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Letter to the Editor

The Future of Repair Networks

An international study looks at what is working - and what likely lies ahead - for franchises, MSOs, DRPs, and other shop affiliate groups.

• Many shops that join networks do so for the wrong reasons.
• Many organizations managing repairer networks would prefer – and might be better off – not doing so.
• As networks become more and more prevalent, the profitability of work available through them generally declines.

As part of the study, David Murby of Numina Consulting examined collision markets in about 15 markets and defined a network as “a coalition of repairer organizations organized along common objectives.” He identified nine types of networks:

1. Vehicle manufacturer networks, generally including dealerships but sometimes independent shops as well.
2. Insurer-approved networks, known in the U.S. as Direct Repair Program (DRP) networks.
3. Supplier-managed networks, created by a paint or parts company, for example, and then promoted to insurers or fleets. PPG’s CertifiedFirst network is one such network.
4. Claims and accident management companies, which oversee a network of shops and manage claims for insurers or fleets.
5. Industry associations that promote their members as a network.
6. Franchise operations, such as CARSTAR, that network independently-owned shops.
7. Buying groups, which may focus on helping members take advantage of economies of sale but may also promote their members as a network.
8. Multi-store operations (MSOs), such as regional or national consolidators.
9. Membership of affiliate networks, in which shops band together to promote themselves although in a looser-knit group than a franchise.

Murby pointed out that for the first four of these network types, creating a repairer network is not a core part of their business but they have done so to address some issue. He distinguishes these “network managers” from the other types of “network providers,” which have created a network often as the core of their business.

Each type of network has its own reasons for existence, Murby said. Vehicle manufacturer want to “own the customer,” protect their brand, and sell parts. Suppliers want tighter connections with customers – and to sell them more by helping them grow. Insurers, too, want to protect the brand they may be spending millions of dollars on advertising to promote (increasingly talking about the services their network of repairers offers the customer) in addition to managing costs.

“But there is one consistent reason that all networks exist,” Murby said. “They all want a consistent outcome. So all those other reasons are important, but ultimately they lead to a predictable outcome. Every time you go into my network, you will get the same service, the same experience, the same outcome.”

Fast food networks do this very well, Murby said.

“Go to McDonald’s anywhere in the world and the burger tastes just as bad,” he said.

It is this goal of consistency of outcome that led Murby to conclude that many shops join networks for the wrong reasons. Shops, he said, generally say the primary reason they join a network is to bring more work to the door. They may also join to feel they are less alone in competing with larger entities, and in order to learn from others, be part of something “bigger,” and benefit from scale in terms of buying. But it is the promise of additional work – whether that promise is made explicitly by the network or not – that drives many shops to join.

Murby pointed out, however, that with the exception of insurers and, in some cases, claims management companies, few networks have more than only very limited ability to bring work to a repairer’s door. Repairers who decide to join a network, Murby said, should be doing so (and choosing which one or more networks to join) more to implement standards internally and across the network to produce consistency of outcome.

“Then you can take the network to the sources of work,” Murby said. “You’re then part of something bigger and get the other benefits, but you’re also more likely to get additional work volume because you’ve built something that provides the consistency they’re looking for.”

So what works in terms of networks and what does not? Murby said buying groups tend to help shops get discounts on purchases, but rarely help with implementation of standards. Insurance and claims management networks provide the best access to work, but require strict compliance and a willingness and ability to provide the customer experience and repair quality at the expected cost. Franchises, supplier groups, and affiliate network can be very good at providing best practices, standards, and support.

“But here’s the challenge with them,” Murby said. “One of the successes of independent repairers is that word independent. They’re entrepreneurs. They’re fiercely loyal to their own business. The challenge is to get them to be more loyal to the network. Therefore my belief is if you want consistency of outcome, the strongest networks are franchise operations and MSOs.”

Here’s why: MSOs clearly have the ability to require those running their locations to meet company-set guidelines and expectations. Franchises often benefit from having owner-operators on hand, rather than just the paid managers of MSOs. And unlike affiliate or supplier groups, franchises require more emotional and financial buy-in.

“The emotional buy-in of putting someone else’s name over the door is significant,” Murby said. “The financial buy-in is not necessarily just the cost of being a franchisee, but also the sense of managing my business in a different way. So if I’m going to buy-in like that, I’m probably going to comply to the franchise arrangement because I’ve seen the benefit of the consistency of outcome. I’m not saying that membership networks or supplier networks can’t do this. But if you’ve got hundreds of independent businesses in your group, getting them all to do the same thing is going to be damn hard.”

Murby said in looking at various countries, there appeared to be somewhat of a cycle of network development within a country, often starting with automaker networks, followed by supplier and insurer networks, and eventually more MSOs, franchises, and affiliate shop networks.

But as the number of networks proliferate in a market, Murby wrote in a white paper provided to IBIS attendees, “The profitably of work sourced though these networks can be called into question.” In some cases, he said, the work enables economies of scale but contributes little to profits. And often “the networks that are able to supply the additional work are often those that drive through at the lowest level of profitability.”

In offering some predictions about the future, Murby said he foresees larger insurers continuing to operate their repairer networks much as they do now.

“They’ve got it down to such a point that the cost, the resources they put in, versus the outcome is not that bad,” Murby said.

But he also believes some of the “network managers” – the companies running networks not as part of their core business – will look to turn more of that management over to network providers, such as franchises and MSOs, that can self-manage the network to eliminate the need for the sources of work using the network to regulate the consistency of outcome. He foresees some smaller insurers, for example, will stop trying to manage their own DRP network or even stop using claims management companies in favor of franchise, MSO, or affiliate networks that audit the performance of its network members for the insurer.

In actuality, this model exists in some small pockets in various markets,” Murby concluded in his white paper. “It reduces costs within the overall repair process and takes waste out of the process. The adoption of common, trusted standards and formal supplier management rather than low-level activity monitoring could have a significant impact on the costs of processing repairs for many organizations that deal with repair facilities, while freeing up repairers to return to their core business of fixing cars.”   o

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