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Ironing Out the Wrinkles in Your Service Agreement

15 Dec, 2002 By: J.J. Morrison imageSource

Ironing Out the Wrinkles in Your Service Agreement

Every dealership has
a maintenance agreement (MA) that generates a nice chunk of income for the
business, right? Think again! Outdated, poorly worded or downright
technologically old-fashioned maintenance agreements are costing many companies
more money than they are generating. In many areas your old maintenance
agreement may be your customers' best friend. It may be providing them with all
sorts of services and supplies at your expense. Whose side is your maintenance
agreement on??

Uncovering Profit
Opportunities Be careful of what is included as "covered" by your maintenance
agreement. Most dealerships are now selling digital equipment but have never
adjusted their maintenance agreement to accommodate this new technology.

Take, for example,
that there are no "click-counts" on a scanner. You have no idea of the mileage
on that machine when you receive that call for service. Is that rebuild going to
be at the customers' expense or yours? Exclude accessories such as sorters,
feeders, and scanners from your MA. Do a rebuild on any one of those items and
it will cost you the entire profit you have made off of that machine over the
last two years.

Think of the number
of accessories on your machine population. Take that number and multiply it by
$150. That total is the average net profit your dealership is losing by not
charging for maintenance on those accessories. That is Net-Per-Year. Think about

What about network
connections and software? What about controllers? Unless you have an excellent
computer programmer on your service staff, be sure your MA specifies that
network software and controller problems are NOT covered. If you service any of
these items, be sure to specify that those problems are billed separately.
Disagreements over software issues have parted many bedfellows.

Does your annual
maintenance agreement still include an unlimited amount of supplies? Many
digital machines also use a lot more supplies than analogue equipment ever did.
Try keeping track of the volume of supplies you send to each account. Many
dealers are finding that they have used all of the profit in a prepaid
maintenance agreement in as little as six months.

The best way to
solve this problem is to put a limit on the amount of toner and developer
included in the annual MA. If, and when, the customer reaches their allotted
supply amount, they can then purchase additional supplies. Thus, supplies can
generate more revenue, rather than eat into the profit the MA was supposed to
create in the first place.

Keep in mind that it
is against the law to state that the customer MUST buy their supplies from you.
This can be worded many ways so that the customer will get the message and you
will stay out of a legal mess. Make it clear that your company will not be held
responsible for "service required due to use of inferior or incompatible
supplies, broken cassettes or damaged exit trays".

Lightning may be an "Act
of God", but it can cost you money. Require the purchase of an "approved" surge
protector or line conditioner as a part of your maintenance agreement. You gain
the revenue from selling the product and save the expense of countless service
calls resulting from dirty electricity.

Who covers
manufacturers' retrofits? While the manufacturers are always in a rush to get
the "latest and greatest" out in the marketplace, what happens when you have
placed 200 or more of their latest dream machines in the field only to find the
model is a real lemon? The factory admits that there is a design flaw, but the
expense of the retrofitting or re-engineering is now your problem. You are left
to eat the cost or deal with angry customers. If you have been in the business
long enough, you have seen this one. Perform preventative maintenance on your MA
and be sure retrofits are clearly excluded.

Adding and
Subtracting Service Routine maintenance is one thing, but a major or even minor
overhaul is quite another. Thirty to sixty percent of most machine populations
are 3.5 to 4 years old or older. These machines are in need of replacement or

Traditionally the
focus has been on selling a new unit. Overhauling a machine is a source of
revenue that most dealers have never tapped. We know dealerships that are
averaging over $20,000 net profit per month from overhauls with two service
people. For an additional fee, offer the option of a machine overhaul in your
maintenance agreement.

Do not make the
mistake of putting a written estimate for the overhaul in the MA. Over the term
of the MA, if the customer requires an overhaul, provide a verbal quote at that
time. This way questions and objections like, "Why isn't this covered under my
maintenance agreement?" can be handled on the spot. You will have the
opportunity to explain that a MA is priced to keep the machine running, not to
rebuild it from the mainframe up on each and every service call. Offering
overhauls is an option that is not available from most of your competitors. For
many of your customers, an overhaul could well be a viable and welcome
alternative to buying a new machine. The customers love it, and when offered
this choice will purchase an overhaul 50 percent of the time.

Most maintenance
agreements do not attempt to include everything. Some exclude consumable
supplies. While you may be thinking paper, toner, developer, you also need to
consider rubber parts like transport rollers and light bulbs (exposure lamps).
Some maintenance agreements exclude a lot more. Exclusions to an agreement need
to be coupled with inclusions that will allow your technicians to install the
needed parts on the spot. By including wording such as, "This contract
authorizes replacement of parts, not covered by the contract, at the time of
service if deemed necessary by a (company name) representative" the customer
gives permission, in advance, for the job to be done right in one visit.
Technicians can install what is truly needed and not have to fight with the
customer over the cost of uncovered parts.

Taking (and Giving)
Responsibility A liability waver is always nice too. This is a great tool if a
maintenance customer refuses any billable parts like a surge suppressor,
declines the replacement of a customer damaged drum, or any billable service
that is needed. No hard selling. A technician just pulls out a form that may
look something like this:


I hereby certify that I have read and understand the ramifications of NOT
performing Factory Specified Maintenance Schedules on my equipment.

_______ 1. That major damage may occur causing a major or minor billable
overhaul to be performed at 1/4 of machine life expectancy due to lack of
regular replacement of lubricants and consumable parts as specified by the
original equipment manufacturer. 

_______ 2. That any Guarantees, Warranties, or Maintenance Agreements that are
based on manufacturers specifications for equipment may become null and

_______ 3. That additional equipment malfunctions may occur. 

_______ 4. That any copier yields (toner, developer, drum) NO longer apply due
to excess service wear or over volume usage on the unit.


Service Technician recommended:

Service Technician:___________________________________ Date:______________

I, _____"Company Representative"___, hereby refuse the above service recommended
by "Your Company Name". Date:______________

Guess what? Nine
times out of ten, the secretary or the boss will instruct your technician to, "go
ahead and fix it right". If the customer does sign the liability waiver and
refuses the work that is needed, this is your documentation for any callbacks
related to that specific problem to be chargeable callbacks.

Maintaining the
Advantage Most dealers bill their customers for maintenance agreements on a
monthly basis. Just think of the benefits of converting to billing one time per
year. This means no more monthly meter readings and a significant savings in
time, mailing and accounting charges! There are programs available to convert
customers to yearly billing. However, if you don't want to convert your old
customers to yearly billing, charge a premium for monthly billing. Most monthly
payment plans come with a price; why shouldn't yours?

Some dealerships
charge 20 percent more for two billings per year, 40 percent more for quarterly
billing, and even 50 percent more for monthly billing. Most customers want to
save money and, if the program is properly explained, they understand the extra
work that is involved with frequent billing plans.

It really is easier
than you may think to convert to annual billing. The key here is to have one
staff member already trained as a MA resource person. This person can explain
the program to the customers and placate those that don't want annual billing.
There are always some exceptions to the rule. Don't get crazy and try and
convert your major accounts that are doing $1,000 per month in cost-per-copy
billing. There are always exceptions, but the majority of your accounts will go
to annual billing if their questions are properly handled. They can go from
monthly billing to quarterly or semiannually billing by using a sales dropping
process. Even quarterly billing is better than monthly billing.

When did you last
raise the price of your maintenance agreement? While you may not have considered
raising costs, many successful dealers are getting up to a ten percent
increase-per-year on their MAs. If you lease a machine for three to five years
without built-in yearly increases, you are not even keeping up with the cost of

Simply by adding, "Automatically
renewable from year to year at the prevailing price" into an agreement will
allow you to cut your processing time in half, assume the sale and still raise
the price (See the side bar). Many companies are putting limits on just how much
they will raise the annual price on their MAs. They are often shooting
themselves in the foot with wording like, "We will not raise your maintenance
agreement more that one half percent over the increased cost of living standard."
You also need to be aware of manufacturers that are now guaranteeing a fixed
price for a maintenance agreement for as long as seven years. Guess who is
losing that revenue?

There are many other
factors that affect the profitability of a maintenance agreement. Every step is
an opportunity for profit, from the correct wording to how the MA is sold.
Excuses like, "it won't fly in my marketing area," and "my competitors include
all that, so I have to as well," simply are not true. And fear not, you don't
have to chart new territory! You just have to find the right program to
implement the changes so the customers stay happy. There are programs available
that can make these changes to your maintenance agreement without losing a
single account. The advantages are great and the profits are high.

For a free,
confidential review of your maintenance agreement, send a blank copy of each
page of your MA to servco@servcomanagement.com for evaluation. Or call Servco
Management to schedule a consultation.

J. Morrison is CEO of Servco Management, a corporation of trade professionals
who specialize in the development and implementation of profit generation
programs and business strategies for document distribution dealerships. With
more than 32 years of experience, Morrison has developed over 40 programs for
Servco that have been installed in over 250 dealerships in the US and Canada.
For more information call 1-800-517-7900 or e-mail us at servco@servcomanagement.com
and request your free copy of our introductory package.

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