OVERLAND PARK, Kan. — Fourteen years ago I became a manager
of a BHPH operation associated with a large multi-franchise dealer group in
Texas. We had a related finance company with a $17 million portfolio. There
were 2,500 open loans averaging 180-week terms at 26 percent interest. This
operation was what I referred to as "Highline BHPH."

I convinced the RFC manager to allow us to begin selling
service contracts on the vehicles that qualified. I marked the contracts up
$600 to add gross to our sales operation.

A few months later, we were having a manager meeting when
the discussion turned to an improvement in the performance of the service
department. Our fixed operations had actually turned a small profit for the
first time. The service manager gave credit to the service contracts and what
he could charge for repairs. He was finding he could do multiple repairs to
vehicles, adding to his average labor hours and parts sales. The collection
manager commented about seeing an improvement in customer satisfaction due to
purchase of the "warranty."

In the months that followed, the portfolio showed some
improvement in collections, which the RFC manager attributed to less complaints
about repairs. And although the RFC lost a collector through attrition, they
did not replace the person. Instead, they shifted the accounts to the other
collectors and continued to make improvements as we saturated the portfolio
with ESP covered vehicles.

A few years later, I got an opportunity to handle a startup
for a franchise dealer in Arkansas. In the business model I put together, I
included a 24,000-mile service contract. I decided our inventory would be
determined by the limits of that service policy so that every vehicle we sold
could be covered.

We advertised that fact in all our marketing and realized a
98 percent penetration on service contracts throughout our portfolio. We marked
up the service contract 50 percent which generated profit for the sales
department as a backend product. The service contracts allowed us to maintain
our customers' vehicles at a much higher level than our competitors. The
service contract included day one coverage, which helped keep the expense of
policy work to a minimum, and a roadside program that included towing up to 150
miles to get our vehicle to the shop from almost anywhere in our state for no
additional charge.

Imagine being able to repair almost everything mechanically
wrong with your customers' vehicles at retail labor rates and parts markups and
making a 65 percent profit on the ROs. The success of the BHPH operation was,
in part, due to the capability of saying "yes" to most repair issues our
customer experienced while making a profit from the shop.

Being able to say yes not only helped our portfolio numbers,
it added to cash flow while positively affecting employee and customer morale.
We enjoyed a 75 percent repeat and referral business which I attribute to
several aspects, but having the service contract and our inventory mix were the
biggest drivers for customer retention. Since we were maintaining the vehicles
much better during the loans, the vehicles were in better mechanical condition
when we did get them back. Our portfolio experienced only a 0.6 percent loss
ratio (charge offs to portfolio balance).

Not many dealers in BHPH consider selling a third-party
service contract to customers. In BHPH, any product you sell has to be
capitalized out of your operating cash flow, and that can limit the number of
cars you sell.

Some dealers choose to be obligor and offer an in-house
program and administer a reserve to hedge against future repairs, either
through reinsurance or on their own. We were offering a third-party service
contract or "admin obligor" program where the reserve and risk are
taken by the service contract provider.

The latter is how I have handled repairs for many years and
thousands of loans.

Look at it another way; as a dealer you invest $5,000 in a
vehicle with a markup of 80 percent to 90 percent. If you're offering a similar
service contract to the one mentioned, you'll invest the same $5,000 in
multiple service contracts that in our operation we marked up 50 percent. You
would get less ROI on that $5,000 upfront, but with enough coverage, the return
in your portfolio performance, customer satisfaction and repeat business, the
shop profit (with a reduction of towing and policy expense) will more than
justify the difference.

Gene Daughtry is an executive conference moderator, trainer
and consultant specializing in BHPH/LHPH dealership operations for NCM
Associates. Daughtry's 22-plus year retail automotive experience began in a
franchise dealership working in sales. Through different operations he worked
as a finance director, sales manager, assistant general manager, general
manager, and handled a startup of a new BHPH operation. He can be reached at
(800) 756-2620 or gdaughtry@ncm20.com.
To learn more about NCM Associates, visit www.ncm20.com.


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