Where the money comes from

It is important to be able to identify the correct cost and profitability to serve your clients, the cost of each and every service offered, the cost and profitability of your technicians, regions, channels, processes, etc.

Due to automation and technological changes the impact on indirect costs has increased over time, thus causing distortions in the establishment of service costs (by the use of accounting assessments and proration techniques). This leads to imprecisions when establishing costs, which in turn can lead to erroneous pricing and discount decisions.

Below are some facts which will surely hinder the cost management process: 

  • ​Diversity of products, services, channels and customers
  • Greater demands from customers
  • Increased competition
  • Increased indirect costs
  • Growing technological innovation
  • Lower margins 

​When it comes to your Service business profitable growth, it is indispensable to resolve the following key issues:

  • Which services have an increasing value and which don’t?
  • How to negotiate fair prices with clients without decreasing profitability?
  • Which clients add value and what is their profitability?
  • Which clients do not add value?
  • How can you reduce costs without impacting service levels?
  • How much should you charge for the service level your clients demand?
  • How to set break fix services that are charged by the hour in order to recuperate all indirect costs involved?

An effective solution to all these questions is to figure out the cost of the main service activities and then identify their use, with reference to the services your company provides (service product portfolio, technician time dedicated to clients, distribution channels, etc.).

Noventum recently developed a simple, but yet effective approach for a Dealer Conglomerate that did not know the cost of the guarantee service they provided to clients (no costing system, only accounting figures). This approach included:

  • Defining the services to be measured, initially only guarantee services. In the case of the Conglomerate they provided services for regular contracts, special contracts, repairs and motor sales.
  • Identifying the direct costs (salaries, parts, shipment costs, costs of logistics, etc.) and then distributing them to the services identified.
  • Identifying the main activities of the company (usually 20% of activities consume 80% of resources).
  • Identifying the indirect costs (labour, costs of personal support, overhead, lighting, etc.) and then distributing those costs to activities.
  • Identifying how these activities are consumed by services (warranties, contracts, special contracts, repair and motor sales) and then distributing those activities to defined services.

This simple model was able to identify which services were profitable and which were generating a loss:

  • Guarantee services 73% of loss.
  • 55% of the total cost was in Motor sales.
  • Motor sales and special contracts generated profits and were supporting the other business losses (guarantees, contracts and repairs).

With this information, the client was able to identify the most relevant costs and key problem areas, but most importantly, corrective actions were made possible.

Lastly, this model was focused on generating cost information on a selection of services, but it can also include profitability by client, branch and business unit. Likewise the cost can be identified by department, technician, etc.

To sum it up, knowing the correct cost of present and planned services should be a prerequisite to any effort for improvement.

To find out more about how Noventum can help you with your Service Business profitable growth feel free to contact us today.

Profitability
Is ‘work harder and cut costs’ the only option?