The more things change, the more they stay the same. In the May 2011 issue of ENX magazine, my service column was titled Calculating Your Service Burden Rate. It discussed the plethora of emails and telephone calls I was receiving requesting my help in determining an appropriate service labor rate to attach to the various levels of products and services their dealerships offer.
At the end of the article, I offered “To receive a copy of the Excel spreadsheet Ronelle uses to calculate the service technician’s burden rate, call or email Ronelle Ingram. I never expected the continual response I would receive for this offer over the past 18 months. I have consistently averaged 5-10 requests per month for this spreadsheet.
Whether you are concerned with how to accurately figure what the actual cost of your hourly service labor rate is for a $12 per hour PM printer tech or $40 per hour CompTIA certified document management guru, this spreadsheet can realistically enable you to calculate what their actual hourly burden rate or cost is to your company.
A typical comment I have heard multiple times from a frustrated CEOs begins with, “This is a sophisticated, successful company. I know our hourly service labor rate is upwards of $100 per hour. But how do I prove this number to my sales department? We have attended all these MPS, cloud and document 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 for using our service techs as their extended sales department.”
The company owner continues, “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+ and CDIA certified tech $40 per hour, how can I prove he actually costs the business $100 per hour?”
If your field technicians are regularly assisting with sales presentations, end user training, equipment set-up, 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 other revenue. Your service department will never be able to achieve 50+% profitability if their available workable hours are given, not sold, to your sales department.
An additional issue conscientious dealers face is the desire to improve their efficiency rate 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. How can management improve our efficiency when it is a mystery to all of us how this $85 per hour is calculated?”
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 other non-departmental duties, it is imperative that the correct labor cost is added to the cost of each element of work.
If your company offers any of the following services, ask yourself: how does your company calculate the service labor cost that must be included into the total cost of the offering? Is the cost of the technical labor hour included as a line item in the final internal cost of each sale? Does the tech and service department earn a share of the commission generated by the sale?
l Maintenance Agreement service
l Hourly service call rate
l Cost Per Copy
l Managed Print Services
l Document management services
l Cloud Services
l Retrieval and Security
l Software installation
l In-house sales training
l Hardware installations
l Solution sales
l End user training
l Warranty work
l Sales assistance
l In shop labor
l Bid preparation
l Telephone support
l In-shop refurbs
l Rental 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 be enough. Example: The tech makes $15 per hour X 13% = $2 + $10 misc costs = $27 per hour. This is incorrect.
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 your operating software that has never been adjusted to your company’s actual cost.
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 calculating click cost, the resulting answer is not useful. Your measured costing, pricing and profit calculations are completely oblivious to the actual cost of 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 of your operating system. 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.
When calculating your technician’s burden you must take into consideration the total cost of paying the technician for 2080 hours per year, (40 hours per 52 weeks) must be generated by the work the technician does in the 500-800 hours the tech is actually doing work (on equipment/ software installation/ end user training) that directly generates revenue that is credited to the service department.
During the course of a year the average tech will be directed to spend 1280-1580 on tasks that do not generate revenue that is credited to the service department. These include: hours that are used for vacations, sick leave, holidays, company meetings, technical training, drive time, goof-off time, helping sales reps, helping with deliveries, cross training other techs, working on in-house computer administration needs, rebuilding of equipment for sales, downloading in-house software, repair or preparation of rental equipment, show room equipment upkeep, preparation for a sales demo, general in-house office equipment maintenance, or any other projects that are requested of service staff but do not provide revenue credit to the service department.
Then there is the issue of poorly managed technical time. Does your tech begin work at 8:00, working on items that generate revenue a full 8 hours each day? The correct answer is NO. Even in the best of service departments, no tech can actually use all 40 labor hours doing work that directly generates revenue that is credited to the service department’s P&L.
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 reimbursement, tools, uniforms, training, 401K, tuition reimbursements, business conferences, coffee, etc. to be added to your cost of the burden rate.
Every employee who generates revenue within your company must carry a portion of our 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 (i.e. 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.
I will once again make the offer. 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 email@example.com.