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Because we prepare our management accounts department by department, it is only natural that we measure the performance of a departmental manager by the results achieved by his or her department. How does this affect the wellbeing of a company?.
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Over the past three years I have been studying why some dealerships can make at least 1% more net profit than others, and it always comes down to the way people are motivated and remunerated. It should always be remembered that we are paid for what we achieve, not for how hard we work, and therefore result-driven job descriptions, not just departmental accounts, must be the key to measuring performance; these result-driven job descriptions can be based on team efforts, crossing departmental boundaries.
For a start, it is well known that the hours sold per job card raised are falling, and because new vehicles are becoming more reliable, warranty work is also declining. Therefore it is logical to think that in five years time we will not require the current number of workshop bays, unless we can sell twice as many cars or become innovative in our thinking.
In addition, parts sold per labour hour will also drop. This problem is mainly due to our poor retention of customers with three, four and five year-old vehicles and the lack of used car strategies.
Why do we not retain those customers?. It is mainly due to the sales managers actions and the way he is paid. Firstly, he will be monitored on his reconditioning costs, and therefore it is only natural that if a four year-old car is coming in part-exchange, he will value the car to trade, as it will probably require at least £500-worth of reconditioning. But by trading it, he just gives the aftersales profit away to the traders.
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By GlobalDataSecondly, four year-old cars have a hassle factor both for the sales team and the manager, and if the cars are not reconditioned before they go on display, the salesperson will sell the car leaving a £1.000 profit in the deal, only to find that he ends up with commission being paid on £500 because when it finally does go into the workshop after being sold, it needs discs, steering boots, and a thousand other things that the service department can find – bearing in mind that their hours per job card are falling. “Tough,” says the sales manager, I’m paid on my control of expenses and the retained profit per unit. “Tough,” says the salesperson, I’m paid 10% of retained profit, so we spend as little as possible on used cars. Let the customer bring it back and get the work done under warranty. By then I’ll have got my commission!.
How much time is taken up by sales managers checking invoices from the service department and by the arguments as to who authorised this and that, instead of both managers working together for the well being of the company?
Bearing in mind that had we valued the car to retail, carried out the reconditioning at £500, the profit opportunities created for the wellbeing of the company would have been beyond belief: the company would, if the reconditioning were carried out at retail, have made £275 extra gross profit, and because 80% of all used cars sold are priced under £6,000, we would have a better chance of turning this car round faster than a nearly-new one. We would have increased our opportunities for additional finance commission, and most importantly, have retained a customer of the type that the dealership needs to protect its future – especially if we had put a twelve-month warranty on the car.
All it takes to put an extra £41000 net profit on the bottom line of a dealership is to sell just one a week of this type of used car.
How many dealerships sell accessories on new and used cars to the tune of £100 per car? Very few. Why? Because of the way we pay our managers and salespeople. How many times have we heard a salesperson advise customers to buy a towbar from up the road because it was cheaper? How often have we had fall-outs when a price was given by the parts department to a salesperson for a dog guard, which when invoiced turned out to be £5 more?
Sales managers don’t put much effort into selling accessories, as by the time they have paid salespeople a few pounds commission there is little profit left for the department, and anyway, by the time the parts and service managers have added their margin, if the sales manager also adds a bit on, we have priced the item out of the market. Hence dealerships sell very few accessories on new and used cars because of departmental pay schemes.
The average dealership selling 600 new and used units could easily increase its parts turnover by £60,000 a year and at 25% profit, make an extra £15,000 contribution.
What’s stopping us making £41,000 extra plus a further £15,000? It,s the way we pay our managers and our sales team.
The same goes for the reception team and technicians. If the receptionist is only paid on hours sold over a poor basic, how can we expect the workshop to be loaded to capacity each day? How do we get an increased hourly recovery rate plus accessory sales if the receptionist is not motivated to sell?
If technicians are paid on hourly rates with time saved bonuses, how do we achieve labour sales per workshop bay in excess of £74,000 each year? Because if the hourly recovery rate is only £30 and we are selling 40 hours per week per technician, we are limited to what return per square foot we can get from the workshop.
If the parts team are paid a basic and a bit of bonus on parts sales over target, then again, they will not be too interested in how service or sales are doing.
So having painted the picture of “carved in stone” reward policies operated within dealerships, let,s go back to basics.
We have land and a building on it. Our objective is to serve the motoring public and at the same time earn a return on our investment. If we were a furniture store or a supermarket we would be looking at a return per square foot, not bonnet profit or hours sold. Maybe we should be looking at profit per display bay for cars, and return per workshop bay for labour and parts sales.
However, our major asset is our people. They are paid not for how hard they work, but for what they achieve for the company, and while they will have major responsibilities for the results they achieve in their specialist roles, they should also be charged with responsibilities of the well being of the company.
Changing the culture
The key lies with the owner of the company. Unless he learns to manage change himself, he cannot expect his team to do so. To be able to change the culture in working practices requires courage and conviction. It also requires excellent communications, upwards and downwards, and an open style of management.
Let,s start with the line managers or team leaders. In most dealerships I go into, the service manager has his inter-firm comparisons just for service; likewise the sales manager for sales, and the parts manager for parts. When they have their monthly accounts review, each is questioned only on his own department and if he has had a good month, he sits back and lets the others get their bollocking.
The first thing we could do is to ensure that all team leaders get to see each other,s inter-firm comparisons. The company accountant should operate a briefing on finance for the non-financial managers, so that each understands how to improve his own performance while ensuring that his actions do not affect adversely the well being of the company overall.
For example, if sales cuts back on reconditioning, how does this affect labour and parts sales? If sales changes its policy on retained profit per new unit, i.e. sells less but makes more profit per unit, how does this affect the volume of customer retention in the next three years – and F&I commission? If the service department reduces its productives, how quickly can we turn used cars round so that cash flow is not affected? If the parts department cuts its stock holding, how does this affect urgent orders or V.O.R.? All these “what if” questions require team leaders to think laterally, and focus on the results for the company, not just their department.
The next thing we can do is turn all employees into salespeople; that is, train all employees in product knowledge, and educate them in our used car strategy.
The next stage is to ensure that daily operating control data are placed on all department notice boards, so that salespeople can see labour sales through the workshop against budget, and technicians can see units sold and parts sales (internal, retail and workshop) every day.
We can then create an innovation team, comprising members from each department, who will be challenged to look at the performance gaps to be closed from all departments, (at first, these tend to be the moans and groans of the employees), and to discuss possible solutions. Once these have been found, the team can move on to other areas, such as benchmarking local competition, and operating customer focus groups.
Rewarding co-operation
Having started to interest the employees in changing their culture, we can then start to look at how we can pay people to think of the company, not just departments.
Without doubt, line managers mindsets will be the hardest to change, as inter-departmental rivalries have been with us a long time. It has become natural for the service department to “stuff sales” on hours taken, likewise for the sales department to moan about jobs not done right first time, on time every time; and for the poor old parts department get it in the neck from everyone – they never have it in stock, it,s on back order, or they have sold it to someone else when it was specially ordered.
The key to sorting this out is again to go back to basics. Once we have produced departmental budgets, we can then join all the departments together – their expenses, salaries, sales and gross profits, from which we then can prepare a team direct profit target.
It is crucial that we come to terms with the facts of life. Gone are the days when sales were the bright boys who made all the money, when sales managers got the biggest bonus and the best cars, and aftersales just got what was coming up for adoption and were lucky if their bonus made four figures.
By paying our line managers on total dealership direct profit, we stimulate thinking about the overall profit of the company. For instance, we can now sell accessories through the sales department without worrying if sales will make its bit of profit. Arguments about reconditioning costs stop. More employees time can be shared; e.g. sales department drivers can be doing delivery and collection for service, sales cleaners can be cleaning service customers cars, salespeople can book their customers cars in for service to relieve pressure on the reception team. The parts front counter team can be trained in reception selling skills, instead of just being number-crunchers. Technicians and parts front counter people can join forces with the sales team on Saturdays to carry out used car appraisals and take those Saturday aftersales phone calls which are a pain to any salesperson who is closing a deal.
Inter-departmental teamwork of this kind does not mean that team leaders abdicate their departmental responsibilities. What it does mean is that they think laterally about the decisions they make, and at the month-end their accountability is now both departmental and for the company’s wellbeing. Motivation of team leaders is important. There is nothing worse than one of them being on a low, it,s infectious and spreads throughout the dealership.
All the team leaders own the problem – be it poor used car stock turn, parts sold per labour hour, parts retail sales, etc., and by using the brains of all the employees through the organisation, innovation teams involve everyone in coming up with solutions
Effectively it does not matter where the profit comes from, so long as we service the motoring public’s needs professionally and get that all-important return on our investment.
Once we have the team leaders thinking laterally, we then have to look at our key players – salespeople, technicians, parts salespeople, receptionists, and even accounts staff.
They are all paid by the company, and rely on our best judgement and on the decisions the team leaders make. So if the team leaders start to think in terms of the whole company,s profit, it soon starts to rub off on the rest.
I have seen amazing results from dealerships who have opened themselves up to new ways of thinking. For example, I have seen how technicians can earn over £22,000 a year, but at the same time produce £88,000 of labour sales per workshop bay; how service receptionists earned £18,500 by being tied into labour and parts sales through the workshop instead of hours sold; how parts back counter staff achieved salaries of £16,500 by being paid on parts and labour sales through the workshop.
In one dealership, four mechanics, plus one parts person, plus one receptionist plus one salesman formed one team, and were paid on joint results; they as a team “owned” 50% of the company’s customer base, and each was therefore interested in how the other was performing, and did the follow-ups together. The parts person was interested in how many cars the salesman had sold over the weekend and what extras he had sold. The technicians were interested, as PDIs and reconditioning had to be planned; the service receptionist was interested so that he could load the shop – effectively they were all interested, as they were being paid for what they achieved, not for how hard they worked.
Car salespeople, who are trained in understanding the cost implications of marketing, demonstration expenses, the importance of incidental income, and customer retention, can perform better if they are paid on customers being retained in the aftersales area. They know we make more profit from servicing the customer,s needs than we do from just bonnet profit. CSI results improve dramatically when the customer deals with the salesperson alone for all his needs.
I accept that inter-departmental teams would not work everywhere, but dealerships which have found a way of making it work. Instead of deciding why it would not work, are the ones who are in a win-win situation, and making 3.5% net profit on turnover.
If you are over 40 you may need review your own attitude to change. There are many well-trained, experienced line managers looking for jobs at this moment, all wishing that they had learned to manage change and use the brains of all their employees for the wellbeing of their old company.
Action you can take:
Review job descriptions: are they results-driven?
Review retention of customers for service over four years.
Check retained profit in reconditioning spend.
Create an innovation team from all departments.
Consider paying managers on joint direct profit.
Copies of “The Retail Motor Industry Tool Kit” can be ordered through Sewells International on www.sewells.co.uk from their order page.
