The Remaining Piece In The Profit Puzzle
Systems for maximizing profit are set up like construction operations. You need a structure. All the pieces must fit together and support the other sections. From there you build on any additional structures and finishing pieces to make the project complete and functional. Leave out any piece or part of the structure, and the project is incomplete and ineffective.
The very same requirements exist for a successful profit system. If some of the pieces are there, it may be a good start but you need all the pieces. Let’s first identify the key elements to a successful system - and then look at the one that I see missing in many service and repair businesses today.
Necessary ElementsFor a successful profit system in your business, you need to use the system elements that have been proven to work and put you ahead of the competition. Only up-to-date techniques will work.
For example, companies still trying to explain their time and materials invoices, price estimates and job quotes are seeing more customer dissatisfaction; while companies using flat rate pricing are gaining increased customer satisfaction, more revenue for technicians, more add-on jobs, overall higher average invoices and more bottom-line profits.
So the first structural element to our proven profit system is a professional flat rate system.
1. Professional flat rate manuals. By showing the customer an easy-to-read pricing manual, which includes relevant add-on jobs, in a print size and style that anyone could read and understand, the customer is comfortable going ahead with the job, knowing the price is fixed and guaranteed.
Plus, the flat rate manual takes over a good portion of the price-quoting and job-closing efforts of the technician. His or her task of quoting a price has been both simplified and made easier, and the revenue he receives for completing the job - and all add-on jobs - is consistently more.
No service and repair business can afford to miss out on this key element to a modern profit system. However, it is not the only key part of the latest way to maximize profits.
2. Service agreements. While the customer is looking at the attractive pricing manual (yes, the technician is encouraged to share the job and price listings in the manual with the customer, no hidden calculations), the customer sees a discounted price available for service agreement customers.
Naturally, he is going to inquire how he can get that lower price for his job. The menu pricing manual encourages customers to ask for the value pricing, for which they can rapidly qualify by purchasing an economical service agreement.
For a nominal charge, the service agreement customer is entitled to free home inspections and a reduced price on all service and repair work. The business can perform home inspections during slower times, so technicians are not without something to do. Since most inspections produce service work that is legitimately needed, the technicians and the business can earn more from that new work. The value to the customer is that he saves money and avoids hazardous situations in his home.
Plus, the business has increased cash on hand from the service agreement fees. (Some businesses have more than 1,000 such customers, including a $50 fee for each.)
3. Measuring efficiency. The efficient use of resources is the next fundamental business management concept. This one is often thought of when looking at manufacturing or other production businesses, but it applies to all businesses.
Now is the time to apply it to your business, and the key element is labor hours. How efficient are your technicians? Have you ever measured the level of efficiency of the people who perform the service work for your company?
It’s not difficult to do. Simply compare the total hours the technicians are paid and the hours they spend on billable jobs. The computation looks like this:
Total Hours Billed to Customers
Total Hours Paid to Technician
The efficiency factor varies widely in companies around the country. Some are as low as 20 percent, a few are as high as 100 percent. What those numbers mean is that, for every hour the technician is paid, he or she produces that percentage of billable hours completing jobs. It is easy to see that the technicians producing high percentages of efficiency are worth more than technicians who are producing small percentages of billable hours during any given week or month.
Before going any further with management practices in your business, start measuring the efficiency factor (let’s call it EF) of all of your technicians. You need this data to provide incentives to the best performers.
Who Makes The Company Money?You need to know who makes the company money (and who doesn’t do so well). If a technician is producing at a high EF, then shouldn’t he be rewarded? You want those types of technicians to keep working for you and to receive incentives for performing their work at a high level of efficiency.
However, you cannot overlook the first step: Start measuring the efficiency of your technicians today. The system requires data, months of background data - years if it is available - to be initiated properly. The process is very simple, and you can keep track of the data on your computer.
Make a basic chart comparing, on a weekly or monthly basis, what the EF is for all your technicians. Once that is completed, you are ready to go to the next step.
Once the EF is recorded for as long a period of time you can accumulate data, then you can start to assemble an incentive plan. The incentive plan need not be complicated; it simply provides an hourly rate that varies with technicians’ EF.
For example, a highly efficient technician may be paid, based on his high performance, $35 or $40 per hour or much more. A less efficient technician would, as you would expect, make less. The rates of pay can increase with the technician’s EF.
When the system is set up, you can apply it to every paycheck, every week. Constant modifications are not required. And there is no limit. If all your technicians produce at the 100 percent EF, then they all receive higher pay. There is no “curve” or limiting factors for rewards.
A Dynamic SystemThe beauty of this system is that the rates of pay can vary with the technician’s EF. In fact, varying the rates is why you implement the system. The potential for a technician to increase his pay always exists, along with the potential for less pay for those who are not as efficient. In other words, those technicians who have significantly more paid work hours than the hours that the company can bill customers from their jobs.
The incentive is clear, specific and can be calculated to the last penny. More efficiency means a higher rate of pay - for every hour worked.
The incentive implements an important company goal: Try to keep hours paid to technicians as close as possible to hours that are billable to customers.
High AchieversCan a technician reach 100 percent EF, or more? Yes, in some companies technicians produce at that level. That means they are paid the same number of hours of work as the company billed the customer. When this level of performance is achieved, the company is extremely efficient; so why not share this efficiency with the technician?
Basically, the plan encourages all participants to focus on maximizing hours of work that can be billed to customers.
For instance, a technician who completes a home inspection on every service call probably identifies, in good faith, an additional fixture or piece of equipment that needs work or replacement in the customer’s home. Selling that job to the customer, or related add-on jobs that are offered in the menu pricing book at a reduced price if performed on the same service call, is a very efficient use of the technician’s time. No travel is needed to another customer location, so work can begin immediately on the next job.
Recognizing the potential for such efficiencies, technicians quickly can realize greater pay for the same time spent working on service and repair jobs in a customer’s home.
More Than 100 Percent EF?Can any technician actually exceed 100 percent EF? Certainly. Here’s how: If the technician completes a flat rate-priced job, a certain time is allowed for the job. It’s an average amount of time that most technicians would take to complete the job. Since it is an average amount of time, it takes into account the time some technicians who do not work as fast, along with the time that fast workers would use, to complete the job. That’s how the average is produced.
However, using the EF calculations, if a speedy technician completed the job in less time than specified by the calculations used in the flat rate manual, his EF would actually exceed 100 percent for that job.
The calculations for a typical job completed in minimum time look like this:
Flat rate job time (billable): 3 hours
Actual job completion time: 2.5 hours
The EF would then be: 3.0 Billable/2.5 Worked = 1.2 = 120%
So more than 100 percent EF is not only possible, technicians in businesses across the country are recognizing the incentive pay available for these higher levels of efficiency and are receiving substantial paychecks.
Good for them, I say. There is no problem paying high-achieving technicians for contributing to the company’s success. As you would expect, the pay rate for technicians with EF ratings higher than 100 percent increases significantly, even higher than the technicians with an EF approaching or at 100 percent. More efficiency, more pay.
What About Overtime?The Fair Labor Standards Act and state laws mandate overtime pay. Employers must pay one and a half times the worker’s hourly rate for all work in excess of 40 hours of work in any week. Some states have daily overtime, requiring overtime pay for all hours worked in excess of eight hours worked in one day. Overtime pay for holidays is twice the normal rate of pay. How does the incentive pay work when overtime is billed?
Actually, the EF calculations and the application of overtime pay are both simple and automated. The hours worked match the hours paid to the worker. For example, if the technician worked 50 hours, requiring 10 hours of overtime pay, or 1.5 times his pay rate for the additional 10 hours, he is paid as follows:
40 hours at standard hourly pay
+10 hours x 1.5 times hourly pay = 15 hours of pay
Total effective pay 55 hours of hourly pay
It is the effective amount of pay, in this case 55 hours, that is used for the EF and the pay calculation for the week. With a much higher “hours paid” number and no higher “billable to customer” number of hours, the EF will certainly drop, along with the hourly pay rate for that technician for that week. The incentive for the technician then, assuming he is attempting to maximize the hourly rate of pay as well as his overall weekly pay, is to avoid overtime.
You might ask: How do you know what the hourly rate is for the overtime calculation? Easy, look at the chart already made up for your business with varying EFs. Enter an EF and get an hourly rate of pay. For overtime calculations, determining the amount to pay the technician, multiply that hourly rate times 1.5 for all overtime hours worked.
Remember, the hourly rate need not be fixed for the year, month or, for that matter, the week. It is permitted to vary. With the incentive pay system, it varies based on the simple EF calculation - perfectly predictable, legal and consistent.
Now it’s time for you to combine all the necessary elements we discussed here to produce a profit system that will push you ahead of the competition. In addition, your technicians - especially the outstanding ones - will be rewarded for maximizing company goals, earn more and stay motivated to work for your company.