Retail

Maybe It’s Time to Re-Examine the Principles of Managed Care

Michael McGregor
Posted on June 27, 2019

A lot has been written about the problems Sears Holdings Corp. has been having with its stores, so I won’t pile on about that. I can pinpoint, however, the exact date Sears Auto Centers began their long, slow decline: June 11, 1992. That was the day the California Bureau of Automotive Repair charged Sears with systematically defrauding customers by overselling unneeded parts and services.

In response, Sears eliminated any sort of technical repair like tune-ups, diagnostics, A/C service and the like. Those big, beautiful, busy 20-plus bay stores that were each doing $3 million revenue in 1992 dollars (that’s $5 million today) never recovered. Sears customers accustomed to one-stop shopping were forced to go elsewhere.

I remember this because I was running the marketing for the western region of a major tire and service chain at the time. While we weren’t paying mechanics and setting quotas in quite the same manner, we tracked shock sales per 100 cars by store, benchmarked brake sales per 100 cars and spiffed brake caliper sales — practices that were just a little too close to what got Sears in trouble.

While Sears Auto management cut and ran from repair, our company’s more enlightened leaders challenged us to change and to seek out more customer-friendly ways of achieving our financial goals. Among the many innovations implemented in response, the concept of managed auto care was born.

Managed care incentivizes the service provider to profitably manage the quality and quantity of service delivery.

Managed care is different from “fee for service.” It involves a contractual arrangement with individuals or fleets (think of them as “members”) to provide for all of a particular vehicle’s maintenance and repair needs over a two- to three-year period. An emphasis on preventive maintenance to prevent breakdown “bends the cost curve” over time as managed care incentivizes the service provider to profitably manage the quality and quantity of service delivery lest they suffer the downside.

The capitation of fees (fixed payment for each member) shifts risk from the consumer to the service provider, but offers substantial potential benefits to both. For consumers, the benefits should be the following: higher quality care at budget-able monthly or annual fees; protection against paying for unexpected and expensive repairs; and the elimination of the perceived conflict that “selling” services and repairs entails.

Managed care involves a contractual arrangement with individuals or fleets to provide for all of a particular vehicle’s maintenance and repair needs over a two- to three-year period. It features something the financial markets love — recurring revenue
Managed care involves a contractual arrangement with individuals or fleets to provide for all of a particular vehicle’s maintenance and repair needs over a two- to three-year period. It features something the financial markets love — recurring revenue
It’s peace of mind. In return, service providers can expect higher customer retention; higher revenue and productivity per repair facility; lower operating costs; and a greater share of the consumer’s wallet.

By focusing on getting groups of vehicles or selling “memberships” that capture long-term revenue streams, managed care salespeople (or better yet an interactive website or call center) are more productive and generate higher sales volume per facility than the traditional shop. Members are “sold to” only once over the course of their membership instead of every time they come in. Then, they are sold again (likely at higher rates because of higher mileage) at renewal time several years later.

The higher sales volume is achieved by keeping the sales process separate from the repair process. In the fee-for-service model, sales are dependent upon the number of technicians on hand on any given day and how busy they are that day. Sales can be shut off if a salesperson is reluctant to commit to the customer that the work can be performed that day.

In contrast, sales under a managed care contract are not shackled by service delivery constraints.

In separating the sales process from the repair process a managed care facility is able to reduce the typical fee-for-service integrated sales/repair 10-step process down to a five-step repair-only process. It cuts out about half the time. The repair staff is solely focused on executing the maintenance and repair plan for each member’s vehicle knowing they will see the member again several times per year.

Managed care positively impacts the three major cost components of a shop: payroll, rent and marketing. Here’s how.

Payroll: a higher ratio of technicians to salespeople.

Rent: larger facilities in perhaps less visible, less costly locations.

Marketing: more efficient customer acquisition process.

And managed care features something the financial markets love — recurring revenue. Let’s say the enrollment rate is 10 members a month. At Month One you have 10 paying members. At Month Two you have 20 paying members. At Month Three you have 30 paying members, and so on. At the beginning of every month you start day one with a higher base of revenues than the month before, as long as you retain those members.

I read with interest Modern Tire Dealer’s summary of Rich Kramer’s presentation regarding inflection points. (See “Goodyear’s Kramer warns of changing attitudes.”) Disruption is, indeed, coming to the industry, but we have time to prepare for it.

Good leaders try to see over the horizon and figure out where to go. Kramer, chairman, CEO and president of Goodyear Tire & Rubber Co., is telling us all to start anticipating these changes and planning for them. Perhaps there’s something in these managed care principles that deserve a closer look.

In future pages of MTD, I’ll publish all of the results, research and learnings from the only real-world test of managed care of which I’m aware. After a decade of thought, research and planning, a dedicated team of tire and service professionals tested managed care for 18 months in Charlotte, N.C., in the early 2000’s. Everything will be explained, and all of the problems, mistakes, failures and successes of managed care will be examined.

Maybe there’s something here that independent dealers can use to address the changes Kramer sees coming. ■

Michael McGregor, “the Duke of Managed Care,” is a partner at Focus Investment Banking LLC (focusbankers.com/tire-and-service) and advises and assists multi-location tire dealers on Managed Care in the automotive aftermarket. For more information contact him at michael.mcgregor@focusbankers.com.

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