Finance and Insurance - The Profit Center
I would like to make myself clear on a few items of interest before I get too deep into the sales processes at any dealership, including: automobile, recreational vehicles, boats, motorcycle, and even furniture or other big ticket items. A business has to turn a fair profit in order to stay in business. I believe that they should make this profit and use it to pay better quality employees a premium wage in order to serve you better. The financial strengths or weaknesses of any business can definitely have a dramatic effect on your customer service and satisfaction. I do not, in any shape or form, wish to hurt a dealerships profitability, as it is essential for his survival. I merely want to advise people how to negotiate a little better in order to make the profit center more balanced.
Let's get right down to this! Every dealership has a finance and insurance department. This department is a huge profit center in any dealership. In some cases, it earns more money than the sale of the automobile itself. Profits are made from many things that most buyers do not understand.
You as a consumer should understand the "flow" of the sales process to understand the profit centers that are ahead of you. Most negotiating from the consumer seems to stop after the original price is negotiated and agreed upon. Let's examine just a small portion of what leads up to that point.
The first thing that every consumer should understand is that when you go to a dealership several things come into play. One of the most important things that I could point out to you is that you are dealing with a business that has been trained to get the most amount of money from you as they can. They are trained and they practice these tactics everyday, day after day, week after week, month after month, and year after year. Let me point out a couple of important facts that I have said in this paragraph. First, you'll notice that I said a dealership and not a salesman and secondly, I emphasized times of day after day, week after week, etc. etc. This was done to let you know that the salesman is working very closely with the sales managers in order to make as much money as he can. Your interests are really not their objective in most cases.
One tactic that is used heavily in the business is that the salesman says he is new to the business. This may be true or not, however; keep in mind that he does not work alone. He is working with store management, who gives him advice on what to say and when to say it. These guys or gals are very well trained on how to overcome every objection that you may have to buying from them. They have been trained in the psychology of the buyer and how to tell what your "hot buttons" are. They listen to things in your conversation that you may say to one another as well as to the salesman. They are trained to tell their desk managers everything that you say and then the desk manager is trained to tell the salesman exactly what and how to answer you. A seasoned salesman does not need as much advice from his desk and may negotiate a little more with you directly without going back and forth.
The process of negotiation begins the moment that you walk into the front door or step foot out of your car and begin to look at vehicles. Different stores display inventory in different ways. This is done for crowd control or more commonly known as "up control". Control is the first step in negotiating with a customer. Ever who asks the questions controls the situation. Let me give you an example: A salesman walks up to you and says "Welcome to ABC motors, my name is Joe, and what is yours?" The salesman has just asked the first question- you answer "My name is George." He then asks you what you are looking for today, or; the famous "Can I help You?" As you can see, step after step, question after question, he leads you down a path that he is trained to do.
Many times a well trained salesperson will not answer your questions directly. In some cases, they only respond to questions with other questions in order to avert the loss of control. An example of this could be something like you asking the salesman if he has this same car with an automatic rather than a stick shift. Two responses could come back to you. One would be yes or no, the other could very well be something along the lines of: 'don't you know how to drive a stick shift?" In the second response the salesman gained more information from you in order to close you. Closing means to overcome every objection and give your customer no way out other than where do I sign. The art of selling truly is a science of well scripted roll playing and rehearsal.
We have established that the negotiating process begins with a series of questions. These questions serve as two main elements of the sales process. First and foremost is to establish rapport and control. The more information that you are willing to share with you salesman in the first few minutes gives him a greater control of the sales process. He has gathered mental notes on our ability to purchase such as whether you have a trade in or not, if you have a down payment, how much can you afford, are you the only decision maker (is there a spouse?), how is your credit, or do you have a payoff on your trade in? These are one of many pieces of information that they collect immediately. Secondly, this information is used to begin a conversation with store management about who the salesman is with, what are they looking for, and what is their ability to purchase. Generally, a sales manager then directs the sales process from his seat in the "tower". A seat that generally overlooks the sales floor or the sales lot. He is kind of like a conductor of an orchestra, seeing all, and hearing all.
I cannot describe the entire sales process with you as this varies from dealer to dealer, however; the basic principals of the sale do not vary too much. Most dealerships get started after a demo or test drive. Usually a salesman gets a sheet of paper out that is called a four square. The four square is normally used to find the customer's "hot points". The four corners of the sheet have the following items addressed, not necessarily in this order. Number one is sales price, number two is trade value, number three is down payment, and number four is monthly payments. The idea here is to reduce three out of the four items and focus on YOUR hot button. Every person settles in on something different. The idea for the salesman is to get you to focus and commit to one or two of the hot buttons without even addressing the other two or three items. When you do settle in on one of the items on the four square, the process of closing you becomes much easier.
One thing to keep in mind is that all four items are usually negotiable and are usually submitted to you the first time in a manner as to maximize the profit that the dealer earns on the deal. Usually the MSRP is listed unless there is a sales price that is advertised (in may cases the vehicle is advertised, but; you are not aware). The trade value is usually first submitted to you as wholesale value. Most dealers request 25-33% down payment. Most monthly payments are inflated using maximum rate. What this all boils down to is that the price is usually always negotiable, the trade in is definitely negotiable, the down payment may be what you choose, and the monthly payment and interest rates are most certainly negotiable. If you do your homework prior to a dealership visit you can go into the negotiation process better armed. You still need to keep two things in mind through this process. The first item is that you are dealing with a sales TEAM that is usually highly skilled and money motivated. The more you pay the more they earn. The second item to remember is that you may have done your homework and think that you are getting a great deal and the dealer is still making a lot of money. The latter part of this statement goes back to the fact that it is essential for a dealer to make a "fair" profit in order to serve you better.
Once your negotiations are somewhat settled, you are then taken to the business or finance department to finalize your paperwork. Keep in mind that this too is another negotiating process. In fact, the finance manager is usually one of the top trained sales associates that definitely knows all the ins and outs of maximizing the dealerships profit. It is in the finance department that many dealers actually earn more than they earned by selling the car, boat, RV, or other large ticket item to you. We will break these profit centers down for you and enlighten you as to how the process usually works. Remember that finance people are more often than not a superior skilled negotiator that is still representing the dealership. It may seem that he or she has your best interests at heart, but; they are still profit centered.
The real problem with finance departments are that the average consumer has just put his or her guard down. They have just negotiated hard for what is assumed to be a good deal. They have taken this deal at full faced value and assume that all negotiations are done. The average consumer doesn't even have an understanding of finances or how the finance department functions. The average consumer nearly "lays down" for anything that the finance manager says. The interest rate is one of the largest profit centers in the finance department. For example, the dealership buys the interest rate from the bank the same way that he buys the car from the manufacturer. He may only have to pay 6% to the bank for a $25,000 loan. He can then charge you 8% for that same $25,000. The dealer is paid on the difference. If this is a five year loan that amount could very well be $2,000. So the dealer makes an additional $2,000 profit on the sale when the bank funds the loan. This is called a rate spread or "reserves". In mortgages, this is disclosed at time of closing on the HUD-1 statement as Yield Spread Premium. This may also be disclosed on the Good Faith Estimate or GFE. You can see why it becomes important to understand bank rates and financing.
Many finance managers use a menu to sell aftermarket products to you. This process is very similar to the four square process that I discussed in the beginning. There are usually items like gap insurance, extended service contracts, paint and fabric guard, as well as many other after market products available from this dealer. The menu again is usually stacked up to be presented to the consumer in a way that the dealer maximizes his profitability if you take the best plan available. The presentation is usually given in a manner in which the dealer wins no matter what options are chosen. With the additional items being pitched to you at closing, your mind becomes less entrenched on the rates and terms and your focus then turns to the after market products. Each aftermarket item can very well make the dealer up to 300-400% over what he pays for these items. Gap coverage for example may cost the dealer $195.00 and is sold to the consumer for $895.00. The $700.00 is pure profit to the dealer and is very rarely negotiated down during this process. The service contract may only cost a dealer $650.00 and is being sold for $2000.00. The difference in these items are pure profit to the dealer. You see, if you only paid $995.00 for the same contract, the dealer still earns $345.00 profit from you and you still have the same coverage that you would have had if you had paid the $2000.00. The same is true for the gap coverage. You are covered the same if you paid $395.00 or $895.00 if the dealers costs are only $195.00. The only difference is the amount of profit that you paid to the dealer. Another huge profit center is paint and fabric protector. In most cases the costs to apply the product are minimal (around $125.00 on average). In many cases the dealer charges you $1200-$1800 for this paint and fabric guard.
As you can see, these products sold in the finance department are huge profit centers and are negotiable. I also have to recommend the value of most all products sold in a finance department. It is in your best interest to get the best coverage possible at the best price possible. Always remember this: The dealer has to make a fair profit to stay in business. It just doesn't have to be all out of your pocket.
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Overview of Finance Services - Offshoring
Offshoring processes in the Banking and Financial Service sector, like most industries, is an accepted and widely adopted way of doing business. In the 1990's the Financial Services sector quickly embraced offshoring in particular in the back and middle office. This early enthusiasm focused on standard, repetitive transactional processes such as credit card processing, and as yet the take up of offshoring more complex processes such as Finance and Accounts has been minimal. Given the current market turmoil what lies ahead for this industry? This article reviews offshoring trends in both the Banking and Financial Services (FS) and Finance and Accounting (F&A) market. I review the overlap of these two markets and establish if there is an unexplored opportunity. Finally, I intend to review how the current turmoil in the financial markets may impact the future of offshoring in the FS market.
Trends in Financial Service offshoring
Offshoring within the FS sector can be traced back to some of the early pioneering contracts of the 1990's. Organisations such as UBS and Citigroup were quick to identify and realise the benefits of offshoring. Many FS organisations set-up captive shared service centres in locations such as Mumbai and Chennai for the provision of predominantly their IT and transactional back office functions. Other organisations such as Credit Suisse opted to join forces with a third party supplier, rather than going it alone.
Interestingly the FS outsourcing market profile has not changed significantly. In 2008 the FS offshore market still strongly reflects its heritage with IT and back office areas still equating for over 80% of the market.
The back office transactional work includes processes such as mortgage, credit card and loans processing and retail banking.
Offshoring is still popular confirmed by a recent report by FS Outsourcing who state that in 2007 the FS outsourcing market was valued at close to £25.2 billion. They also estimate the FS market to grow at approximately 25-30% per year, which is phenomenal. Indeed there is an argument that, given the current economic climate and turmoil, the estimated growth of this market may be underestimated and that many FS organisations will look to further utilise offshoring to achieve necessary efficiencies and cost savings to survive in these challenging times.
Trends in F&A offshoring
The F&A market is a multi-billion pound industry and can also be tracked back to the 1990's with early deals such as BP with Accenture and IBM. Offshoring F&A typically starts with basic transactional processes such as accounts payable or travel and expenses. These are usually the first processes to be handed to a service provider, often under trial. Like the FS market, the F&A market place is experiencing significant growth. FAO states that in the last 5 years this sector has seen 40% growth with 107 contracts signed in 2007. As highlighted above this growth is despite its poor take-up from FS companies.
The F&A market, shows no signs of slowing down with many wide-scope F&A deals being signed including well known names such as BBC with Xansa (now Steria), Thomas Cook with Accenture and Centrica with WNS. The F&A market has providers servicing a broad range of industries, from travel to utilities and manufacturing to drinks companies, many of whom have special, individual and unique, requirements and regulations.
This sector's growth can be split in two parts. Firstly, more organisations are realising the benefits of offshoring basic, repetitive, rules based and transactional processes. Secondly, this market is evolving. Many companies have gained more confidence in their offshoring providers, some of whom have worked together for over a decade. They are now exploring offshoring more complex processes.
The cross-over
It is clear from the sections above that both the FS and F&A markets are buoyant and experiencing significant growth in their own right, but there is limited overlap. As stated above FS outsourcing reported that of the £25 billion FS market just 2% is represented by F&A.
Our research shows that, of the banks and FS companies that have outsourced any F&A processes, most remain in the bottom third of the complexity pyramid above. National Australia Bank has outsourced their accounts payable to Accenture and Lloyds TSB have a contract with Steria for the provision of their accounts payable, employee expenses and fixed asset accounting.
This focus on just the transactional work is years behind other industries. There are only a handful of FS organisations who have taken it a step further and offshored processes higher up the complexity pyramid.
Morgan Stanley and HSBC are two examples of organisations actively utilising offshoring and who have pushed the boundaries into the middle tier of the complexity pyramid. They both operate their own captive shared service centres which provide F&A services, including statutory accounts and risk reporting, and HSBC's also includes tax and financial analysis. Examples of FS organisations who have offshored middle tier operations working with third parties are less widely reported. In 2005, Finodis was established. This is a joint venture between Fortis Commercial Finance (FCF) and Electronic Data Systems (EDS). The joint venture provides invoicing, payments and management reporting.
Our research could find only a few, predominantly US, examples of FS organisations who have offshored higher end (top tier of the complexity pyramid) processes including financial analysis, planning and treasury. Interestingly in most cases they used a third party provider rather than setting up operations independently.
Given the success, at many levels, of outsourcing F&A in so many other industries why is there such a limited appetite to offshore these processes, in particularly in the UK FS market?
Offshore providers can offer many references of clients who have successfully off shored similar F&A processes, for example the well publicised success of BP. The original contract signed 15 years ago was worth $20 million a year this was so successful that their outsourced contracts are now worth £1.5 billion. Yet few FS clients have been convinced. So why are FS organisations not offshoring? Do they have valid reservations?
Why not F&A?
A possible reason the FS sector lags behind in F&A offshoring is that management have had other important competing priorities. Management of FS organisations have been dealing with constant change over the last few years and have had to address other major issues such as IFRS, USGAAP changes, Sarbanes Oxley, Basel II, MiFiD and other regulatory changes.
Additionally whilst recently working on a recent UK bank engagement the following issues were also cited as barriers:
o Operational Risk
o Compliance Risk
o Reputational Risk
Operational Risk
The safety and 'lock-down' functionality of technology, systems and data were cited as reasons for blocking offshoring. There was concern that remote offices are less secure. This location issue has however not stopped the banks detailed above so clearly this is not insurmountable. Fraud was also a concern and it was felt the increased remote nature and use of third parties extenuated the risk.
Compliance Risk
The FS industry is fiercely regulated. There is increasing pressure for the sector to be more transparent and able to provide regulators and investors with meaningful investment information. A very important point is that Chief Finance Officers and relevant account executives are personally responsible for compliance. They cannot delegate their responsibility so there is often concern about offshoring. Executives want to guard this work closely so they can ensure compliance and control. It should be noted however that compliance and regulation is an issue being faced and overcome by many industries. Compliance with rules, regulations and standards can and are being written into contracts. This reduces the loss of control and, some would argue, introduces contractual boundaries often stricter than internal governance. Other organizations have taken more innovative steps. Credit Suisse made the decision to co-manage their offshored location. They put their management 'on the ground' working alongside their third party provider. This relationship and contract is a success. Compliance risk can be minimized but if the appetite for offshoring is not there then this risk could prevent it from happening.
Reputational Risk
The reputational risk if something fails could be detrimental' was cited as a major issue for FS organisations. This risk is interesting as if something fails then it could be detrimental to an organisation, but this is not necessarily increased because a third party supplier is involved. As per the point above if the appetite doesn't exist within an organisation then this issue will become a show-stopper.
The issues and hurdles faced by FS clients are complex but every industry has specific nuances and processes and regulations that are unique to them. The FS sector's F&A processes are not so complex or unique that they cannot be offshored, as demonstrated by those who have already done it.
The road ahead
For the last decade the FS sector has been very successful but at the current time you cannot open a newspaper or turn on the TV and fail to hear about the worsening financial state of the economy. The credit crunch and daily press coverage of the government bailing out the banks is causing major economic, financial and reputational damage. The years of strong growth are behind us. Life in the city is tough and going to get more so. In recent years success has meant banks have not had to focus on their cost base. However this is going to change and become a key priority. Over the next 12-24 months FS organisations will have conflicting pressures. There will no doubt be more regulatory changes (as a result of recent events) which will need to be implemented but these will need to be dealt with whilst also addressing cost pressures. CFO's are going to be facing increasing cost and resource pressures and are going to have to make tough decisions. For those organisations who have not already done so offshoring is a possible option to overcome both the cost and resourcing challenges. Offshoring will be utilised not just to get the competitive edge as the likes of HSBC and Morgan Stanley did, but to ensure these organisations just stay in the game. The current economic turmoil will increasingly focus attention to parts of the FS organisation where cost savings and efficiencies can be achieved. F&A offshoring is an established market with proven track record so is a sensible starting place. The current economic situation will result in boundaries being pushed and changes that were 'nice to have' becoming a necessity.