Fast Break: Creating a Customer-Centric Operating Philosophy for Automotive Service

Introduction

I’ve been working with dealers for almost 35 years in fixed operations. I’ve had the great fortune of starting or being involved in several technology companies that were very successful in helping fixed ops. 

And while I’ve never drawn a paycheck from a dealer, I’ve worked with well more than 2,000 of them, observing the best operations around the country and taking part in implementing many new processes and technologies that produced great results — and a few that didn’t. I count many dealers and dealer personnel as friends.

 I previously gave my view about the future needs of automotive service in a book I wrote last year, Fast Lane: How to Accelerate Service Loyalty and Unlock Its Profit-Making Potential. So why write another book?

A couple of reasons. First, our industry is changing at a faster pace than I’ve ever seen in my 35 years as a participant and close observer, and most of you tell me you see the same thing. 

Second and most important, I’ve come to believe that many dealers have a blind spot about their service departments that must be corrected — urgently. We’re transaction-centric, overly focused on the RO and on optimizing the dollars from each customer visit. 

I understand why this happened: It’s an outgrowth of the showroom, where we try to optimize the vehicle-sale transaction. But I believe this approach in service has caused, and continues to cause, great harm to overall dealer health. 

What we need to focus on is how to keep every customer possible, so we can realize the most from their lifetime spend in service and sales.

 In basketball, a fast break occurs when the ball quickly changes possession, and players move fast for a scoring opportunity. You quickly change from defense to offense. A fast break can sometimes be a game-changer. 

The fast break is a fitting analogy for what I think will be an ever-more pressing need for dealers and service leaders to quickly break from the transaction-centric tradition and adopt a more customer-centric operating philosophy. 

Unlike basketball, the fast break in your service operation won’t happen in a matter of seconds. But I believe the commitment to make this important transition needs to come sooner rather than later, given the imminent changes to the car business — and the way we service cars and customers — that the future will most certainly bring. 

 If you imagine creating a customer-centric organization as drawing a bulls-eye with the customer in the center, we’re currently not even aiming at that target. We’re about 10 feet to the left, shooting at a different target that says transaction-centric. 

We must shift our aim so that we achieve the first-layer fundamentals (Culture, People, Leadership, Capacity, Facilities and Technology), then the elements they support, so that we’re laser-focused on the customer.

My goal is that Fast Break gives you the framework and motivation to make the change and some tools to help you do it. 

Ready? Then let’s get to work.

Chapter 1

Are We Really Meeting Our

Profitable Growth Objective?

For years I’ve been asking dealers and service leaders a question: What’s your primary objective in your service department?

I’ll often hear answers that are similar: Happy customers or Customers who come back or top CSI scores.

I don’t hear too many dealers or service leaders list profitable growth as a primary objective.

You could argue, I suppose, that the common answers imply profitable growth—that is, if you keep your customers happy and satisfied, they will come back.

But I take a different view. 

I don’t think that our industry, by and large, is optimizing the service-customer experience to the degree it could or should, and the consequences of this reality are only becoming more profound. 

Let’s start with some stats:

If you look at fixed-operations stats from NADA, you see what might be a troubling trend.

Since 2010, we’ve seen fixed operations log largely consistent annual growth rates of 4 percent to 6 percent. (In this stretch, there’s a 1.1-percent decline between 2011 and 2012; it seems an anomaly amid the larger trend.)

If you look deeper, you’ll see the industry achieved significant 8-percent growth in fixed operations in 2016—the largest lift in the past nearly 10-year stretch. If we think back to all of the airbag-related recalls that year, I think we can explain why dealership service departments logged more work.  

But since that year, fixed-operations growth has been more modest. 

In 2017, NADA says fixed operations across franchised dealerships grew about 3 percent. As 2018 comes to a close, it’s looking like it’ll be another year of 3-percent growth. 

Fixed Operations Continues to Grow

Fixed Operations Growth

Source: NADA

I’m not suggesting this growth is bad. Far from it. Any growth, in any business, is a step in the right direction. 

I would suggest, however, that there’s a little more to the growth story we should be thinking about. 

Let’s take a step back for a moment, and consider a couple more questions: 

Isn’t it a little curious that fixed-operations growth in the past few years tracks very closely to the respective annual rates of growth in new vehicle sales?

Is it unfair, courageous or crazy to suggest that, with all the new vehicles and customers dealers have put on the roads for nearly the past decade, we should see even better growth rates?

Going a step further, isn’t it reasonable to think that if one of our primary concerns is customer retention—as evidenced by nearly 57 percent of dealerships saying it is, in fact, a primary concern—then maybe, just maybe, we’re not doing the job of retaining customers as well as we could or should?

Now, let’s ask a different but related question: Has this recent growth really been profitable?

On one hand, the answer is absolutely.

If you look at NADA stats, you’ll see that fixed operations is contributing a larger share of dealership gross profits for most stores—up from 45 percent in 2012 to 49 percent in 2017. (NADA’s projections suggest the fixed-operations contribution to dealership gross profits ran about 49 percent in 2018, too.)

Meanwhile, through this same period, service revenues have remained stable at roughly 12 percent of overall dealership revenues. 

These numbers seem pretty good and healthy until you start considering that gross profits have been continuing to decline in new- and used-vehicle departments in recent years, even as revenues grow. 

Against this backdrop, wouldn’t it be reasonable to expect that if we really were achieving profitable growth in fixed operations, we’d see a more profound lift in both fixed-operations revenues and its contribution to total dealership gross profits?

All of this suggests to me that something is most definitely wrong. 

We don’t really seem to be retaining as many customers as we rightfully should, given our track record of new- and used-vehicle sales. And, since we aren’t retaining customers as optimally as we might, we aren’t really achieving the goal of truly profitable growth, year after year. 

I feel the need to call this situation exactly what it is—a sign of significant underperformance in fixed operations, no matter what the official statistics appear to suggest. 

It’s my belief that the primary reason behind this underperformance is the way we service (or don’t service) our service customers. 

By and large, it seems our customers exist to serve our purposes of selling more hours and work to make more money (the transaction-centric mindset) rather than truly serving customers to develop the trust and loyalty that will keep them coming back and not leaving us for good (the customer-centric mindset).

The goal is profitable growth.

In the following chapters, we’ll examine how you can make a fast break toward a more customer-centric operating philosophy and, perhaps more important, why this philosophy is essential to adopt today, before the chance for you to make your break passes you by.

For now, though, I’d respectfully suggest that we stop kidding ourselves. Yes, as an industry, we might be growing in fixed operations and, yes, we might be making money.

But I think you’ll agree that we could and should do better. The opportunity to achieve profitable growth, year after year, is out there. 

My question to you is whether you’ll have the fortitude and will to seize this opportunity for you and your customers. 

Chapter 2

A Tougher Road Ahead

Fast breaks in basketball don’t happen if players are standing on their heels. 

That’s why coaches, in basketball or any other sport where reaction time and speed are critical factors, implore young players to stay on their toes. To be up and ready to move. All the time. 

I share this analogy because it’s fitting for the situation where today’s dealers and service leaders find themselves. I believe we are in the car business’s equivalent of a fast-break moment when it comes to adopting a customer-centric operating philosophy in fixed operations.

We have a choice. We have the option to either react to the moment, or it will pass.

Now, I consider myself a pretty even-keeled, level-headed person. 

In fact, I got my pilot’s license in part because flying a plane requires an ultimate degree of control. Even in dire, panic-prone situations, it’s the steady hand and mind that keeps the plane in the sky or gets it, and your passengers, safely back to ground.

In other words, I wouldn’t suggest that we are in a somewhat urgent moment for fixed operations if I didn’t truly believe the time to transition to a customer-centric operating philosophy is upon us.

This urgency is rooted in the current and emerging realities of the auto-retailing environment:

Reality: Dealers will expect better results than you’re delivering to ensure the overall health of their dealership investments.  

It’s no secret that margin compression on the variable side of your dealership is significant these days. The average gross margin for new-vehicle sales declined to 2.5 percent in 2017, from 3.3 percent in 2015 and a whopping 4.6 percent as recently as 2011, according to NADA data. On a net basis, most dealers now are losing money selling new vehicles.

Meanwhile, used-vehicle gross profits as a percentage of transaction prices continue to slide, down to an average 11.7 percent  in 2017 from 13.7 percent in 2011, according to NADA. 

And for the first time in the memories of anyone I know, the average retail net profit in used vehicles went negative in 2017, sliding to a -$2. Of course, one of the primary drivers for this result is that luxury brands miscalculated residual values of vehicles coming off lease, which forced dealers to buy them back for more than they could be sold at retail. 

Join those grim statistics to the fact that we’ve probably peaked on the sales side. Indeed, it looks like the industry is experiencing a soft landing, but we’re still going to be selling fewer vehicles and making less money as we do.

I suspect many dealers are viewing these financial stats with the same reaction as Scooby-Doo on a Saturday morning: Ruh-roh.

The bottom line is that dealers will, out of necessity, be leaning more heavily than ever on fixed operations to drive the financial results they expect from their stores. 

Reality: A different set of customer expectations: The financial pressures on dealerships are occurring at the same time as  the fundamental relationship between American consumers and the process of buying an automobile continues to shift.

For good reason, Americans have come to regard the car-buying experience on a par with getting teeth pulled on the list of unpleasant episodes in their lives — thanks to the time it takes to complete the purchase, the annoying persistence of price haggling, and other aspects of the transaction that spell aggravation, apprehension and tension for buyers.  

So, if there were reverse bucket lists of experiences that most Americans would want to avoid until the day they die, surely dealing with the new-car-buying process would be at or near the top of many lists.

The general distaste for the car-buying experience hasn’t been lost on a growing body of entrepreneurs. There are plenty of companies offering alternatives to the traditional car-buying experience. (Car vending machines are a neat gimmick.) 

Meanwhile, dealers are playing catch-up. After years of pooh-poohing or scoffing at the idea, dealers are now recognizing that a digitally driven sales process isn’t just something for the future, its time has arrived today.  

Consumers can access any number of vehicle-research sites and can browse inventory online. The dealer, OEM and third parties are integrating their processes—for example, the credit application is online and helps speed lending decisions; other portions of the F&I process have been moved online or streamlined to reduce customer wait times; test drives can be scheduled online; and you can even make deposits prior to stepping foot in the dealership. 

These advances in digital retailing lessen the Number One pain point of the vehicle purchase: time spent in the dealership. By blending traditional processes with online options, consumers can now tailor the purchasing process