Keeping Optimism in Check

Jan. 1, 2012
Being overly optimistic can lead to poor business decisions and an unhealthy bottom line.

I recently heard Larry Baker, a shop management expert, speak at a local auto body association meeting. Baker works for DuPont as an executive facilitator, a consultant of sorts who helps DuPont customers manage their businesses better. Baker spoke about having better staff, better internal processes, providing more value for customers and achieving better financial performance. The financial-performance part especially caught my attention.

He said most shops operate on what he called “lagging indicators.” They only find out how well they’re doing at or after the end of the month. He said superior shops operate on leading indicators—what I would call dynamic, daily, money monitoring indicators. Instead of getting sales and profit figures when the performance period is over, Baker suggests keeping aware of financial performance as it happens.

“I’ve noticed that some people are prone to what I would call hyper-optimism. Their expectations are very often vastly out of touch with probable reality.”

I thought back to some of the serious financial errors I’ve seen and I could see that an owner sometimes thought he was doing better than he actually was. So he spent more than he could afford at the time. If he had been on top of what was really happening, he would have been less likely to spend money he didn’t have.

This phenomenon reminded me of an article in Time Magazine (June 6, 2011), called “The Science of Optimism.” The author reports on a number of studies that show that “optimism may be hardwired by evolution into the human brain.” A person’s vision of the future is often rosier than reality. Possibly, as the author notes, because positive expectations enhance the odds of survival, optimists live longer and are healthier. That’s the upside, but the downside is that “overly positive assumptions can lead to disastrous miscalculations.”

I’ve noticed that some people are prone to what I would call hyper-optimism. Their expectations are very often vastly out of touch with probable reality, so they take steps and make purchases based on a faulty analysis of what is likely to happen. Baker’s suggestion to keep abreast of leading financial indicators might reduce some of those unrealistic assumptions before they became irreversibly costly.

But it occurred to me that there could be other leading indicators that could cost a shop in other ways. One shop owner told me the things he hated most in his business were surprises—little troublesome things like an engine problem light on or an airbag error that can take added technician time to track down, just when a customer expects to pick up a car.

I wondered what leading indicators could head off this kind of delay. It would seem that better internal communication would be the key to avoiding these kinds of surprises. A production manager communicating to the estimator about a possible delay in time could do much to alleviate this kind of problem. But a production manager or estimator who was overly optimistic about delivery times could be unlikely to treat the possibility of a late delivery seriously, possibly losing the shop a potential repeat customer.

The issue of leading indicators is a standard concern in a business that relies on inventory to deliver a product. Inventory needs in this kind of business are often based on repeat customer demand projections, but in the collision repair business, customer volume is highly unpredictable. Delays in receiving parts can be a major source of delay in completing and delivering vehicles to customers. Rosy, over-optimistic estimates of parts availability can be deadly.

Shops that have a high rating for vehicles delivered on time often have a policy of doing complete teardowns at the outset to ascertain exactly what parts will be needed. Shops that do have a relatively stable flow of repeat business from a dealership, used-car lot, government agency or commercial fleet can gather leading indicator information by simply staying in close touch with each key source person and asking for the probable volume of vehicles to be sent.

Finally, one of the best sources of leading indicators is a good shop management program, but many shops either don’t use one, or use only a small portion of the features available in a system. It may be that the natural optimism of a shop’s owner or manager leads him or her to believe that most of the key information can be kept in mind.

If Larry Baker is right, more than 80 percent of shops in the country operate far below their potential for volume, efficiency and profitability. The optimism article notes that sometimes “optimism is irrational and can lead to unwanted outcomes.” Just to be safe, it would seem to be a good idea to check those financial leading indicators and keep on top of communication indicators to run a more profitable shop.

Tom Franklin, author of Strategies for Greater Body Shop Growth, has been a sales and marketing consultant for more than 40 years.

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