Thursday, January 2, 2014

Service Department Profit: Focusing on What Matters

A service department's income statement consists primarily of four key elements: sales, cost of sales, expenses, and net profit. Sales is sales of labor time, of course. That's the department's commodity as it were. Cost of sales is what it costs just to have that time available for sale. Expenses means the department's share of the overall store's expenses. And net profit, the “bottom line,” is what is left when the cost of sales and expenses are subtracted from sales. Service managers need to think about these four elements, and more importantly, they need to focus on those parts of the income statement they likely have the most influence over -- sales and cost of sales. That is, how many dollars come in, and how many of those dollars make it to the bottom line.

Service sales are affected by three things: the size of the department's customer base, the frequency with which customers return, and the per-ticket revenue. These are the easiest and most rewarding things to manage, and all are under the service manager's control. The first one, the department's customer base, is managed by the service manager by two tactics, customer relations and marketing. Effective customer service pays off in word of mouth, the best kind of advertising there is. Marketing on the other hand, for the service manager, means pursuing service sales. You do this by learning to overcome service sales objections and boning up on your upselling skills. You go after fleet maintenance and insurance jobs, and you make “get aquainted” calls to new vehicle purchasers, inviting them in for service. You also pursue service sales by adding value. If a shop has particular skills, the manager promotes them. This might be suspension work, dyno tuning, machine shop services -- any kind of work that puts the shop ahead of the pack, so to speak, and allows it to bill (and thus compete) on the basis of ability, not strictly price, an important advantage. The frequency with which customers return to the service department is affected by things such as followup calls, postcards, advertising, service specials, and customer loyalty programs. Per-ticket revenue is determined by effective service write-up, including the walkaround technique, upselling, menu pricing strategy, and proactive customer communication while the jobs are underway. All are vital.

Controlling the cost of sales is just as important as going after more sales, if not as much fun. It starts with managing the tech's wages, but also involves tracking and improving their efficiency, that is, each tech's percentage of actual to billed time. Even shop layout and service procedures affect cost of sales, which the savvy service knows very well. If the service department struggles with the cost of each billable hour it sells, the manager may need to implement an incentive pay system, and also to determine whether the shop's labor rate is adequate.

The service manager doesn't have to be an accountant to know how to take advantage of basic profit principles. These two things, sales and the cost of sales, are the service manager's keys to unlocking the real potential of a profitable service department, and he must learn to recognize, control, and work with these important elements.

The ABCs of Service Department Time Control

In the service department, it's all about time. Time is the service department manager's commodity, his or her stock in trade, the thing he buys and sells, and in a very real sense, his inventory. It stands to reason that a service manager needs to have a handle on what happens to time in the department.

Though it is possible to account for one or two more, there are generally speaking three kinds of time in the service department: available, billed, and clocked. Available (A) time is the time a technician is clocked in for the day, which will, because of the timeclock, not include any breaks such as a lunch break. Billed (B) time is that time the customer pays for, the time the shop manage to bill out. Clocked (C) time is the time spent on a specific job or task. Unlike available time, which is clocked per day, clocked time is clocked per job.

The three kinds of service department time are tracked by the use of a timeclock, or more often these days, a computer program called a dealer management system (DMS) which has timeclock functions built in. The tech “clocks” in at the beginning of the workday, out for lunch or other breaks, and finally out before going home. That's available time. As the tech begins one job he or she clocks in, and out again when finished. That's clocked time. Billed time is of course the time quoted to the customer and which the customer has agreed to pay when the job is completed.

Although it might to some people seem as if billed time and clocked time were the same, they are definitely not. They are usually different and at times can be very different. How much different is called the technician's efficiency. Efficiency always means input vs. output. In this case, it's how many hours went into the job, versus how many hours are billable on the outcome side. Some folks feel efficiency measures how fast the tech is, but that is not correct. Efficiency actually measures a technician's skill level. A fast tech will indeed spend less time doing the job than the time the customer pays for, but if he is too fast, and has to do the job over again as a comeback, this affects his efficiency. He has to clock in on the comeback, but the customer doesn't have to pay for it, so the efficiency percentage is affected. The result is that using efficiency in this way, that is, accounting for comebacks, directly communicates the technician's skill level, his ability to do fast yet quality work.

Beginning techs straight out of trade school will often rate at about 70 percent efficient. This means they take 30 percent longer to do the job than the customer pays for. That is expected with a beginning tech. After 12 to 18 months, this tech will begin to approach the 100 percent area, if they are sharp and the shop environment is conducive to growth and efficiency. Veteran technicians commonly rate in the 100 to 150 percent range, depending again on outside factors. And this efficiency metric isn't used just for individual techs. It can also be used to gauge the efficiency of the entire shop. Are the techs waiting too long at the parts window? Or are there glitches in communicating with the service desk? These kinds of things can be tracked using the efficiency measurement.

Another measurement that can be taken is how productive a technician is. This is done by comparing his billed hours, again, but this time against the tech's available time, not his clocked time. Productivity measures the technician's monetary value to the department. In other words, how well he turns time into money, a fairly important question. Productivity numbers tend to be in the 80 to 90 percent range.

Finally, one more measurement can be made, and that is the technician's industry, his busy-ness. Comparing the tech's clocked time to his available time will tell you how much of the time he is clocked in for the day he is clocked in on jobs. How much he “keeps his head down.” This to me is an important measurement, perhaps the most important of all. For while efficiency tells us of his skill, and productivity his monetary value, industry gauges something more important than both of them, his work ethic. Like productivity, industry should be fairly high, 80 to 90 percent.

These ABCs of time control measure and grow a shop's techs, gauge the efficiency of the service department as a whole, and even help determine whether the shop's job rates are correct. Service managers want the very best information on how their commodity, time, is being used and managed.