Performance Review

These measurements, known as key performance indicators (KPIs), provide insurance companies with a snapshot view of how a shop is performing in regards to alternative parts usage, repaired versus replaced panel labor, refinish labor and average claim severity. These statistics play an important role in the relationship between a repairer and an insurer. KPIs are often used as justification for increased re-inspections, estimate scrutiny, probation, or possibly even termination from a DRP program.

The pressure on a shop to "hit their numbers" is remarkable. But the calculations used in most KPI reports are flawed. A key to maintaining DRP relationships is understanding KPIs thoroughly. Understanding the goals that need to be met, how the KPIs are calculated, and their effect on a shop's profitability is paramount to maintaining a positive DRP relationship.

In recent years insurers have placed relentless pressure on repairers to increase their utilization of alternative parts such as reconditioned, aftermarket and LKQ parts. OEM versus alternative parts utilization is a closely tracked number on any KPI report, but the way this number is calculated is flawed.

There are several reasons why OEM parts utilization can be overstated. First, a vehicle may be too new for an insurer to require the use of alternative parts. These vehicles should be excluded from the calculations entirely. Second, no insurer condones the use of alternative parts for safety equipment, like seat belts or airbags. Safety related parts are high-priced items, which have a large influence on KPI scores and should be excluded from the calculations. Third, repairers receive no credit on a KPI report for choosing a more cost effective OEM part over a more expensively priced alternative part. Finally, some KPI reports calculate OEM parts percentages based off of list prices, while LKQ parts utilization is calculated using the cost factor excluding markup, resulting in an unfair understatement of LKQ parts utilization.

If confronted by an insurance partner regarding apparently high OEM parts usage, a shop must recalculate the data by omitting any vehicles too new for alternative parts and removing any safety related parts used in repairs. Recalculating the data reduces the OEM parts percentage and increases the alternative parts utilization percentage, yielding a truer picture of shop performance.

When analyzing a KPI report it is important to understand the correlations between the calculations on the report. Like damage traveling through the front end of a vehicle, KPI calculations also move in unison. That is, you can't change one number without affecting the other numbers on a KPI report. Parts, paint and repair versus replace labor are all related to each other on a KPI report.

For example, as more panels are written for replacement using LKQ parts, refinish labor increases due to the need for refinishing of edges, undersides, and blending into adjacent panels. Therefore, it is difficult to maximize alternative parts utilization without driving refinish percentages up. The opposite is true when a shop writes more repair labor on an estimate. The repaired panel percentage increases, while alternative and OEM parts decrease, and average refinish hours decrease due to less edging, undersides, blending, and partial paint deductions.

At this point in the analysis a reality check is necessary. Just because a KPI goal is set, doesn't mean it is correct. Scrutinize the goal. Verify the goal is realistic and, most importantly, profitable. There's no point in meeting the KPI goal if you aren't profitable at the goal. If the goal isn't realistic ask your DRP partner how they arrived at the goal. Ask how the KPI is calculated. Be prepared to educate and offer evidence to your DRP partner why the KPI may need to be adjusted.

A large push in recent years has been to reduce refinish labor as a percent of the total estimate. Refinish KPIs are very important in terms of a shop's profitability as they affect both refinish labor and paint material sales. Refinish goals are set lower and lower each year, minimizing profits on both refinish labor and paint materials. As refinish KPI percentages move into the low teens, shops with low paint material sales may find themselves working at break even or even worse loosing money on paint materials to meet these low refinish thresholds.

Achieving a thorough understanding of the KPI metrics used to grade your shop is just as important as a thorough understanding of the p-pages of an estimating system. Knowing how you are measured and the flaws inherent with the measurements provides a shop with greater negotiating power when threatened by low KPI scores. This knowledge empowers a shop to meet the goals set forth in the KPIs while writing a profitable, truthful bill of repair.