12/11/2014 22:53
As part of an exclusive series on twenty first century service management sponsored by Advanced Field Service, Field Service News Editor Kris Oldland takes a look at how to decide when it becomes unprofitable to take on a deal…
It is the perennial internal struggle that so many field service companies face. In the race to grow your service business are you at risk at accepting business that ultimately will impact your bottom line in a negative fashion?
[quote float=”left”]We have all been faced with that one bit of business that could have potentially have a wider tangible benefit for our business yet the profit margin is too tight[/quote]We have all been faced with that one bit of business that could have potentially have a wider tangible benefit for our business (such as raising our profile in front of a new sector) yet the profit margin is so tight that it makes taking that business a worthless exercise when reviewed in the cold black and white figures of a profit and loss sheet. Taking a different approach to the same challenge, can the sheer effort to maintain business viability – and keep your engineers working out in the field – become an easy temptation despite the fact that it may ultimately lead to the overall failure of a business?
All too often we witness some field service businesses being tempted to take on clients with narrow profit margins, which is a very dangerous path to tread to say the least.
To build a truly sustainable business, you need to be able to focus on the jobs, contracts and clients that are most profitable, rather than trying to be all things to all clients.
So for those responsible for enduring their field service operation remains profitable it’s absolutely critical to take the time to occasionally step back and analyse your client base. Understand each of your clients (and prospective clients) and try to identify those that fit within the two following categories…
Clients who are already profitable:
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- How can you quantify for them the work that you do, so that it is recognised and suitably remunerated?
- How can you keep these clients ‘locked in’ by delivering service beyond the agreed service level agreement (SLA) but without draining your resources and revenues?
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Clients who could become more profitable:
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- How could you better manage the time you spend on their projects?
- Can you identify where you are providing more than you agreed within the contract and budget?
- Do you have an evidence base that will support you in negotiating with clients to pay more or expect less?
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Clients who are unlikely to ever become sustainably profitable:
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- How could you readdress the balance and bring these clients back within acceptable parameters?
- If the evidence shows these clients are always going to be an excessive drain on resources, do you need to make the difficult decision to agree to go your separate ways in order to free up your engineers’ valuable time for more profitable jobs?
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If you can gain a better understanding of each and every client’s worth to the business, you’ll be well placed to decide where to invest your resources for optimum return, both in retaining clients and also in pursuing new business. There may be that one occasional client that it could be argued will bring greater business value to your organisation even if they fall in to the latter camp. However, even these clients must be fully understood.
[quote float=”right”]More importantly does it counter balance the loss leader? If the answer is no then quite bluntly you should be walking away from it all[/quote] The potential benefits of working with such a client can and must be translated into a quantifiable figure, and that figure should be reviewed over time to see if the initial predictions are being validated. For example if you take on one client who is a leader within their field, the theory of Social Proof should lead to some others within that field joining you also. How much is that additional business worth? More importantly does it counter balance the loss leader? If the answer is no then quite bluntly you should be walking away from it all.
Making tough decisions
Admittedly, turning work away is never easy to do, but it can also free up your expensive resources to focus on where they can bring best return. This is where it becomes absolutely essential to have transparency between divisions and to train your sales force, who are almost certainly focussed solely on revenue, to begin focussing on profit instead. It is madness to incentivise an individual on revenue from a product sale if ultimately your organisation is going to lose on service revenue in the long term.
[quote float=”left”]This is a slow train to disaster and companies still employing such a quick buck style of sales are destined for failure. [/quote] Unfortunately the sales of product and service remain isolated in so many organisations, and even today I here anecdotally of huge service contracts being bundled in for free as ‘added value’. This is a slow train to disaster and companies still employing such a quick buck style of sales are destined for failure. Such an approach should be consigned to the 80’s where quick turn over was king.
Successful businesses in the new millennium understand the long term value proposition of service, indeed the bleeding edge companies moving towards a servitization model are showing us a path that truly benefits both client and vendor. Service is the long stay foundation on which profitable businesses are now being built upon. And whilst moving to such a model requires a radical rethink of core business strategies, modern technology plays an incredibly important part in enabling this shift.
At the most basic level your service management solution needs to give you the advantage of arming you with the evidence and information you need.
As mentioned previously, there may be good reasons to bid for contracts which you know from the start will generate very little profit: a project may have particular prestige attached to it or it may extend your portfolio by taking your practice into a new market/territory.
[quote float=”right”]quantify the risks and have measures in place to contain any losses so that they don’t overwhelm your business and become a bottomless pit. I[/quote] However, before bidding for such work, you’ll want to quantify the risks and have measures in place to contain any losses so that they don’t overwhelm your business and become a bottomless pit. If you can draw on a solid foundation of knowledge of costs and time for previous similar contracts, you will have a better understanding of the commitment you are making and the potential risks.
With contracts of this nature, it is more important than ever to keep to the requirements set out in the SLA. Set clear expectations at the start, apply strong change control, and have a process to handle requests from the client for additional work.
This feature is part of a series exploring Service Management in the twenty first century and is accompanied by the excellent eBook The Service Management Handbook 2014 which is published by Advanced Field Service.
To Download your copy of this incredible resource click here and complete the brief form.
This feature is sponsored by:
