The Value Point System
The storm blew up without warning, although everyone should have known it was coming. The boss had just returned from his monthly meeting with the CPA. It began with the warehouseman —“We need to keep material costs below 15 percent.” Then, he saw the operations manager — “We have to keep our gross margin above 60 percent or we’re losing money!” Next was the sales manager — “Can’t you do something to get the close rate above 85 percent? Tell those guys to sell, sell, sell!”
Finally, the storm blew past and soon everything was back to normal. No one really knew how their particular numbers fit into the overall game, they just knew that the boss was mad about them, again.
Wouldn’t it be great to boil our performance measurement down to one number that everyone in the shop could work toward? What if hitting one target means we’re not only an efficient, profitable business but also we’re being fair to customers as well as employees?
Assigning ValueThere is no such measurement, but we can get real close with a simple value point system encompassing most of the critical numbers in one neat package. You won’t need to track sales, figure gross profits or calculate billing efficiency if you don’t want to. Measure your goals with these value points and nearly everything else will fall into place.
Value point management begins by setting a value point goal for each lead service tech in your shop. I prefer an annual goal of 1,000 value points per tech. There’s nothing magical about 1,000, but it is a nice round number for calculations. If you’re using a flat rate pricing system, your value point should coordinate with the labor used in the tasks.
Here’s a simple example to help you align your value points goal to your price book: Examine the labor assigned to frequently used jobs such as a typical water heater change out; maybe a no-frills 50 gallon electric. In the service world, it’s reasonable to think that an experienced plumber could do two of these jobs in a day, even when accounting for windshield time, diagnosis, paper work and clean up.
If this water heater task includes two billable hours and a plumber could normally do two of these jobs a day, then you have a goal of four value points per day. If your pricing system includes three billable hours each for these installations, you’ll have a goal of six value points per day.
Now, simply multiply this daily goal by the number of productive days per year. Example: 235 six-point days equals 1,410, or just call it 1,400 value points. The same number of four-point days would be 940, or just round it to 950 value points. Now your value point equals the labor hours used in your flat rate system.
To assure that you’ve established a reasonable goal, measure performance with your newly established value points for a month or two “off the record.” Use companywide numbers and simply keep track of all the “hours” included in each task sold. Example: If you have two service trucks with daily goals of four points, then in four weeks they should tally close to 160 value points. If they’re a little below goal, you probably have a good target because performance will improve as you start managing toward this goal. Remember, this value point is going to become a performance standard, so it needs to reasonably reflect achievable performance.
Establishing CostWith your value point established, the next step is to establish your cost per value point. If you don’t want to bring in the bean counters, here’s a simple way to figure your cost:
1. Total all operating costs, including all wages. If you’re on a performance-based pay system, include a reasonable estimate of wages that you expect to pay. If you pay hourly, make sure your wage figures include any anticipated overtime. Make sure your numbers include everything that has anything to do with your business.
I often meet contractors with no owner compensation, few benefits and whose wives keep the books for free. These are legitimate expenses that should be included in your operating expense! The only items to exclude from this number will be nonwage job expenses such as materials, rental equipment, permits and subcontractors.
2. Next, simply divide your total costs (from No. 1 above) by the number of service trucks you have on the road. A two-truck operator with $300,000 in costs would have a total operating cost of $150,000 per truck.
3. Now just divide your cost per truck by your value point goal. If your value point goal is 950 per truck and you are the contractor in No. 2 above, then your cost per value point would be $150,000 ? 950, or about $158 per value point.
4. Use the cost above in calculating your selling prices, applying whatever profit margins you desire to achieve. You’ll have to check with your pricing system to see how to use this number. For some systems it’s equal to your cost per billed hour.
So far, we have established a value point goal, determined the cost per value point and calculated our selling prices accordingly. Your hard work is about to pay off!
More Profit With Lower Sales?Using value points, service personnel don’t have to shoot for big sales numbers and can, in some cases, actually be more profitable with lower sales numbers.
To illustrate, let’s use our fictitious company above with a cost of $158 per value point. We’ll assume the company costs are based upon four value points per truck per day, which means each truck costs $632 per day to man and support. Our profit target is a reasonable 25 percent.
Tech A, the super sales guy, comes in at the end of the day, proudly showing off a $1,500 invoice. He had managed a nice water heater sale with a couple of small add-ons. There’s only one problem — for today’s efforts he only racked up three value points. Your goal is four.
Just as Tech A posted his numbers on the board, Tech B trudged in. “All I had today were small repairs. At least I had a couple on one job but other than that, what a tough day! I could only come up with $875 in sales!” But he did manage to click off his four value points for the day.
After a quick glance at the tickets, the owner bought a soda for one of these guys. Which one? Let’s look at the numbers.
Remember, both techs were shooting for four value points ($158 X 4), or $632 just to cover costs. Our 25 percent margin means the value points would retail for $842.67.
Tech A, with his big ticket job, produced only three value points, which means that the labor portion of his sale retailed for only $632. In this case, he exactly broke even on operational costs according to the value points.
Tech B, with a string of little repairs, turned in four value points for a total of $842.67. Hitting the goal, that fourth value point, equals $210 worth of profit.
Tech A had a much higher invoice so surely the profit on materials put him ahead, right? The invoice was $1,500 and we know that the three value points accounted for $632 of that, leaving $868 in material sales. Since the job was priced out of our price book, we know that the profit is built in at our reasonable 25 percent. This means Tech A earned $217 in profits on the materials.
Tech B sold a few parts too, but only $32.32 worth for a profit of $8.08.
But, when the profits are tallied, Tech A produced $217 in actual profits while Tech B squeaked past him with $218 in profits. Tech B was more profitable even though Tech A had $625 more in sales! The boss, however, blew that dollar difference on a bottle of pop so the two techs ended the day with a draw.
This is just the beginning of managing with value points. Next month, we’ll explore some practical tips for maximizing your company’s profits using value points. In the mean time, if you’d like to download a spreadsheet to let you play “Tech A vs. Tech B” using your own numbers, just point your browser to www.serviceroundtable.com and go to the “FREEBIES” page.