If you don’t see your service department as a profit center, it may be time to revisit the numbers.
For many dealers, a service department provides a vital source of income during economic downturns – particularly this last one – by selling repowers, routine maintenance and more for existing customers who aren’t ready to upgrade their old boat just yet.
“Dealers that were balanced and had a strong, well-managed service department, in the last market downturn it was very clear – there were the haves and the have-nots,” said John Spader, president of Spader Business Management. “It’s one of the best things you can do to get yourself bulletproof for when the next recession hits.”
And make no mistake – it is a matter of when, not if. It may not be as devastating as the Great Recession, but there is a natural ebb and flow to economics and it will eventually turn downward from our current upward trajectory. When that time comes, making sure your service numbers add up to maximum profits will help you survive and thrive.
Proficiency in efficiency and productivity
Tracking efficiency is typical in most service departments, as it allows dealers to keep an eye on how much cash they are truly generating for every hour they pay a technician. It is equally important, however, to be looking as well at the productivity rate, which is the actual hours worked on a job by a technician.
A technician can be incredibly efficient for two hours of his or her day, especially if that’s all the work they have. And if the work is completed in one hour, that’s a 200 percent efficiency rate. But if a technician is punched in from 8 a.m. to 4 p.m. and only works for an hour, the productivity rate is very low.
“They might be 100 percent productive, but not generate one penny of cash because you told them to move in and out of boat shows and do policy work and change the oil on the company truck,” said Spader.
The maximization of productivity and efficiency together make proficiency. To achieve a high proficiency rate, efficiency should be the technicians’ responsibility – how fast they get the job done, how efficient they are to get it done under the billable hours. Productivity should be the manager’s responsibility – making sure the work is there. This collaboration builds an effective and profitable service department.
“As long as the manager is keeping the work flowing and the work coming in for the techs, then that gives them the ability to be on the clock or on a work order as much as absolutely possible. We strive for as close to 100 percent productive each day as we can and the best way we can schedule that,” said Chris Olsen, director of service and storage at Seattle Boat Company. “Productivity is all about having the work there. Efficiency is all about having the techs getting it done.”
It’s vital to not just track these numbers, but to do so daily. This allows the department to catch issues quickly and make corrections accordingly, without leaving dollars on the table.
“If you notice that you have a technician that’s been declining in how efficient they are each day, then you can have that individual chat with [a manager] and say ‘I notice you’re not quite punching out as much work as you usually do. Is there something going on? Is there a tool you need? How can we correct the issue,’” said Olsen. “You can really spot that right away instead of a month later … and it takes longer to correct. And by that time, you’ve already missed a lot of billable hours.”
Another key metric is the service department’s customer service index scores. Those numbers are what will determine how successful the business can be retaining customers. Seattle Boat Company tracks its service CSI and strives for 100 percent. The company achieves this by sending a survey to every customer after each contact for feedback.
“If we get negative feedback, management will immediately contact the customer to see how we can make it right,” said Olsen. “Our goal is to catch our mistakes before they hit Yelp, Google or any other review site to ensure we have done everything we can to make a happy, long-term customer.”
Major dollars and cents
Using service department metrics will help a dealership turn the service department into a revenue-generating machine, whether it’s through improved budgeting or finding new revenue opportunities.
Seattle Boat Company uses a 10-year history, after having tracked its metrics for so long, to help build its service department annual budget. The company can look at a technician who has been with the company for several years, see what they have produced year over year and how that breaks down month by month, review their efficiency and create a budget accordingly.
“We don’t say we’re going to make this much money this year and then go back to the tech and say, ‘You need to do this.’ We start with the tech and see the history, and see what can we do to improve year over year, what little changes do we need to make, make those corrections and then figure out [budget],” said Olsen. “And then we move that forward and that will eventually tell us how much income we’re going to have for the year per tech, and then you add them all together and you know what your service department is going to have total for the year.”
Properly tracked metrics also benefit the overall bottom line of the business.
“A well-run service department can financially add minimum of two to three percent to the total company net profit,” said Spader. “And so if you’re a $10 million dealer, a good service department could add $200,000 to $300,000 to the net, if they’ve got a good net.”
Focusing on making the service department profitable can also combat the erosion of margins in the sales department, as many dealers have experienced due to competitors undercutting one another on price and parts becoming more readily available for cheaper online.
“That’s why we’re focusing on the service department, because there is more of a margin,” said Kelly Fullerton, chief operating officer at Eric’s Outboard Marine Service, Inc. “That’s really where we can make the most money … so that’s where we want to gear our attention toward.”
Tracking service metrics helps dealers control the department’s expense ratios, because the technician as an expense ratio has the biggest impact.
“Nine times out of 10, if a dealer gets their technician expense ratio in line, unless they’ve really gone wild with spending in a different area, their net profit will be OK,” said Spader, who added that a service department’s net profit should be at 20 percent or more. “Because to get the technician expense ratio in line, you have to have the right labor rate and the right efficiency, and to do that you’ve got to have a good management system and program going. And if that’s the case, usually when that ratio comes into line everything else will be OK.”
The service department also has a strong effect on margins on the front end. Think of a salesperson who wants to close a deal with a customer and wants to add a couple thousand dollars, and claims it’s worth the price because “we’ve got the best service around.” Will the salesperson be confident saying this without feeling like they are lying? Will the customer believe the salesperson?
“A good service department will add a couple of points just in hard cash to the net of the company, but it will also add a good couple of points or more to the sales department because they can sell with such confidence and have the ability to sell more,” said Spader. “That’s the hidden effect that so many dealers don’t understand of when sales is trying to close the deal and they can’t because they’re scared to death of what the customer is going to experience in service.”
And of course, there’s the huge benefit a well-run service department brings customers. If customers aren’t sitting around waiting for their boat because the department is efficient and productive, they are more inclined to keep doing business with the dealership.
“Somebody’s not going to wait five or six weeks that their boat is down in the summer to get it repaired,” Fullerton said. “Or they’re going to go somewhere else and you’ve lost that customer, maybe for good.”
“For our customers, the more efficient we can be, the high quality of service that we give, we can schedule and turn these boats in and out within a day or two, and that’s what our customers want to see,” added Olsen. “They want to see it done right and they want to see it done fast.”
Two types of service, one happy customer
Spader Business Management recommends tracking where labor in the service department is coming from — what percentage is prep and reconditioning, warranty or customer pay — to determine if the service department is a retail service business or a service support center for sales and customer needs.
A service support center is bringing in about 15 to 20 percent of customer pay, while a retail service business is bringing in about 50 to 60 percent.
“Somebody that’s doing 50 to 60 percent of their total labor sales in customer pay, they’re out there actively selling and marketing and really going after [that customer] and turning it into a business. In the other, it’s really just a support function,” said Spader.
Either business model can be very profitable for a dealership; while some may believe that a low percentage of customer pay in the service department points to its lack of efficiency, there are high-performing dealers who take excellent care of customers with either model.
“People think if they’re not in the customer model, they’re not a good dealer. I will show you hundreds of dealers with high CSI, high market share, consistently take good care of their customers but don’t have the customer pay-driven model,” Spader said.
Whether or not the department will be profitable depends heavily on who is running it. Spader doesn’t recommend aggressively targeting customer pay work for the service department unless an owner is ready to hire somebody who is incredibly skilled in service, because it’s a different behavior characteristic and skill set than a sales manager.
“If they want to make [the service department] a true customer business, it’s very important that they get somebody that has that skill set,” he said. “You show me somebody who’s got a strong sales department and a strong service department that’s doing 50 percent-plus in customer labor, and 99 out of 100 I’ll show you that they’ve got two opposite skill sets that are managing those two [departments].”
Apples to apples
For dealers looking to find extra assistance tracking their service metrics, 20 groups provide an excellent opportunity for peer comparison and review.
Seattle Boat Company belongs to two 20 groups, which Olsen said has provided the dealership long-lasting friendships as well as a wealth of new ideas and best practices.
“We love to hear the fresh ideas from different dealerships and how we can bring that into our dealership, and either use that best practice or possibly even improve upon it, and then once we do that bring it back to the group [and] say ‘We took your idea and we tried this and it worked great,’” he said.
This true “apples to apples” comparison helps paint a clearer picture of just how well the business is doing and where it needs to improve. Many dealers who get involved with a 20 group find that while they thought their numbers were a home run, in truth they were low performance compared to other businesses.
Spader sees the true value in being able to pick each other’s brains and learn from each other’s successes.
“You can compare where you’re at and then where you’re low, go pick the top two or three dealers in that column and find out what they are doing. And you’ve got proven systems,” he said. “And in those 20 group, those dealers will share anything with you, so you don’t have to reinvent the wheel – just go talk to those top two or three, take the things that make sense for you and go implement them.”
Systems for service
There is no one way to track service department metrics – ultimately, whatever way a business can ensure tracking is done regularly and correctly is the best method to choose.
Seattle Boat Company uses a dealer management system to build work orders, bill them out and track technician time. The team uses the software to clock in and out and the company can pull a report from that system.
“We can break it down into days, weeks or the month, and each column for the day we have productive hours for that day, we have standard hours – which is flat-rate hours – for that day, we have our time clock hours and then below that sick leave, vacation, holiday if it pertains for that day,” said Olsen.
Eric’s Outboard uses a combination of a software system and a whiteboard so technicians can readily see how many hours they billed and worked.
“I think the whiteboard is beneficial because the technicians themselves can see whether they’re profitable for the company, whether they’re covering themselves or whether they maybe need to pick up the pace a little bit,” said Fullerton. As for using the software, “We know where we need to put our resources. We know whether that department is making money. We left a lot of money on the table [in the past] because we have not been able to service our customers.”
Spader Business Management also offers workshops to train dealers how to track service department metrics.