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Modeling Behavior

Examining Financial Modeling for the Dealer Community

Jul 8, 2016 12:22:28 PM


By Scott Cullen

If you talk to Jerry Newberry, President and Managing Partner of Pros Elite Group, he’ll be the first to tell you that most dealers are using some variation of the “Johnson model” in their business. After all, it’s the standard financial model for the office technology space. Why mess with what works, right?

Wrong.

The problem is most dealers across the United States and Canada only work with a portion of the model. And that scenario has a negative impact on profits.

“There are well over 100 office imaging benchmarks that we look at within an office equipment company,” explained Newberry. “For the model to accurately allow you to identify profit opportunities, all the revenue and expenses need to be allocated to the correct categories. The inconsistency that we see is all over the place. We find that in just about every dealer we visit.”

The widely accepted Johnson model has been around for many years and has been adjusted for the industry, but Newberry says the model is only as good as accuracy of the allocation of the revenue and expenses.

“What we find a lot of times is they have not bucketed the revenues and expenses correctly, so they are showing that they are better in some areas, when in actuality there are big opportunities for them,” stated Newberry.
 

Jerry Newberry, President and Managing Partner of Pros Elite Group
Jerry Newberry, President and Managing Partner of Pros Elite Group

Does the size of dealership matter when it comes to focusing on only portions of the model?

“No,” responded Newberry. “The bigger they are the more opportunities they have [for improvement].”

Another interesting tidbit offered by Newberry is that the more tenured the manager, the larger the organization, the more issues Pros Elite tends to find.

Newberry, along with Senior Partners Steve Rolla and Jeff Kelly, possess more than 100 cumulative years of experience in the industry. Rolla has run three dealerships, while Newberry has worked for Global Imaging as corporate officer and VP of service, as well as Xerox, during the course of his career. Kelly has been the president of his own company and held service VP and management positions within Xerox and the independent dealer channel.

Ready to Launch
When a dealer contacts Pros Elite Group they either know they are losing money or have a feeling something’s not right. The problems that dealers tend to have are often easy for the pros at Pros Elite to identify and are typically found in service, sales, and admin.

Here’s how it works: Pros Elite assesses where the dealership currently is and identifies where it is against the model, as well as the reasons why the dealership is in its current position. At that point, Pros Elite develops a detailed action plan and works hand in hand with the dealer to execute that plan to attain high profits, operational performance, and benchmark levels of customer service.

“The day-to-day demands of the business often direct the activities of the management team,” explained Kelly. “The challenge for a company executive is to break his or her normal pattern of behavior and focus on executing our customized plan of improvement. Knowing what needs to be done is very different than consistently executing the process that drives results within a dealership. We teach the management team how to create bandwidth within their busy day and direct that time toward achieving measureable improvements. This is mission critical in order to create long-term, sustainable results.”

One common issue Pros Elite finds is the complete lack of a sales management process. “Our industry is in a flat or slightly shrinking mode, and more so than ever there’s a need for a defined sales management process,” stated Rolla.

That sales management process should outline everything from how a dealer recruits to how sales activity is measured, including having a precise definition of how that activity is executed. Also critical are benchmark models for sales territory design and compensation for not just revenue but also gross profitability. Finally, the model takes the dealership to areas in the industry they have yet to penetrate such as MPS and MNS.

“From an overall operations standpoint, there is a need in almost every dealership to align the personnel in the right financial and functional buckets, so the dealer principal can identify where they are functionally profitable and where they are functionally not performing,” added Rolla. “When we align the personnel in the correct functional areas, almost every dealer’s financials change dramatically. This becomes the starting point for us to begin to work to improve the productivity and profitability functionally.
 

Steve Rolla, Senior Partner of Pros Elite Group
Steve Rolla, Senior Partner of Pros Elite Group

As one might expect, much of the initial assessment revolves around the dealership’s financials. By using a portion of the model, or not managing and monitoring things as they should, lost revenue and profit opportunities are the norm.

“As a rule of thumb the mass majority—90%—are making half of the net operating income they should,” revealed Newberry. “If the benchmark is 14% to 15%, they’re in that 6% to 7% range so they’re leaving a lot of profit on the table.”

Newberry’s background is on the service end of the business, and service-related issues can be a huge financial drain on a dealership. The average service margin he sees is about 10% points off the model. So if the benchmark is 52% for aftermarket and service, 42% is the norm he sees in the industry. Within our current dealer group, we are achieving well above benchmark in all aftermarket profit measurements!

“The aftermarket side is the big ROI impact we have on clients,” noted Newberry.

Incidentally, Pros Elite has a general rule that within four to six months of engaging with a client, its services are usually paid for, if only because of the impact on the aftermarket side.

“We find margins in service low, margins on the supplies side low,” said Newberry. “We know and have all the processes to put into place to begin to address whatever areas are out of line in the aftermarket, whether it’s productivity of the employees, parts over expenditures, or whatever it might be.”

Another common issue tripping up dealers on the service side of the business is that service call activity is typically eight to 10 times higher than it should be. There are various benchmarks Pros Elite uses to gauge the productivity of employees and the reliability of the dealer’s installed machine base, which dictates how many employees the dealer needs to manage the revenue generated by service.

“We have almost a 100% success rate of cutting [a dealer’s] call activity coming into the company in half within a 90-day time frame,” boasted Newberry.

Rolling in the Deep
From beginning to end, the process of placing the dealership back on track with the model usually runs approximately 12 to 24 months.

During this time, the dealer can expect weekly, bi-weekly, monthly, or quarterly calls where Pros Elite measures the progress of that dealer functional group, or the overall dealership performance with the dealer principal.

“We are their conscience,” stated Rolla. “I like to refer to ourselves as the Weight Watchers scale. It simply tells you if you did or didn’t get it done and tells you where you should focus. That’s what we do on those calls. We’re always in touch with that dealer from either the overall functional side or overall performance side throughout the course of the engagement. Because [the action plan] is so thorough and conscience- rather than critic-oriented, clients rarely leave us. We become that compass for their dealership.”
 

Jeff Kelly, Senior Partner of Pros Elite Group
Jeff Kelly, Senior Partner of Pros Elite Group

What’s the one thing that is most surprising to dealers after Pros Elite delivers their assessment?

“The principal is astounded by the lack of hours that [service technicians] are working and the amount of duplicate parts replacement going on inside their business, which is costing them hundreds of thousands of dollars,” responded Rolla.

ROI is important to dealers, and Newberry reported that the goal is a 10-times return on the investment the dealership makes in Pros Elite. Apparently, that’s a conservative figure.

“In most cases, it’s not 10-times, it’s 20-times, 30-times or 40-times,” said Rolla.

Even as the industry model evolves to include benchmarks for emerging services such as MPS and managed services, dealers can’t afford to pick and choose what benchmarks they’re going to follow.

“The industry is changing, margins are shrinking,” said Newberry. “You can’t run your company today the way you did 15 years ago and be successful.”

Change or Be Changed
It may be an exaggeration that one can’t run their dealership the way they did 15 years ago, or even 10 years ago, and be successful. However, it cannot be overstated that the industry, as well as its product and service offerings, is evolving. I’d venture to guess there are still plenty of dealerships conducting business the same way as they have in the past and doing all right. But, can they be doing better? Especially if they are now offering new products and services that they haven’t historically?

I’ll buy what the Pros Elite team is selling there, and say, yes they can. That possibility is as good a reason as any to take a step back and objectively evaluate how your dealership is (or not) using the model or what benchmarks within the model you’re overlooking when running your dealership.


This article was originally published on TheCannataReport.com and appears here in slightly different format.


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About The Cannata Report
Founded in 1982 by Frank G. Cannata, The Cannata Report has since become a leading domestic and international management media resource for the independent office products and workflow solutions dealer channel. Along with hosting its annual Awards & Charities Dinner, The Cannata Reports publishes 10 issues of its magazine per year and offers a host of services, including integrated marketing, event sponsorship, general industry consulting, panel assembly and moderation, and guest speaking engagements.