Management Basics Part 3 -- Getting What You Pay For

By Gary Hart

One of the most written about topics in the AGRR industry also happens to be one of the least solvable problems--pricing. Many shop owners and managers have put the blame on the networks and insurance companies for their failing business. Surprisingly, and as unpopular as this will sound, it is your fault. Before anyone takes offense to this statement, let's take a look at how your company interacts with its vendors.

The AGRR industry has three distinct sets of vendors that shops rely on to maintain their business: insurance companies, third-party administrators/networks (TPAs) and wholesale suppliers (distributors). To put the AGRR food chain in to perspective, let's map out the way the "system" works.

First, we have the insurance companies which ultimately decide whether they want to be burdened with having to internally handle a glass claims program or outsource it. In most cases, the insurance companies turn to a TPA to handle all aspects of their glass program when they choose not to handle it internally. In this outsourcing process, the insurance company mandates to the TPA the discounts and pricing guidelines it expects to receive from the glass shop (provider) which we will call the "insurance rate."

Here is where it gets tricky! The TPA takes the insurance rate and sometimes creates a different set of discount and pricing rules. These rules are usually increased; therefore creating a spread that goes directly in to the TPA's pocket, which it will maintain is its service fee. For example, World Acme insurance mandates that its glass program be 30 percent off NAGS with a $30 kit and $25 per hour labor. In this example, World Acme will outsource its glass program to our fictional TPA, Linksafe.

Linksafe takes World Acme's discounts and pricing guidelines and now mandates the following "contract rates" to the providers; 60 percent off NAGS, no kit and $40 flat rate labor. When the provider completes the work, Linksafe makes payment to the provider based on the contract rate and invoices the insurance company at the agreed upon insurance rate and retains the difference. This is just one example in a list of many to illustrate this process.

In all fairness, there may be some insurance company to TPA relationships where the TPA simply provides its services for a fixed charge while not changing the discounts and pricing. As you can see, your shop has very little say in this process and ultimately you are at the mercy of the TPA.

In the repair and replacement process, the glass shop has to purchase materials through a distributor to complete the job and relies on many distributors to fulfill its product needs. Out of the entire AGRR system, this is one of the areas you can change, albeit only through volume and good vendor management. Volume is an easy one as it is part of the scale of economy. To put it simply, you purchase greater volume and your wholesale pricing drops. The only caveat to this is if your shop happens to be in a depressed market where you may be able to negotiate better pricing with your vendors because they are hungry to make a sale.

So the question that is probably on your mind is, "What can I do to get what I am paying for?" That's right, I said "what you are paying for" because indirectly you are paying for the privilege to work with your vendors and distributors just as they do with your organization.

The first thing you will want to do is determine which vendors contribute the most to your business. These will be the vendors we will want to focus on as we utilize good vendor management techniques. At the end of part 4 of this series you will be able to:

  • Identify which vendors to manage (key vendors),
  • Enhance relationships with the key vendors,
  • Reduce the risk of vendor nonperformance,
  • Learn to identify and use key performance indicators (KPIs),
  • And find out how to implement an effective vendor management progam.
The first group of vendors we will look at are the insurance companies and TPAs. From your current POS system you should be able to print a sales report that will give you a breakdown by vendor (i.e., Safelite, Lynx, Allstate, etc.). You will want to select the date range for March 1, 2004 to February 28, 2005 and if possible, have the report sort the order by dollar amount, highest to lowest. As we go through each vendor group, we will want to keep in mind the following questions: How does this vendor support our existing or new business objectives and where will this vendor affect our business?

Without a doubt, each vendor at the top of your list accounts for 80 percent of your gross revenue, however this isn't the end-all when it comes to dealing with a vendor. Let's use our fictional TPA Linksafe to illustrate how a vendor may support your existing business objectives while adversely affecting your net-profit or operating margins.

In this example we are going to say that Linksafe accounts for 100 of your 150 claims per month with an average invoice of $275, for a gross contribution of $27,500 per month. In addition, let's say that each invoice we submit to Linksafe has an average hard cost of $175 (e.g., R&R materials and labor only). At this point, before any administrative and overhead costs are inserted, our Linksafe example has a net profit of $10,000 per month. This is where many business owners stop and make the assumption that working with a certain vendor, like our fictional TPA Linksafe, gives their business a pretty decent profit margin and in even more cases many never even run the reports necessary to come to this conclusion, these are the businesses that are failing.

In Part 4 we will pick up the pace and bring in all of the other factors that will help us determine your true net profit for a certain vendor. We will then look at ways to negotiate better discounts with distributors and how to squeeze extra profit from the TPAs. At the end of part 4 we will have a plan in place that will allow you to benchmark and manage your vendor relationships on a regular basis.

Gary Hart is CEO of eDirectGlass.

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