Fresh Start on an Old Concept

As anyone who has dealt with special finance knows, getting a special finance department successfully off the ground can be a daunting task. Throughout 2009, Special Finance Insider will follow one dealership’s attempt to do just that. As part of a series, we’ll be conducting a case study of Ideal Auto Group, a franchise dealership in Frederick, Md., handling Buick, GMC and Hyundai lines.

In each issue, we will check in on the dealership’s progress as General Manager Todd Otis and his team put together what they hope will ultimately be a successful special finance operation. We’ll track the results of their various efforts, successful or not, and we’ll observe how they deal with the particular challenges of starting up and operating a special finance department.

Special finance is not a new concept at Ideal Auto. In fact, it should be noted that this is not the dealership’s first attempt at creating a special finance department. According to Otis, “We’ve been pretty committed to it for a long time.”

However, while commitment is essential to special finance success, it seems commitment alone was simply not enough to deliver the results Otis desired. He reported that the dealership had been pursuing special finance “with a great degree of sincerity” for 18 months to two years prior to the current venture, but had not seen any measurable degree of success. His biggest disappointment during that time frame, he reported, was “return on investment … the amount of money we invested in the process in its entirety versus the income we received for it.”

Despite that disappointment, he remained convinced of the viability of having a special finance department. Unlike others in the industry who view the tightened credit market as a reason to stay away from special finance, Otis seemed to think the tough economy was all the more reason to believe a special finance operation could be viable, citing the fallout from the credit crisis and pointing out that the retail consumer would be more credit-damaged than ever once the crisis begins to resolve.

Otis’ commitment to establishing a successful special finance department within Ideal Auto Group did not waiver. However, he said, “I had done enough trial and error to not want to do it that way anymore.” He made a decision that he hoped would finally mean success for his department—he chose to bring in some help from outside the dealership. Otis was hopeful that an outside professional who specialized in special finance operations could “give us more of the nuts and bolts of doing it correctly, even if it was a little bit more expensive on the front-end to get it done right.”

He reached out to industry experts in an effort to find a consultant who might be able to provide the dealership with some assistance in correctly putting together and sustaining a special finance department. In early October of 2008, Otis began working long-distance with a consultant. Later that month, the consultant started working on site at the dealership, the objective being to start fresh and build the department from the ground up.

Since the dealership was not exactly a stranger to special finance, they at least had some of the basic principles down. However, the trouble seemed to be not with their knowledge of special finance, but rather with their execution of the operation. The consultant’s approach took a slightly different tack than what had been done before. Otis learned that although he had been concentrating on the right areas – things like purchasing and managing leads and trying to understand the type of inventory he needed to have in place – the dealership’s resources weren’t being invested in those areas in quite the right ways. Said Otis, “The slight differences are apparently what make all the difference.”

One of the first areas to be addressed by the consultant was that of leads. “We changed not only lead providers but our entire approach to it,” said Otis. He explained that they had previously been trying to organically generate subprime leads through advertising, using a few SEO/SEM-related tactics online as well as some print and cable advertising. Otis said they discovered that such methods were fantastic for generating traffic. The problem was, despite big responses to their efforts, they weren’t selling any cars. “We were ready to give away TVs and everything else, and my salespeople were running for the hills,” he said. Lesson learned—higher traffic does not necessarily translate to higher sales volume.

That rather expensive practice has since been abandoned. With the consultant’s guidance, focus has shifted to third-party leads and trying to work with third-party providers to get a higher quality of lead. Otis will keep track of response time to leads and will watch for duplicates to make sure they are getting the quality of lead promised by their providers.

To measure the effectiveness of their new approach to leads and lead providers, Otis will track the number of leads coming in, the number of appointments set, the number of appointments that show and, of course, the number of sales. He will also track ad spends for leads on a monthly basis and determine the cost per sale. “Ironically,” he noted, “we’ve tracked and done all these things for 18 months.” This time around, however, he will have professional guidance to show him how to put those numbers to work for the new department.

Another key issue to be addressed was staffing. Otis said the process of finding personnel is ongoing. They’ve already been through what he described as the first phase of hiring, in which six people were hired off the street and trained. Three of the six did not pan out, leaving Otis with only three salespeople in the department. His goal was to start out with five or six salespeople in the department, so he plans to begin a second phase of hiring to find at least two more salespeople. The search for a special finance manager is also underway.

The special finance department will initially function separately from the rest of the sales floor. A room with desks, phones and computers has been set aside from the rest of the department’s operations to serve as a place for the special finance sales staff to make their outbound calls. Desks are provided on the showroom floor for meeting with customers. “It’s a little bit more a traditional approach to working with [customers] once they come in,” said Otis, but the rest of the time the special finance salespeople are “kind of sequestered.”

The goal is for 100 percent of the department’s traffic to arrive at the dealership by appointment. Once the department is running smoothly as its own operation, Otis said he would then consider moving to a blended sales floor. For the time being, a walk-in special finance customer will be handled by a regular retail salesperson who works the deal in conjunction with the acting special finance manager. Otis said they are working on getting controls in place to identify walk-in subprime customers quickly.

Otis’s sales goal for the new department is 40 to 50 units per month. His hope is that, 12 months or so down the road, the department will be selling at least that number of vehicles every month and will be accomplishing that goal “without a lot of fanfare.” His long-term goal is to grow the operation incrementally without creating instability. To accomplish that goal, he said it will be important to have a fairly stabilized employee base so he can “feel relatively confident that we have the disciplines in place to ratchet it up by adding another couple of people to the department.”

The next five issues of SFI will provide you with a true inside view, allowing you to see the ups and downs encountered by Otis and the burgeoning special finance department, giving you an intimate look at special finance today. We’ll likely see not only what brings them success, but also how they respond to adversity and how they will compensate for things that may go awry. In our next issue, Special Finance Insider will follow up with Ideal Auto to see where they are with respect to their goals and find out what new challenges they are facing.

Special Finance Insider Vol. 3, Issue 1