was asking to avoid having to extend the discount to State Farm.

“It’s making the other carriers step up,” Grieve said of the new Select Service.

Indeed, about one-third of the shops on the new program with which INSIGHT has talked said they eliminated discounts to other carriers rather than extending them to State Farm, and about a third lowered their State Farm rates, while the remaining third, like Grieve, had to make no change.

Some see growth

Though Grieve has not seen an uptick in State Farm business since the program rolled out in his area early this year, others elsewhere in the country said they have.

Like Grieve, Gary Wano Jr. said his company, GW & Son in Oklahoma City, Okla., had only one other DRP and so did not have to extend any additional discounts to State Farm. He was cautiously optimistic about Select Service.

“Since the program began, we have seen a noticeable increase in State Farm work,” he said. “We realize the program is in its infancy so we are aware that some of the aspects of the agreement have not come into play. I can see some potential challenges as the program matures, and each repairer will have to determine based on their business models whether the program will be worth continuing with. That's the way we will do it.”

Darrell Amberson, president of Lehman’s Garage, a six-shop collision repair business in Bloomington, Minn., said his company also has seen an increased amount of State Farm work since the program’s roll-out in his market.

“It has helped our business being on the program,” he said. “I know I’ve read surveys that find many shops say they have not seen an increase and may have even seen a decrease. So I suspect my experience is not universal.”

But like Grieve, Amberson agreed the “most favored nation” clause in the Select Service agreement regarding pricing has been a good wake-up call for many in the industry.

“I like that it has put us as repairers in the position to look more closely and perhaps take a little firmer approach toward those insurers that are the most aggressive on lower rates and discounts,” he said. “That’s something we probably should have been doing a better job of all along. I do know that often in the past the higher rates we as an industry were paid by State Farm were kind of a crutch that allowed you to sort of bargain away some portion of your business at a lower rate, so I like the fact that it has pushed us to take a close look at that and not be as inclined to offer that long deal to somebody because you know you’re going to get paid more from somebody else. It puts the insurers more on a level playing field.”

Betsy Fessler said she and her husband Robert have seen about twice as much State Farm work at their shop, Fenders Collision Center in Sunnyvale, Calif., since the 11-employee business became part of the new Select Service program last October. Fessler said their rates to State Farm dropped because she had been unsuccessful in the months leading up to the roll-out to get other insurers with which the shop has DRP agreements to pay higher rates.

“But we subsequently decided if we can’t get the [lowest-paying companies] to increase to x dollars an hour labor rate, then it wasn’t going to be worth it for us to keep on as one of their direct repair shops,” Fessler said of several other insurers. “Every one of them came up to that very point, and one or two actually offered us much more. It makes me wonder why I didn’t push for that so much sooner. We get so complacent sometimes.”

State Farm continues to enjoy more of a discount than it received previously at the shop, however, because of one other major DRP the shop has, Fessler said. Still, the increases from some of the other carriers, and the increased State Farm work, has made getting on the program a good move so far, she determined.

Others see declines

Some of that increased work may have come at the expense of Steve Sturken’s business, Sturken Auto Body, in San Jose, Calif., about 11 miles away from the Fesslers’ shop. Sturken, a past president of the California Autobody Associa-tion, said he is among the estimated 40 percent of former State Farm Service First shops nationwide that are not part of Select Service. Last fall, about two years after moving into a 21,000 square-foot facility (which doubled the shop’s footprint), Sturken learned that his Select Service application had been denied.

“It’s hurt me a lot because I thought I was in and ended up being out, and that has cost me $40,000 a month,” Sturken said.

Other than State Farm, the shop has done little DRP work, instead preferring to focus on dealership referrals. Though obviously stinging from the loss of the State Farm program, it was a good reminder for Sturken of one of the beliefs he described in 2005, long before Select Service had been announced.

“DRPs are a model that works for a lot of people,” Sturken had said. “Most large shops are successful because of that model. But you have to know how much control of your business you want to have, and how much you’re willing to give away. I like to control my own destiny.”

But others who take a dim view of Select Service have not done so because they were turned down for the program. Curt Nixon, the third-generation president of L Monty Body Shop in South El Monte, Calif., chose not even to apply for Select Service. Although the shop participates in about a dozen other DRPs (and had participated in Service First), Nixon found certain aspects of the Select Service agreement unpalatable.

In particular, he said, pricing structure is one of the few pieces of proprietary information to which shops have not given up access. He also does not believe any insurer should expect the best of all discounts regardless of how it compares – in terms of sales volume or other program requirements – to other carriers with which a particular shop may work.

“We didn’t do a huge amount of volume with State Farm anyway, so it was relatively easy to say no thank you,” Nixon said. “We went from maybe eight cars a month to maybe four cars a month. Not a huge loss. But because of the loss we would have had in order to extend the discounts to all eight of those cars – and we weren’t confident that count would increase – I think we’re in a better position. And the shops around here that stayed on [Select Service] don’t seem to be exploding with volume like everyone thought they would.”

Nixon pointed to one of the key as-yet-unexplained aspects of the new Select Service. Several studies, including INSIGHT’s own research, have found that the vast majority of Service First shops not chosen for Select Service have seen some decline in State Farm work. But a much smaller percentage of those on the new program – one-half or less – report any increase in work.

It is a trend on which we will continue to keep a watchful eye.   o

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