How to Add Revenue and Save Clients with Service Contracts
One is hard-pressed to find a business owner that isn’t interested in generating recurring revenue. In the systems integration industry, one of the ways of achieving this is through the sale of service agreements, contracts that bind clients to a fixed cost for maintenance, repair, and even emergency response. While those that have seen success with these swear by them, the reality is that few systems contracting companies have any kind of formal service agreement in place.
Why? For one thing, they’re not an easy sell, said Chuck Wilson, executive director of the National Systems Contractors Association (NSCA). “The value proposition is that you are selling the finest product in the world and it’s superior in every fashion,” he said. “When you turn around and say, ‘For this dollar amount, when it breaks, we’ll fix it,’ it’s difficult to rationalize.”
However, Wilson is a firm believer in the value that service agreements, or in more contemporary terms “managed services,” bring to both those who are selling them as well as their clients. “With a lot of the systems that NSCA members sell, there is a strong desire on the part of the clients to have a managed services program that goes with it because there are a lot of codes and testing that need to take place throughout the year,” he said, acknowledging that some vertical markets make for an easier sell over others. “Hospitals, for example, go through an annual accreditation process, and you want to make sure that the life safety systems are up and running.” On the other hand, houses of worship, where the systems aren’t mission critical, may be more reticent to sign on.
Wilson, who prior to joining NSCA ran a systems integration firm which boasted a dedicated service department, favors an aftermarket approach: When he was in business, once the company completed an installation and covered the warranty, an after-market salesperson would present the client with a service agreement. “Other people would argue that you’re being silly if you don’t give the client the quotation for the service agreement as part of the original package, they argue that you should do that up front,” he said. He believes in the after-market method because it helps salespeople avoid questions about product quality at the outset of the initial project.
Bob Bach has worked with service agreements for more than 30 years. As director of client services at Advanced AV in West Chester, PA, he has spent the last 10 years growing the systems integration firm’s dedicated service department. A quote for the company’s service agreement, “Advanced Advantage,” is included in the overall quotation for every project proposal the company issues, a mandate that has been instituted by the firm’s management. Bach attributes the success of Advanced AV’s service department, which boasts an 80 percent renewal rate on its contracts, to the support it receives from the company’s executives. “In the world of service, the renewals are the key,” he said. “As long as your renewals are holding up between 60 and 70 percent and the business is growing, you can continue to grow your service department.”
Advanced AV’s Advanced Advantage includes parts, labor, loaner equipment, training, freight and travel, and in some cases 24/7 support. Bach noted that one factor that makes his department more efficient is that all of its technicians are highly trained and certified, including those who deliver support over the phone. “As a result, about 48 percent of the calls are resolved on the telephone. We don’t have to dispatch someone,” he said. This, combined with the ability to perform troubleshooting remotely via IP-addressable equipment, saves time for both Bach’s technicians, as well as the company’s clients.
While systems integrators should avoid trapping themselves into unrealistic, and costly, agreements, it’s also necessary for the service contract to offer the client solid support. “Be thoughtful about what you write into those contracts, what they cover, and the value that they are really providing their clients,” Wilson said. “It’s one thing to say, ‘For this amount of money, we’ll provide a service contract on this system for a year after the warranty expires.’ Then, when the customer looks at the fine print, they discover that there are a lot of exclusions.” The value must be fair for both parties.
Wilson underlined that while the implementation of a formal service agreement practice requires some up-front effort, business owners must remember that these documents add to their bottom line. “Without that service work appearing on a contractual basis, the equity of their company—the value of their business—means nothing to a prospective buyer,” he said. “If it’s not on paper, it’s not worth that much.”
Margin Builder
While many clients are attracted to service at a fixed price, systems integrators run the risk of losing money if they are not careful in their calculations. It’s important to examine what integrators are willing to cover. “Our members have to be mindful of what happens if something out of their control occurs,” cautioned Chuck Wilson, NSCA executive director, adding that it’s important to include an ‘act of nature’ clause. “That would include things like storms, and even negligence.” Integrators may also consider excluding items that the client’s property, casualty and liability insurance already covers.
Carolyn Heinze is a freelance writer/editor.
