Cut to Grow
A recent election in France demonstrated a major difference in management philosophy. As you may know, several countries in Europe have spent themselves into very deep holes and as part of the European Union, the task of bailing them out has fallen to the most affluent countries. This is mainly Germany but also to some degree, France. The German solution for these countries is extreme austerity, cutting spending in every way possible. The cost of bailing out these countries therefore affects countries like France, with key partners suggesting that they must share in the austerity, cost-cutting mode. The new president of France disagrees. Instead he wants to emphasize growth. His viewpoint is that cutting costs without also investing in growth projects, creating more jobs, and increasing national income from exports and other initiatives will cause the economy to shrink and become even less able to fund loans needed by suffering members of the European Union.
Over the years I’ve witnessed many companies that got into financial trouble. A typical solution has been to call in the bean counters. For them, cost cutting is of supreme importance. But I’ve observed that without a corresponding effort to grow, cost cutting will cause the company to shrink and become even less able to pay debts and survive. Fortunately I’ve also known a few growth-oriented shop owners. When a recession hit and jobs became scarce, their first impulse was not to lay off workers, cut hours and look for shortcuts and lowest cost parts and materials. Instead, they took the viewpoint that the most essential action was to find any way possible to expand and increase business volume. At the time I was surprised to find these shops doing unusual things like painting boats, buses and horse trailers, or leasing paint-booth time to filing cabinet manufacturers. And when the economy bounced back, they were still there, while some of their cost-cutting competitors were long gone.
Today we are still in a slow economy in many parts of the U.S. It’s not surprising that implementing “lean processes” is a popular strategy among shops these days. But a question comes up. Is it more profitable to put a majority of time and resources into maximizing efficiencies, ordering spaces and cutting costs—or would it be more profitable to focus on increasing business volume and the number of quality customers? Might it be possible that this intense focus on being “lean” and cost cutting is driven by a dependency on insurance revenue and insurance company pressure to lower prices?
A local shop in my area surprised me when they dropped two major DRPs and shifted their focus entirely to maximizing business from local dealerships. At the time it seemed to me this might be a form of financial suicide, but a year or so later, I see this shop opening several estimating satellites at dealerships, adding employees and noting that profits are way up. I also heard one employee comment that no longer having to purchase used parts from a required vendor or having to use aftermarket parts as dictated by a DRP was one factor in the increased profitability of this shop.
Once again, management guru Peter Drucker’s advice may be on target. He says, “Marketing and innovation are the foundation areas in objective setting.” When a shop’s top priority is efficiency and cost cutting, these “foundation areas” may suffer to the point of business stagnation. Without an increase in revenue, the best that can be hoped for is squeezing a bit more profit out of existing revenue. This growth viewpoint calls for dedicating a portion of scarce resources to developing new business. Without taking a detour from the core business of collision repair like the guys who began painting horse trailers and metal file cabinets, shop owners who have focused heavily on growth like the guy who dropped DRPs to maximize his dealership business, should in the long run enjoy more profits.
This is not to say that there are not many shops putting in lean processes, maximizing efficiency, cutting costs and still focusing on growth and building new business But the shops I see doing this have abundant resources to do both. Many are multi-shop operations with both management and marketing teams. But Drucker points out that, “No business can do everything…. It has to set priorities.”
For a business with limited resources, while it makes sense to implement lean processes, it would seem the top priority still has to be growth and increased revenue.
Tom Franklin, author of Strategies for Greater Body Shop Growth, has been a sales and marketing consultant for more than 40 years.