Plugging the Leaks in F&I

Unrealized opportunities for profit occur all too often in the F&I office. At the recent Industry Summit in Las Vegas, John Braganini, principal, Great Lakes Companies, and Steve Veldkamp, director of training, Great Lakes Companies, faced the issue head on and shared their tried and true methods for turning opportunity leaks into profit.

The quality of a dealership’s overall sales efforts is determined by the combined transactional yield in each area of the dealership – F&I, sales, and service. From the moment the customer enters the dealership to the point of delivery, opportunities for profit can be missed anywhere along the way. To illustrate, Braganini began with the following example:

A sales manager’s front-end profit for the month (excluding lease and fleet deals) was $1000 dollars. If everything were to occur perfectly – each involved person following every step to the sale – the maximum front-end gross profit could be as high as $1500. Making considerations for the staff, competition, etc., a realistic sales goal could be $1200. Given this scenario, Braganini asked the audience where the $200 difference between front-end profit of $1000 and the established sales goal of $1200 leaked out for the month. The first step for effective remediation, he explained, is tracking and identifying the leak(s).

“If I came to your store every Monday,” said Braganini, “and told you what each sales person could have done differently to earn those $200, there would inarguably be great value in that. The targeted performance is worth a ton of money. Having the correct remedial solution would be valuable to any dealer.” To accomplish this goal, Braganini and Veldkamp developed a data driven management system to replace other commonly used methods for analyzing sales profits, such as throughput analysis.

Throughput Analysis

Braganini described throughput analysis as the traditional and most commonly used method for analyzing retail sales.¬ Throughput analysis examines the overall profit at the end of the month. If the results are not acceptable, changes are made in hopes of increasing future profits. Braganini explained, “A finished production period is examined and broken down by gross, units and/or per retail unit (PRU). The data is reviewed and a decision made as to the acceptability of the yielded results. A remedial solution is then implemented.” The problem with this method lies in the determination of the remedial solution. Since the only data considered in throughput analysis is the end of the month profit, it is impossible to know where the breakdown occurred. Braganini said the implementing remediation boils down to guessing. “Making a guess about where the leak is and making changes in attempt to remedy the problem is, at best, taking a stab in the dark.”

Though commonly used, Braganini and Veldkamp said throughput analysis is NOT a recommended form of management. “It is not capable of providing the detailed data necessary to identify a problem and come up with a solution. Whenever I guess,” said Braganini, “I am never right more than half the time. Using throughput analysis, you might adjust pay plans, implement training, or replace people in an attempt to improve profits – but if you guess wrong, you could destroy careers, the profitability of the store, or damage moral. You could ruin everything if you don’t have any data.”

To comically illustrate throughput analysis, attendees viewed a black and white clip from an episode of “I Love Lucy.” In the clip, Lucy and Ethel were beginning their first day of work at a candy factory where they were tasked with wrapping individual pieces of candy as they passed on a conveyer belt. At first it was ridiculously easy, but as the process sped up, candy after candy was missed and Lucy and Ethel frantically stuffed unwrapped candies into their mouths, hats and dresses in hopes of hiding their inability to keep up from their boss. Veldkamp described the clip as the perfect example of managing the end result.

Process Analytics

The management system Braganini and Veldkamp recommend is process analytics. Process analytics identifies all of the sub-processes, or “drivers” throughout the entire sales transaction. It is driven by data gathered on each step in a transaction. Parameters for driver performance can be predetermined and managed in order to meet objectives. It also allows for targeted driver remediation.

Top Five Profit Drivers

After years of consulting with dealers, Braganini and Veldkamp have identified the most common drivers of profit in a sales transaction. Using process analytics, each driver is easy to define, simple to track, and easy to measure. The remedial methods are also easy to define, track and execute. To track the process, they developed five simple yes or no questions for the F&I manager to respond to after the completion of each delivery. The questions address five different areas and responses are tracked using technology. They refer to the process as “Five Driver.”

“The first thing that has to be done when we go into a dealership,” explained Veldkamp, “is data collection; get those five questions answered at delivery 100% of the time. Getting the process established can be a struggle for the first few months.”

Braganini and Veldkamp described the five most common drivers of profit and offered remediation strategies for each:

1. Desking

The sales department typically controls desking compliance. It is easy to identify and is inarguable since it is listed on the sales worksheet. After each deal, this information is used to determine if the deal was closed using the standard dealership participation rate with fair terms and conditions. For example: A customer wants to purchase a $50,000 car for $200/month. The sales person gives the green light and turns them over to F&I. The F&I manager then has take over the role of sales and close the deal; either by asking the customer for a down payment of $20,000, taking the loan out to 84 months, or lowering the price of the car.

Remediation Strategy:

A predetermined, acceptable threshold for closing deals in F&I should be determined by the sales manager. Ideally the F&I office should not be used to close more than 10% ¬– 15% of deals. This requires collaboration between the sales team and the F&I department, which can be a challenge. If this continues to occur too frequently, making the dealer principal aware of the situation may be the needed catalyst for reducing this practice.

2. Turnover

Customers should be physically introduced to the financial service manager within 30 minutes of the sale.

Remediation Strategy:

If turnovers are not being done properly, the point of break down in the process must be determined. Is the F&I department too busy? If so, scheduling could be modified. Is it due to online sales ¬– customers who are not present at the dealership at all? It could be how the sales person handles customers who have secured their own financing. Word tracks can be provided for the sales team to use in these instances. A procedure for handling deals that do not take place on the floor needs to be implemented and employees need to be trained to follow the established procedures.

3. Delivery Conditions

The finance manager should receive the customer within ten minutes after their arrival for delivery. This also tracks whether a vehicle delivered was before noon. Generally, morning deliveries are better because customers are at their best, rather than tired after work at the end of the day; which leads to higher product acceptance rates. The dealership needs to be properly staffed and operate in a manner that focuses entirely on the customer once they walk in the door.

Remediation Strategy:

Evaluate the scheduling of deliveries. Deliveries need to be scheduled at reasonable times to allow for a proper delivery. If one delivery is already on the books, make other customers aware they will have to wait if they arrive at the same time and offer an alternative time. Schedule deliveries so they are not rushed and a proper presentation can occur. This typically increased product acceptance rates.

4. Menu

A needs-based menu with products and services specifically geared towards each customer’s needs should be professionally prepared and presented for every transaction. The menu should be included in every deal jacket. Deal jackets are checked for the inclusion of the menu through random audits.

Remediation Strategy:

If menus are not being used on a regular basis, training on the proper way to prepare and present a menu could be the answer. If a dealer doesn’t have a process, one needs to be established and employees trained on the procedure. The menu design and product placement may need to be modified. Braganini and Veldkamp recommend breaking products down into categories: debt, mechanical and non-mechanical categories. The menu presentation can also be reviewed using video recording and managers can be coached on improving presentations. Different menus should be prepared for lease customers, cash customers and finance customers, as each type of customer brings their own set of risks and needs.

5. The 300 Rule

Offer 100% of the products to 100% of the eligible customers, 100% of the time.

Remediation Strategy:

Customers should be offered and presented every optional service they are eligible for or express interest in. This is monitored through video recording. Videos are randomly selected and reviewed – ideally once per week, per producer, but at a minimum, twice per month per producer. If managers are not following the 300% rule consistently, training on products and product selection, and objection handling could be the answer. Make sure products that are offered are a good fit for customers’ needs - both individually and based on the demographics of the dealership’s customer base.

Setting the Stage

To maximize profits, Braganini and Veldkamp recommend scheduling time to sit down with the dealer and set driver performance parameters in each of the five areas described above. The five drivers are used to determine where the money is leaking out of the store so that the remediation can be set up to target where the leak is occurring. The PRU can be calculated when the system was followed and when it wasn’t. Examples taken from actual stores were given showing significant increases in profitability when the Five Driver system was used consistently.

The video review objectives should be specific to each dealership and should consider culture and demographics of that dealer’s customer base. Performance should be tied to compensation; having a pay plan that takes into consideration the five drivers can be a very effective tool. Pay plans should focus on product, not reserve.

The bottom line from Braganini’s and Veldkamp’ presentation is that missed opportunities can be turned into profitable transactions with the use of a data driven management system. Identifying and focusing solely on the areas in the transaction that are not capturing potential profit can effectively be remediated to maximize profits. Ultimately, Veldkamp says, “If you don’t track what is occurring, you don’t know what to attack. Manage the drivers to the objectives and throughput will follow.”