A Look at Performance-Based Agreements
At the end of 2015, CARSTAR signed its first performance-based agreement (PBA) with an insurance carrier. Today, CARSTAR Vice President Arlo Johnson says that the majority of shops within the CARSTAR network participate in some type of PBA with one or more insurance partners. And he expects that by the end of the year, all of the shops under the CARSTAR banner will participate in at least one, if not more.
Johnson explains that PBAs can be compared to a more committed DRP relationship. Johnson says that PBAs—contracts between a shop and an insurer that require certain KPIs to be met—can be daunting to a shop owner because penalties are enforced if these goals are not met. However, this type of agreement does have benefits and can allow shops to operate with less oversight from insurers and offer a sense of security that traditional DRP programs cannot.
How prevalent are PBAs in the industry?
I wouldn’t say that it’s something new but it’s new to CARSTAR. From what I can tell, performance-based agreements have been around for some time. Different carriers employ them with different MSOs. I know that certain carriers are now starting to explore performance-based agreements where they haven’t previously. I think it’s becoming more common across the top carriers in the network.
What is the difference between a PBA and a traditional DRP?
A performance-based agreement is an extension of a DRP. Think of a DRP like dating. Performance-based agreements are more like marriage. Both have referral lists. Performance-based agreements are different in the fact that there are specific KPIs that are spelled out within the agreement. They can be different KPIs, but those that are chosen have specific numbers that are associated with them that insurers expect you to hit. From what I’ve seen, they can take on many shapes and sizes. For example, your shop’s length of rental (LOR) would have to be a certain number of days. If you underperform relative to those number of days, some form of payback will be due to the carrier to cover the loss.
How exactly does that work?
We have network-level agreements with KPIs and when we achieve these, we’re all good, and when we don’t, we’re liable for whatever adjustment is necessary. It could be a payment back to the insurance carrier or it could be a forward-looking adjustment to estimates for a period of time. It depends on how the contract is written.
For a shop owner that’s used to a more traditional DRP relationship, a PBA might seem daunting. Why would a shop owner ever want to do this?
It can be intimidating. Yesterday, a shop owner may have been on a DRP without any penalty and, today, he or she is operating where they may have to face a fine if they don’t meet certain objectives—but there are benefits. Like I mentioned before, there’s the ability to work within a self-managed network. Shop owners in this type of agreement may find themselves in a more autonomous network with less oversight from the carrier. Beyond that, there may be an opportunity for more volume. Some of these agreements allow shops that perform well to secure more business than they would have on a DRP. The top spots on referral lists may be given to shops that are performing well under a PBA.
Another benefit is that a performance-based agreement can offer a sense of protection. If you’re involved in a performance-based agreement with an insurer, you’re a true partner to the carrier. What I mean by this is that through this type of agreement, underperformance is measured and addressed with the opportunity for the MSO to correct and improve behaviors. In a DRP agreement, a shop owner may not get the opportunity to correct this behavior and will be thrown right out of the DRP.
Are there certain KPIs that shop owners should pay more attention to than others?
The main ones that I’ve seen are cycle time and CSI, which makes sense. Body shops are an extension of insurance businesses, and it’s important for body shops to understand that they need to take care of these customers. If body shops do a poor job, it’s likely that the customer will look for a new insurer, so that’s why CSI is so important. As far as cycle time goes, it’s important to do a quality job but it’s also important to do it as quickly as possible to mitigate the cost of rental that gets passed back onto the insurance carrier. Beyond those two KPIs, it varies.
What advice would you give to shop owners to make the most of a performance-based agreement?
I think the main thing is awareness. Pay attention to the goals of the program and make sure that not only are you aware, but that your employees are aware of the goals as well. Identify opportunities to make adjustments in your store relative to performing against those agreements and leverage the resources that your franchisor has provided to help you meet these goals.