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Are You Running Service Or Is Service Running You?

10 Jul, 2002 By: Wes McArtor imageSource

Are You Running Service Or Is Service Running You?

mentioned last month, I have been very fortunate to have the opportunity to work
with many outstanding office equipment dealers throughout my career. In my
current capacity, I have taken advantage of the many quality practices these
dealers use, and I offer their insight to many of our customers. I readily admit
that most of what is discussed here is not necessarily new information, nor are
the solutions mine alone, but I have seen the same common problems in varying
degrees in almost every dealer I have consulted with. With this in mind, I would
like to highlight these common areas of concern, and offer suggestions on how to
solve the often-complex nature of running service.


last month’s Losing Focus Part II, we discussed a common complaint of
customer’s, the inevitable call-back also known as a CB. In this month’s
Losing Focus Part III, we will take a look at financial benchmarks.



can be, and often is, a very touchy subject, but needs a direct approach if you
are to maximize the profitability of your service department. There are quite a
few industry experts who can provide you with benchmarks for your service
department. These financial indicators are valuable reference tools, but they do
not tell you what must be done to achieve those goals, and in fact can mislead
you into making the wrong decisions. For example, a common benchmark is revenue
per Service employee
. I’ve seen dealers fire people because they were not
achieving the targeted revenue per service employee. But this measurement is not
that simple.



if the reason your revenue per employee is low because you are selling Service
contracts below what you should? If you are in a market that allows you to pay
less per employee, you could actually have more employees for the expense than
other dealers. This also holds true for the common benchmark of parts cost as a
percentage of service revenue. What if you are allocating consumables as
supplies and not parts? Poor revenue performance will also affect this number.
Population demographics play a big role as well.



that are heavily populated by older segment one and two machines tend to have
poorer profit performance than newer dealers, with mostly a high-end digital
product base. There are many examples such as these. I am not suggesting that
benchmarks are not a valuable tool, on the contrary, I make my living providing
benchmarks. What I am suggesting is that you cannot live and die by these
benchmarks. You should apply them to your individual circumstance and be willing
to adapt your business to the benchmarks or the benchmarks to your business. It
is unrealistic to expect every business equipment dealer to fit all models of
service benchmarks.



issue that helps you understand your service business lies in the allocation of
revenue and expense as well as definition. As a business owner myself, I concede
that setting up your revenue and expense allocations is a daunting task, and
there could be a multitude of justifications for how your business is set up at
the moment. I bring this up because benchmarking of any value is dependent upon
a certain amount of conformity in how you allocate income and expense.


classic example would be the commonly used service gross profit percentage.
I’ve been in six dealerships in the last 45 days and half of these dealers are
misallocating a significant cost of sales to service. When service refurbishes
or rebuilds a machine for resale, the total cost of parts and labor should be
paid by sales, as are machines that are prepared for demo or installation. At
three dealerships I consulted with, their costs were absorbed by service, while
the revenue that resulted from the sale of these machines was kept by Sales. The
resulting bottom line to the dealer isn’t going change because of this, but
sale’s bottom line looks better, while service’s bottom line looks worse.
So, if I’m going to benchmark off the industry experts, who “do” allocate
these cost of sale items correctly, and one of the dealers who does not, it will
be very unlikely that service will achieve the benchmark. There are quite a
number of examples similar to this.



  • Selling
    items, which require a technician to install, and allocate them as supplies
    instead of parts

  • Dispatchers
    that are a general company administration expense not a service expense

  • Parts
    personnel that are assigned to the general warehouse “admin” cost

it is very important to understand the definition of the items being benchmarked
so that you can adapt those numbers to your business model. This is not to say
that doing any of the above allocations is right or wrong, it’s simply a
matter of definition.



is my belief that service has two basic components, revenue and expense. With
this revelation in mind, let’s talk briefly about revenue. Service derives its
revenue from service contracts, time, materials, and customers. Revenue splits
from all inclusive lease contracts. There are obviously more combinations than
these, but for simplicity’s sake we’ll discuss these items.


is a two-headed beast because it is one of those items that is service only, and
sold almost exclusively by sales. It is generally understood that without new
machines, Sales service will perish. The issue here is the ability of your
company to accurately determine your cost of service in every sale, then control
the sales department in a way that ensures service will be sold as often as
possible at an acceptable margin above your cost.


this point, the equation becomes a little complicated. None of the six dealers
I’ve visited knew definitively what their service cost was! The accepted rule
of thumb (read educated guess), take the recommended yield of the consumables,
look at the cost of similar existing products, and there you go. This worked
well in the past because, almost in spite of themselves, copier dealers could
make money.


all this has changed. Margins are smaller, and the ability of the service
department to control cost has become a requirement. By analyzing the service
performance of over 860,000 copiers, we know that each copier model manufactured
is sensitive to the volume of copies that is produced each month. As such, the
cost per copy performance of the model is directly tied to that volume. If you
are not aware of the volume in which a machine performs optimally, and where
they run the worst, you can easily allow sales to put machines in volumes that
are potentially unprofitable.


systematically targeting copy volumes that are optimum for the model being sold,
you can maximize the profit potential of that sale. At the very least, you
should be making decisions based on the best available information, ensuring
your business is besting any of the financial benchmarks you choose to use.
Remember that service benchmarks are only reference points and should be used to
help you run your business better.

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