ENX Magazine Business Profile

I’ve been very fortunate to have had the opportunity to work with many outstanding office equipment dealers in my career. This is the third installment of the series of articles developed based upon many quality practices these dealers use. Most of what I discuss here is not necessarily new information, but I’ve seen the same common problems in varying degrees in almost every dealer. With this in mind I’d like to highlight these common areas of concern and offer suggestions on how to solve the often-complex nature of running service.

Problem number 3: Financial Benchmarks For Service

This 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 financial benchmarks for your service department. These are valuable reference tools but 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 financial service benchmark is revenue per service employee. I’ve heard of dealers actually firing people because they were not achieving the targeted revenue per service employee. This measurement isn’t a simple one to say the least. What 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 as 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, not just parts? Poor revenue performance will also affect this number. Population demographics also play a big role. Dealers who may be heavily populated by older segment one and two machines tend to have poor profit performance than dealers with a MIF of mostly high-end digital product base. There are many examples such as these, and I’m not suggesting that financial benchmarks are not a valuable tool; in fact I make my living providing benchmarks. What I am suggesting is that you cannot live and die by these benchmarks alone. You must 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 find a one size fits all model of service benchmarks.

Another issue that makes understanding your service business lies in 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 are a multitude of justifications for how your business is currently set up. I bring this out because benchmarking of any value is dependent on a certain amount of conformity in how you allocate income and expense.

A classic example would be the commonly used service gross profit percentage. I’ve been in a number of dealerships in the last year, 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 for by sales, as should be for machines that are prepared for demo or installation. In 3 dealerships I consulted, these 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 to change because of this, but sales bottom line looks better, while services bottom line looks worse. So if you’re going to benchmark off the industry experts who “do” allocate these cost of sales items correctly and you’re one of the dealers who doesn’t, it will be very unlikely that service will achieve the financial benchmark. There are quite a number of examples similar to this in our industry, like selling items that require a technician to install it, and allocating it as a supply instead of parts, or dispatchers that are a general company admin expense not a service expense, and parts personnel that are assigned to the general warehouse admin costs and not a services expense. So it is very important to understand the definition of the items being benchmarked as well as the details 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.

It is my belief that service has two basic components, revenue and expense. DUH! With this revelation in mind let’s talk briefly about each component. Revenue: service derives its revenue from service contracts, time and material customers, and revenue split from all inclusive lease contracts. There are obviously other combinations than these but for simplicity’s sake we’ll discuss these items. Revenue is a two-headed beast because it’s one of those items that is a service only item that is sold almost exclusively by sales. It is generally understood that without new machine sales, service will perish. The issue here is the ability of your company to accurately determine your cost of service in every sale, and then control the sales department in way that ensures service is sold as often as possible at an acceptable margin above your cost. At this point the equation becomes a little complicated. None of the last 6 dealers I’ve visited knew definitively what their service cost was! The accepted rule of thumb was (read educated guess), take the recommended yield of the consumables and look at the cost of similar existing products and there you go. Or worse yet, go by what the manufacturer estimates the cost to be and mark it up. This worked well in the past because, almost in spite of themselves, copier dealers could make money. Today that has all 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 3.4 to 3.6 million devices every month, BEI knows 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 which volume a machine performs at optimum and where they run the worst, you can easily allow sales to put machines in volumes that are potentially unprofitable. The example below demonstrates an individual model and how it performs in each volume band for parts and labor costs only. Notice the Cpc (dealers CPC) and the Vol Nat Cpc (National CPC for that volume band) are relatively close, indicating this dealer is operating near the national levels. When pricing contracts you should consider what volume band the machines will live in and adjust them accordingly. In this example the 0-5,000 range is more than double the cost of the 5,001-10,000 range not including toner.

By systematically targeting copy volumes that are optimum for the model being sold, you can maximize the profit potential of that sale, helping you achieve those financial benchmarks. 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 benchmarks are only reference points and should be used to help you run your business better. However you should understand where your service performance benchmarks compare against national benchmarks to understand how your dealership compares. If your service performance benchmarks and financial benchmarks are bad, that may be an indication your dealership has a problem. If your service performance benchmarks are good and your financial benchmarks are bad, it could just be the bucketing process of your revenue, and a detailed understanding of financial benchmark is needed.

Mr. McArtor is the president of BEI Services, Inc. that now tracks every service call that occurs on over 3.5 million imaging devices, around the world. If you have any questions please contact BEI Services, (316)772-0234 or Wes@BEIServices.com.