Lately, a wide
variety of businesses have been requesting my help to determine an
appropriate labor rate to attach to the various levels of products
and services that dealerships offer. I recently talked to the
owner and his service manager of a $40,000,000+ authorized
dealership with multiple offices in five states.
This is a successful company that has been in business for over 30
years. The owner candidly admitted, “I know our hourly labor rate
is upwards of $90 per hour. But how do I prove that number to my
sales department? We have attended all these MPS and service
management seminars. We are told that our service department can
make 50%+ profits. The problem is most of these profits are
supposed to be charged back to our own sales department.”
If your field technicians are regularly assisting with sales,
end-user training, setting up equipment, working on MPS bids,
doing equipment installations, etc. without the service department
receiving their fair share of the revenue, you are reducing the
hours the tech is available to generate revenue. Your service
department will never be able to achieve 50%+ profitability if
their available working hours are given to your sales department.
“I have the power to shift some of the cost burdens from the
service department to the sales department. But I am receiving
pressure to substantiate these high costs of the service burden
rate. If I pay a senior OEM factory trained, CompTIA Net+ or CDIA
certified tech $20 per hour, how can I prove he actually cost the
business $90 per hour?”
An additional issue dealers face is the desire to improve their
efficiency to reduce their burden rate. The problem is intensified
because they are not sure how this burden rate is actually
calculated. A small dealer from the Great Lakes area asked me, “I
know my techs are costing the company about $85 per hour. That’s
what the experts keep telling me. But how can management improve
our efficiency when it is a mystery to all of us how this $85 per
hour is calculated?”
These questions are asked by conscientious dealers who realize
just matching the competition’s pricing is not the appropriate way
to set your own pricing standards. The need to redefine the
structure necessary to accurately calculate an appropriate hourly
burden rate is a sign of MPS dealers refining the pricing process.
There is no way to appropriately determine the actual cost of any
of the services provided by your technical or solutions staff
without thoroughly understanding the actual cost of each labor
hour. If the labor of a field or in house service technician is
used in the performance of duties, it is imperative that the
correct labor cost be added to the cost of each required sale.
If your company offers any of the following mentioned items, ask
yourself how your company calculates the labor cost that must be
anticipated when determining an appropriate cost of these items:
• Maintenance
agreement
• Hourly
service call rate
• Cost Per Copy
• Managed Print
Services
• Installations
• Solution
Sales
• Training of
end users
• Warranty work
• Sales
assistance
• Document
management services
• In shop labor
• Bid
preparation
There is no accurate way to determine the cost, price, or profit
of any product or service your company offers that involves a
service technician if you do not know how to accurately determine
what each hour of your service technician’s labor costs your
company.
The most common mistake made by those trying to figure out a
ballpark estimate of the cost of their own service technician’s
burden rate is to take the tech’s hourly wage, add 13% to cover
the cost of governmental required fees and then add a little bit
more. Usually another $5 or $10 per hour should do. Example: The
tech makes $15 per hour X 13% = $2 + $10 misc costs = $27 per
hour.
A savvy business person immediately knows this rate is too low.
Owners, controllers and those returning from a multiday MPS or
service seminar are consistently told the cost of the service
burden rate is somewhere between $70 - $120 per hour.
Some dealers are lulled into passive acceptance believing their
operating system automatically calculates the precise click cost
of each machine, group of equipment, or customer. Most are totally
unaware of what hourly burden rate is being used in the
calculations. The pre-designated field, which lists the hourly
burden rate, is usually located in an obscure changeable field in
the software that has never been changed.
Those who obsess over a mil or two are missing the greatest
deviance in the pricing process. In most office equipment service
departments, labor is your number one cost. Without an accurate
service labor rate in the equation that is calculating click cost,
the resulting answer has no validation. Your measured pricing and
profit calculations are completely oblivious to representing your
financial reality.
I challenge my readers to actually find someone in your dealership
who can tell you what dollar value is being used in the hourly
labor rate field. Once found I believe the number will be lower
than your actual cost. This means any software generated
calculations of click cost are totally bogus without your accurate
burden rate being used.
The reality is most dealers are not fully aware of the most
critical component of their costing formula that determines their
supposed cost per click. Your current pricing for Maintenance
Agreements, CPC, MPS, installations and even a basic one hour long
service call has little actual mathematical justification without
knowing your true cost of your hourly service labor burden rate.
When calculating your technician’s burden rate you must determine
the total hours for which the tech is paid; normally this is 2,080
hours per year. Then figure out how much of that paid time is
actually available for paid field work. These paid, unworked hours
include: vacation, sick days, holidays, jury duty, mandatory daily
breaks, car trouble, training, travel and wait time, and meetings.
Additionally there are all those government-mandated taxes
including FDIC, workman’s comp, social security and Medicare. Plus
most employers have chosen to offer costly perks that workers have
come to expect including heath insurance, long term disability,
mileage and tuition reimbursement, tools, uniforms, training,
401K, etc.
Next, there is the responsibility of every employee who generates
revenue within your company to carry a portion of your businesses’
overhead. This normally amounts to another $13 to $17 per hour
that must be added to the cost of the hourly burden rate.
Once all these calculations are made, the dealer can adjust for
(add to the hourly burden rate) the percentage of profit that is
expected. By appropriately adding, subtracting, multiplying and
dividing all these pertinent expenses and time allotments you can
establish a more realistic cost of each hour that is actually
available for a trained technician to be able to generate revenue
for your company.
The need to understand and be able to calculate the cost of the
service hour, or burden rate is essential. There is no accurate
way to determine the actual cost of the services provided by the
technical staff without fully understanding and being able to
mathematically substantiate, the actual cost of your service labor
hour.
To receive a copy of the Excel spreadsheet Ronelle uses to
calculate the service technician’s burden rate call or email
Ronelle Ingram @ 714.744.9032 or
ronellei@msn.com.
Ronelle Ingram,
author of Service With A Smile, also teaches service seminars. She
can be reached at
ronellei@msn.com
