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Creating Budgets in Your Service Department

14 Mar, 2003 By: Ronelle Ingram imageSource

Creating Budgets in Your Service Department

Budget time.
Whatever time of year your company's fiscal year begins, every manager, director
or vice president has to struggle to create next year's guesstimate of what they
want to happen, how much it will cost and how the money will be generated to
meet the stated expectations. So many things go into the budgeting process
including hopes, dreams, corporate mandates, personal bonus quests, labor hours,
training costs, auto expenses, parts, cell phones, laptop computers and employee
bonuses to name a few. The most difficult part of the service department's
budgeting process is the huge support responsibility, with very little control
of the revenue line. More than 80 percent of my service department's revenue is
price controlled by a non-service employee. Additionally, these non-service
employees tend to personally lose money every time they increase the service
department's revenue line. This is a classic win / lose predicament.

It's All About The

With the increasing, overall percentage of equipment being acquired through all
inclusive lease agreements (equipment, service and supplies), the customer only
sees a total monthly cost. Every cent of the monthly payment that is assigned to
pay for the service and supply portion of the cost-per-copy (CPC) lease, lowers
the overall amount that is assigned to the cost of the equipment.

Under traditional
CPC leasing agreements, there is little to no incentive for the sales rep to
charge a higher price for the service and supply portion of the CPC than what is
already mandated. Very often, reps will plead with the service manager, for a
reduced rate for the service and supply portion of the monthly cost. This allows
a higher price to be assigned to the hardware portion of the sale.

Let me be more
specific. Periodically a company's owner sits down with the departmental heads
of sales, service and supply to set maintenance agreement (MA) and CPC pricing.
At the end of these meetings (heated discussions), prices are set but rarely to
anyone's satisfaction. Service never receives enough money. Sales feel the
service and supply pricing is not market competitive. Supplies know they are
receiving the short end of the stick, especially when dealing with color and
multifunctional machines.

Discounting Dilemmas

There is just never enough money to go around. Once the MA and CPC prices are
set, the discounting begins. If the service or supply manager refuses to lower
the listed priced for this "very competitive deal," the sales reps
feels their hard fought sale has been sabotaged. The sales manager quickly makes
a call and talks about the need for you to be a team player, the competitive
market place, bonus attainment, how, "you can raise the prices next
year," yadda yadda yadda.

The squeeze is on…say
no, you instantly become the villain. Say yes, and you have just lowered the
threshold of pricing on all future deals. Even worse, by agreeing to lower the
price on service and supplies you have reduced 60 future opportunities to
generate profit. The equipment portion of the lease is paid up front in one lump
sum. The service and supply portion normally has an escalation and overage
clause. By lowering the initial service and supply portion of the monthly
payment in favor of a one time higher equipment cost, the dealership reduces the
next 60 months of earnings.

Each time a rep asks
me to lower a listed service pricing I ask, "What part of our service
program can I eliminate? Can I send an untrained tech? Is it all right if it
takes two or three days to get to the customer? Can I eliminate overnight
freight on needed parts? Can all incoming service calls go directly into voice
mail? Will the sales department take over the technical telephone help desk? Can
I reduce car stock inventory by 50%. Can we forego salary increases to all the
technicians? Better yet we can simply not offer vacation, sick time or training
for anyone who works in the service or supply departments."

Needless to say, the
sales rep has no idea what I am talking about. "Of course you can't do
that. You don't understand, just lower the service and supply rate this time. It
is a very competitive deal," the salesperson usually responds.

"Is there any
money in the deal on the sales side?" I ask.

After a long pause,
"A little," the rep relies in a much softened tone.

"Let me make
sure I have this straight." I say. "You have enough money in the deal
to meet the base transfer price. Plus, there's enough money to allow you to make
'a little' on the deal. You will receive the lease bonus. You will receive your
quarterly bonus, but service must lower their rate for the next 60 months. You
want me to override the listed pricing so you can make a little more money
today, all the while realizing the company will lose money for the next five
years. If you need a lower service rate, you can buy it down with the 'little'
money that is left in the deal. My responsibility is to make sure there is
enough money in the deal to pay for five years worth of responsibility."

A Constant Battle

 Service managers have enormous budgetary responsibilities with little
opportunity to control the source of their revenue. Service is a support
department with an income responsibility. Service departments have multi-million
dollar budgets that generate the largest portion of business profits, and yet,
the service department's management rarely has the final say on their pricing

Adding to the
service department's revenue generating paradox is the desired ratio between
prepaid (MAs, CPCs, rentals, warranties) and billable (time and material)
service calls. Ideally, at least 80 percent of all service revenue should be
prepaid. The better we do our job of selling prepaid service, the less
opportunity service has to generate time and material billables. It never fails
that when a service tech charges a CPC customer for a toner spill or network
administration, the sales rep is on the phone to us, relaying the customer's
complaints about the extra charges.

The new digital
equipment needs fewer parts and service. The pricing curve has already lowered
itself to a point of little return. The .015 to .02 cents per analog copy has
already been replaced with .005 to .009 full service and supply pricing for
digital equipment. My service budget is being destroyed by .02 per copy analog
service agreements being "upgraded" to .0075 CPC pricing. With each
new replacement, my service revenue is reduced by 50% or more.

Is There An Easy

Not that I have figured out yet, but, at least I understand the question and
need for vigilance. The need to control 36 to 60 months of after-market revenue
is the key to a profitable company. The long-term viability of any traditional
copier dealership is ultimately generated by the month-to-month revenue
generated from disciplined pricing established at the time of original equipment
placement. Knowing the right questions to ask, replies to make and attitude to
give can be a big help in the world of negotiation.

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