In January, Special Finance Insider introduced readers to Ideal Auto Group, a franchise dealership in Frederick, Md., looking for a better way to build its special finance department after some less-than-successful attempts in the past. General Manager Todd Otis agreed to let SFI readers follow the dealership’s progress and see firsthand the successes and setbacks involved in trying to get a SF department off the ground.

Otis has always believed special finance could be a lucrative profit center at Ideal Auto, despite not seeing much success with previous efforts. A few months ago, he made the decision to hire an outside SF consultant to help Ideal restart a department that never truly made it off the ground.

Not surprisingly, there have been a few stumbling blocks so far, which Otis expected. “The department is evolving,” he said. “It’s a startup … Even a well-developed business plan can require a lot of adaptation if you’re going to persevere.”

Staffing was one of the first issues to be addressed. When SFI first spoke to Otis, his goal was to have five or six people in the department making outbound calls and setting up appointments. Of the six people who were first hired, only three worked out. Otis had also been searching for a manager for the department, but those plans have changed. The special finance department staff is now down to two and efforts to find a department manager have been temporarily halted. Otis’ consultant did not believe there was enough volume to justify bringing on a full-time special finance manager at this time.

Instead, they decided to move Anne Beard over from Ideal’s finance department to monitor outbound calls. Beard’s job is to keep the SF salespeople on their phone scripts and make sure every call is handled in the correct way. Otis said the consultant’s training stuck, and the salespeople only need “modest oversight” to stay on task. Their primary role in the dealership has also been adjusted somewhat.

Otis had previously intended for the SF staff to make the outbound calls and set the appointments, then greet the customers when they arrive at the dealership and conduct the initial interview before getting the manager involved to discuss their credit situation. They will continue to greet customers who show up for scheduled appointments, but they will no longer be conducting the interviews.

Instead, the manager spends one-on-one time with the appointment shows to discuss their credit situation and determine how Ideal can help them. Sales Manager Ken Cherry has been tapped to conduct most of the customer interviews. According to Otis, Cherry already has some experience in special finance and is very familiar with the process of handling SF customers. Now, the primary function of the two SF salespeople is making outbound calls, setting appointments and making sure the appointments show.

Another issue that had to be addressed was Ideal’s approach to leads, and that approach has changed more than once since the department started. Initially, they shifted focus away from organically generating leads through advertising and SEO/SEM and put more energy into working leads from third-party providers. The leads they were buying, however, were in the range of $35-or-so per lead. Otis’ consultant reasoned that it made no sense to spend that amount of money on a lead without some guarantee of the quality, so they decided to try things out on the other end of the spectrum, taking half of the advertising budget and sinking it into lower-cost leads. The other half of the money went into a direct mail campaign targeting the 580 to 620 credit score range. Unfortunately, neither venture gave them the results they wanted.

Paying around $18 a lead worked better in theory than it did in practice. The result was a lot of low-quality and low-score leads that got them nowhere and even slightly damaged morale because no one could get a deal bought. The other half of the equation, direct mail, didn’t work much better. Part of the problem with direct mail, they discovered, is that there’s no way to predict how many people will respond. If enough people don’t respond, the cost per lead is higher. In Ideal’s case, the response didn’t justify the cost; the amount spent per retail unit sold was too high.

They got away from direct mail and cheaper leads and moved back toward the higher-priced but better-quality lead. They now believe they can get a better return on investment by buying a small number of higher-quality leads and working them more efficiently, rather than trying to work a large number of cheaper leads with no guarantee of quality. They are now taking leads from only two lead providers, Interactive Financial Marketing Group’s pre-qualified leads and DealerLink’s Platinum leads.

Another unforeseen problem that surfaced was the issue of financing sources. Otis is still struggling to get the right finance companies in place to cover the full range of subprime credit. Initially, the problem was not having anyone to cover the lowest tier of subprime. In their consultant’s experience, there were usually local or regional banks or credit unions that could be brought on board to purchase lower-tier deals. However, in Ideal’s case, there was no regional bank or credit union to be found to cover that tier for them. This caused a bit of a slowdown in the process, as they tried to double back and find a finance source that would cover the lower tiers. That particular need was finally fulfilled when they brought Westlake Financial on board.

Ideal now has several finance sources in place: AmeriCredit, CitiFinancial Auto, Capital One, Chase, Regional Acceptance, Drive Financial and Westlake. However, they are still struggling to get a finance source in place for the 500 to 550 range. “We’re still missing [ a band of the credit spectrum], which is a step between a Westlake and a Chase,” said Otis.

Part of the struggle is working through agreements with finance companies, something Otis has been doing recently with Fireside. “We spend a lot of our time grinding through [finance company] agreements…there’s a lot of back-and-forth between the [finance company] and our dealership to make sure the legalities all make sense for the dealership,” he explained. “It just takes us a long time to get [an agreement] to the point where we’re comfortable with it.”

He speculated about what Ideal’s situation would be if things had been done a bit differently with finance companies and if part of the puzzle had been put together in the very beginning. “Had we had that particular piece for this to begin with, I think we’d be much, much further ahead now,” he stated. “But it turned into just an extremely time-consuming process to sort it out.”

Another issue to be tackled was inventory, which has been the responsibility of Ideal’s used car director, Quinn Burroughs. According to their consultant, Burroughs has caught on quickly and is doing very well locating and acquiring SF inventory, negotiating with Enterprise Rent-A-Car and consistently finding cars in every segment that can be bought back of book. The more challenging aspect of inventory, according to the consultant, is managing the higher-mileage vehicles, those in the 90,000- to 100,000-mile range and under $7,000 ACV.

Ideal was not accustomed to handling this type of inventory; in the past, any such vehicles taken on trade were simply wholesaled. That is no longer the case. In fact, Ideal’s wholesale buyer acquires even more of these vehicles by picking them up from other area franchise dealerships that take them in on trade. The problem has not been finding that kind of inventory; rather, the challenge has been learning not to spend too much time or money on recon so they can get the car onto the lot at a cost that will allow them to still make a reasonable profit. “We obviously are working through it, trying to find the mix to gain some near-term success,” said Otis.

Otis has been told by some people that he’s launching his department amidst a perfect storm in special finance, “and that wasn’t good or bad—it just was,” he stated. He maintains a pragmatic view of his situation. “The downside is that your struggles are going to be as monumental as you’re ever going to face,” he offered. “The upside is that you’re at least doing your trial and error … in an environment that allows you to get things sorted out … You don’t have so much business that you can’t really focus on your process and how you’re developing your department.”

Despite some setbacks, commitment has not wavered; Otis and his team plan to keep forging ahead toward their SF goals. In the next issue of Special Finance Insider, we’ll check in with the crew at Ideal Auto again to see where their latest efforts have led and what new challenges have arisen in the meantime.

Special Finance Insider Vol. 3, Issue 2