Calculating Your Service Burden Rate 2.0

The more things change, the more they stay the same.

In the May 2011 issue of ENX Magazine, my service column was titled Calculating Your Service Burden Rate. It discussed the plethora of emails and calls I was receiving, requesting my help in determining an appropriate service labor rate for products and services dealerships offer.

It is impossible to accurately figure out the dealer’s cost (not end-user pricing) of any technical service your company offers, without understanding how to accurately calculate the hourly burden rate of each technical staff member.

At the end of the May article, I offered “To receive a copy of this Excel spreadsheet Ronelle Ingram uses to calculate the hourly burden rate, while teaching the BTA FIX Seminar (Cost Management for Service); call or email me.” Seven years later, I never imagined I would still be receiving these requests.

This Excel spreadsheet is the base element used in the one-day, BTA FIX seminar I have been teaching since 1978. It enables you to accurately calculate your tech’s hourly burden rate—be it a $15 per hour printer tech, the $25/hour factory-certified field-service engineer or a $50/hour certified document management guru. Big dealer or small, this spreadsheet enables you to calculate what each service department employee is costing your company, before any profit is added.

Typically, I hear this from frustrated CEOs: “We are a sophisticated, successful company. I know our hourly service burden cost is upwards of $125. But how do I prove this number to my sales department? We continue to attend industry offerings. We are told that our service department can make 50-plus percent profits. Upon closer inspection, these profits are obtained by charging our own sales and administration for all the technical assistance we receive from our own service department.”

The company owner continues, “I have the power to shift some of the cost burdens from the service department to the sales department. But I am receiving pressure to substantiate these high costs of the service burden rate. If I pay a senior OEM factory trained, CompTIA Net+ and CDIA certified tech $50 per hour, how can I prove he actually costs the business $125 per hour?”

If your field technicians are regularly assisting with sales presentations, end-user training and equipment set-up; working with the sales department on complicated solutions bids; doing equipment installations; etc., without the service department receiving their fair share of the revenue, you are reducing the hours the tech is available to generate other revenue. Your service department will never be able to achieve 50-plus percent profitability if their available workable hours are given, not sold, to your sales department.

An additional issue conscientious dealers face is the desire to improve their efficiency rate, in turn reducing their burden rate. The problem is intensified because they are not sure how this burden rate is actually calculated. A small dealer from the Great Lakes area asked me, “I know my techs are costing the company about $95 per hour. How can management improve our efficiency when it is a mystery to all of us how this $95 hourly burden rate is calculated?”

Does your company offers any of the following services?

• Pre-sales consultation on necessary hardware needed
• Figuring out what software and add-ons need to be part of the solution sale
• Taking part in the sales presentation
• Installation
• Field testing and customizing software
• End-user initial and on-going training
• Modifications, updates

If so, ask yourself: how does your company calculate the service labor cost that must be included into the total cost of these offerings? Is the cost of the technical labor hour included as a line item in the internal cost of each sale? Does the tech and service department receive credit for the labor hours used and profitability (including a percentage of the commission) generated by the sale?

Successful dealers often explain to me how they incorrectly calculate their tech service burden rate. “We start with the tech’s hourly wage, about $20. Then we add 13% to cover the cost of government-required taxes, and then add a little bit more, usually another $10- or $20/hour to cover profit. We know this is just guessing.” Example: The tech makes $20/hour X 13% = $2.60 + $20 profit = $42.60/hour. This is not the correct formula. Worse yet, the true burden rate of the full-time tech being paid $20/hour, is in excess of $80/hour—without any profit being added.

A savvy business person intrinsically realizes $42.60 is too low of a burden rate. Owners, controllers, and service managers returning from multiday service seminars are consistently told the cost of the service burden rate is in the $80–$120/hour range before any profit is added.

Some dealers are lulled into not being concerned with the tech’s hourly cost to the company. They trust their company’s operating system to automatically calculate the precise click cost of each machine, group of equipment, or customer. Unfortunately, most are totally unaware of what hourly burden rate is programed into their software that makes these calculations.

Those who obsess over a mil or two when pricing clicks are missing the greatest deviance in the costing process. In most office equipment service departments, labor is the number-one cost. Without an accurate service labor rate in the equation, it is impossible to calculate the true cost of anything.

I challenge my readers to learn what dollar value is used in the hourly labor rate field of your operating system. Once found, I believe most of you will have a number that is much lower than your actual cost.

When calculating your technician’s burden rate, you must take into consideration the total cost of employing the technician for 2,080 hours per year (40 hours/week for 52 weeks). This is even though most techs are only able to do revenue-generating devours that are credited to the service department for 800-1,000 hours/year.

During the course of a year, the tech will be directed (or allowed) to spend 1,000-1,200 hours on tasks that do not generate revenue credited to the service department.

These include:

• Company meetings
• Technical training
• Driving time
• Helping sales reps
• Deliveries
• Cross training other techs
• Working on in-house computer administration needs
• Rebuilding of equipment for sales
• Downloading in-house software
• Repair or preparation of rental equipment
• Showroom equipment upkeep
• Preparation for a sales demo
• General in-house office-equipment maintenance
• Vacation, sick leave, and holiday pay

There is also the issue of poorly managed technical time to consider. Do all your techs begin working on revenue-generating endeavors at 8 a.m.? Are they working on items that generate service revenue a full eight hours each day? The correct answer is no. Even in the best of service departments, no tech can consistently use all 40 labor hours each week, doing work that directly generates revenue credited to service’s P&L.

Additionally there are government-mandated taxes, including FDIC, workman’s comp, Social Security and Medicare. Plus, most employers have chosen to offer costly perks that workers have come to expect, including:

• Health insurance
• Long-term disability
• Mileage reimbursement or company cars
• Tools
• Uniforms
• Training
• 401K
• Educational tuition reimbursements
• Business conferences
• Coffee

Each of these must be added to your cost of the burden rate in the form of each tech carrying a portion of the company’s overhead.

Once all these calculations are made, and a realistic hourly burden rate of $80-plus/hour is reached, the dealer can add the percentage of desired profit to the hourly burden rate to obtain an appropriate end-user price. By properly adding, subtracting, multiplying and dividing all these pertinent expenses and time allotments, you can establish a more realistic cost of each hour available for a trained technician to generate revenue for your company.

The need to understand and be able to calculate the cost of the service-hour burden rate will open your eyes to a more appropriate business reality. There is no accurate way to determine the actual cost of the services provided by your technical staff without fully understanding, and being able to mathematically substantiate, the actual cost of your service labor hour.

I will once again make the offer. To receive a free copy of the Excel spreadsheet dealers can use to realistically calculate the service technician’s burden rate, call Ronelle Ingram at
(760) 249-8133 or email: ronellei@msn.com.