Often times, dealer-principals and managers have difficulty fully understanding their service department. This leaves owners plagued with questions about how to solve problems that relate to the bottom line. Often a deeper look is required, along with an additional understanding of what is important to profits and efficiency. Bob Clements, president of Bob Clements International, a training and development company that specializes in creating high performance dealerships and organizations, stresses that if you understand the service department better, see its flaws and actively fix them, your dealership’s growth potential will reach 100%.
Clements knows all dealers want to create a high performing service department because it is often the number one question dealers ask for his expert advice on. Ultimately, Clements’ 32 years of experience has shown him that many dealers forget how critical the service department is until things have gotten bad. The first thing Clements does to evaluate the situation is ask two questions: why is your service department not performing and how do we move it to that next level?
Why You Have a Service Department
“The first thing that we want to try to understand is really why does your service department exist?” Clements says. “When I talk to dealers about this question, most of them go, ‘Well, we have to have it. If I didn’t need it, I really wouldn’t have it. If I could get rid of one part of my dealership, I’d get rid of my service department.’”
- Service departments are the heart of how to maintain your customer when they return for those second or third sales, or even for maintenance on their current piece.
- Finding and keeping good service technicians can be difficult, so it’s important to pay them what they are worth for the region you are in. It is also important to invest in them by making sure they are attending trainings to strengthen their skills.
- Understanding how you set your effective labor rate will directly correlate with how much you should be paying your service technician. Those numbers are important and ideally can be raised between $8-10.
- You should factor in 20% of every billable hour for your net profit. If your service department isn’t making any money for you, an examination of your shop should happen.
- Placing your services and rate at a higher prices won’t drive away your customers if you are producing great service. Five out of six customer value great service over finding the best deal or lowest price out there.
According to Clements, dealers say this because they don’t really understand how the service department works. “A service department is probably the simplest thing in the dealership to run. It requires the highest level of competence on the people. There’s no department in the dealership that requires a higher level of technical skill than the service department,” he says. “That’s the frustration a lot of owners and managers have. It’s not so much the department itself, but it’s really understanding how to find the right kind of people to do it.”
There is no secret to why a service department exists: it’s there to make money. Clements has encountered dealers who simply undervalue the department by saying, “it’s just something that we have to do for the customers.”
“That’s a poor reason to have a service department,” responds Clements. “Obviously you want to take care of customers, but the reason that you want to have a service department is you want it to be this cash machine that throws off hundred dollar bills all day. I have a good friend of mine, Mike McCrate, at Tulsa New Holland, who I’ve worked with for years. Mike’s favorite saying is, ‘If what you’re doing’s not throwing off hundred dollar bills, you need to fix it so it does throw off hundred dollar bills or quit doing it.’”
Service departments aren’t optional or a necessary evil. The department will bring in the most profits for the dealership if ran correctly. Clements says, “The service department is what brings back the customer the second and the third and the fourth time. I tell my service managers and my service technicians as we’re doing turnarounds in shops, ‘You know, any slick salesperson can sell anybody a piece of equipment one time. It’s the service department that gets that second sale, that third sale and that fourth sale.’ Conversely, if we have a great salesperson that does a great job with the customer and sells him a piece of equipment, and we mess it up in the shop, it’ll be the last time that customer does business with us.”
The impact the service department can have on a customer directly affect a dealership. Poor and sloppy work in the shop can affect whether customers continue to trust you with their equipment. The struggle is there, according to Clements, because dealers fail to realize that customers choose to come to them even though they have plenty of options. It’s the shop’s job to maintain that customer.
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8 Questions to Self-Evaluate Your Shop
Your goal is to be able to say “yes” to 6 out of the 8 questions. If you are having trouble answering “yes” to many of these questions, you need to invest time to get your dealership running at a higher efficiency.
1. Do you maintain an accurate accounting of all your technicians’ time?
“If you’ve got 4 technicians and they’re there 8 hours a day, you are buying 32 hours of time. If you’re not able to keep track and tell me what happened to all 32 of those hours down to a tenth of an hour, you’re not accurately accounting for all your technicians’ time,” Bob Clements, president of Bob Clements International, says. “I need you to understand this: if you’re posted labor rate is $90 an hour, one tenth of an hour is $9. If a technician loses one hour of time that he didn’t keep track of for a day that’s $90. If I have 4 technicians that’s $360.”
2. Do you file warranty claims at least on a weekly basis?
“Most people say the manufacturers don’t give us enough time for warranties,” he says. “I wouldn’t say that’s true, but not in all cases. Sometimes you have plenty of time, but your shop is recovering so poorly you’re only recovering at 70%, and the time that they give you is based upon a shop recovering in the 85-90% range. Don’t blame your lack of recovery on poor warranty claims.”
3. Do you understand what your warranty recovery rate is by vendor?
“If you look at every one of your manufacturers you should be running a report that shows you what your warranty recovery rate is. So, if I asked for ABC manufacturer, and I do a warranty for them and ask for $1,000 but they only give me $800, then I know that my warranty recovery rate for that vendor is only 80%,” he says.
4. Do you use flat rate billing on the majority of the repairs that come through your service department?
The United Equipment Dealers Assn. (UEDA) is working with software companies to create a flat rate system that essentially allows you to pull rates into work orders so you can see flat rates and that your techs will know exactly how much time they have to work on a project and to make it billable. The beauty of flat rating is that it also sets the customer expectations because when you bring the equipment in you’re basically telling the customer, “Well this is how much it’s going to be.” Clements understands that even though not everything can be flat rated you can do it with 70-75% of all the work that comes into your service department.
5. Do you have a written process for equipment entering and leaving your service department?
From the moment you either have a piece of equipment brought into your dealership or you pick it up, you communicate with the service department what is going on, either verbally or through a written procedure they can look at. It is also best practice to communicate with the customer within 24 hours on what you are seeing and some basic information. Clements says your focus should be following through from beginning to end, from drop off to pick up, including communications on what complex repair may be taking place. “How are you doing?” Clements asks.
6. Does your compensation help drive both quality and speed of the equipment repair?
“If you have great technicians all they want to do is sit there all day long and turn wrenches because that’s how they maximize the money they make. Most of the shops I work with have an hourly rate they pay technicians. If I work my butt off and I kill it for 8 hours, and I get you 10 hours of billable time, I still make $20 an hour for 8 hours: I make $160,” says Clements.
“Where goofball technician on the other side over there, they screwed off 3 hours today. They make $15 an hour; you still paid them for an 8 hour day. That’s demotivating in a shop. You want to make sure your compensation program drives both the quality and speed of equipment repair.”
7. Do you require your technicians to attend manufacturer training?
“Manufacturer training is critical. If we want to get high performance in our shops, we’ve got to have technicians who are factory trained technicians. They’ve got to be passionate and want to go to that training. Are you making sure that you’re sending all your techs there? Or are you sending the service manager to all of them, so he can maintain the certification for the dealership, and the technicians are just hoping the service manager in some way can communicate all of the training knowledge back to them? Don’t do that,” says Clements. “Don’t have one person in your shop that goes to all the training. You’ve got young technicians; get them out there to training. That’s how they’re going to get better. That’s how they’re going to get faster.”
8. Do you avoid pulling techs off their work orders to do non-billable tasks?
“You can’t pull your technicians off a job to go out and unloaded a truck, to sweep the floor or to empty the oil. My technicians in our shops, all they do all day long is turn a wrench,” he says. “I tell people again if I can make $90 an hour on a technician, the last thing I’m going to have him do is do a job a $15 an hour person can do. They’re not going to sweep the floor. They’re not going to go out and get their own equipment. They’re not going to go out and clean their equipment. All they’re going to do all day long is turn a wrench. That’s how they’re going to make their money, and that’s how they’re going to make money for me.”
Manufacturers, Sales & Service Departments
Understanding who your customers are is just as important as understanding why you have a service department. If you know who your customer is, Clement says, then you understand why your service department should be your highest focus.
Only 1 in 6 of your customers care about getting the lowest labor rate.
“I ask dealers, who are your customers? They say, ‘Well, we have all types of customers. They’re farmers or they’re whatever.’ No, I say, your number one customer in the service department is your sales department,” says Clements. “You have to understand that when we do a service department turnaround, we really create a priority list because we need to have that service. Who’s our highest priority customer? Who’s our second highest priority? Who’s our third highest priority? I tell people the sales department is the highest priority customer of the service department. The sales department is their purpose. Their primary purpose is to go out and sell equipment because we know, regardless of who the manufacturer is, once we sell something it immediately starts to break.
“The sales department is like the Johnny Appleseed. They’re out there planting apple trees for us. As those trees are out there then they start producing fruit, and the fruit is like a tractor or a UTV or excavator or whatever, the fruit of that is service and parts.”
High Performance Shops
Every dealer, in one form or another, wants to be at the top of their game and be recognized for being a high performer. Many of the obstacles you have to tackle in order to achieve that status start with understanding your numbers and your shop. Clements tackles the issue of how to still come out on top despite the challenge of finding and/or keeping good service techs.
“I know a common theme today in shops is it’s really hard to find good technicians. Yeah, it is hard to find good technicians, but it’s not as hard if you pay them well,” says Clements. “And it’s not as hard to keep them if you pay them well.”
Clements admits that comment leads into the question of how much do you actually have to pay a technician? He says it’s a complicated answer but realistically, it depends on your region.
“If you’re on the East Coast or the West Coast that’s going to be different than if you’re in the Midwest or in the South just because of the cost of living, but there’s a rule of thumb with everything in a dealership,” says Clements. “In a dealership, everything is a number. There’s nothing that happens in a dealership that your business management software can’t pull a number up for you and tell if you’re doing good or bad.”
When digging further into those numbers Clement says, “Our compensation programs and all our departments are based upon some percentages. In service there are basically four things that we look at, and they’re all based upon a percentage of your effective labor rate. Not your posted labor rate, but your effective labor rate. Your effective labor rate is your posted labor rate minus any write offs that you did on work that you didn’t charge the customer for or work that you did for a manufacturer where your recovery was less than 100%. If I do work for a manufacturer warranty job and they only pay me 80% of what I ask for, then that 20% would be deducted as a part of your posted labor rate, and ultimately you would come up with an effective labor rate.”
Effective Labor Rate
Everything that a service department does should be based on its effective labor rate, so it’s important to know and understand that number. Clements explains the calculations aren’t as extreme as you may think; it can be as simple as adding $8-10 of your posted labor rate to get your effective labor rate.
“If you’re charging $95 an hour, your effective labor rate is probably $85. If you’re charging $80, your effective labor rate is probably, let’s say conservatively $70 an hour,” says Clements. “So when we look at our effective labor rate we say, how much can I pay a technician? When we look at technician’s cost we look at the effective labor rate. Let’s say your effective labor rate is $80 an hour. I can pay a technician who is 100% efficient 30% of that in a combination of hourly rate plus bonuses.”
Clements breaks it down even further explaining what bonuses consist of and what the range of hourly pay should look like to maintain that staff.
“If my effective labor rate is $80 an hour and if a technician was 100% efficient, meaning in an 8 hour day he is billing out 8 hours of time right, I can pay that technician up to $24 an hour for those 8 hours he’s there,” says Clements. “Now we wouldn’t do that in the form of a full a $24 an hour. We would probably do it in the context of maybe $20 or $22 and then a $4 bonus for every billable hour or $6 bonus for every billable hour, but it’s 30% of your effective labor rate is what you can allocate for a technician’s cost.”
You won’t find and keep good A level technicians if you offer them $15 an hour, says Clements. Comparing the numbers to other industries can help dealers understand why labor rates might have to change in order to keep that A level tech.
“If it’s going to cost me $30 an hour, then I have to have a minimum of $90 effective labor rate, so my labor rate’s going to have to be around $100-105 an hour,” says Clements. “That’s how the automotive industry does it. That’s how the trucking industry does it. They look at what it’s going to cost them to get an A level technician and to keep them, and their labor rate is based upon that number. Understand that your labor rate is not based upon what you’re going to charge a customer, but how much you’re going to have to pay the kind of technicians you want and to get to keep them.”
Management Cost & Net Profit
After you have figured out the your effective labor cost and what is the best pay to give technicians to keep them around, you then have to look at other numbers, like management cost. For every billable hour that’s produced in the shop you should be able to pay for your management, and your management costs, says Clements.
“Your number one customer in the service department is your sales department…”
– Bob Clements
Management costs should be 15% of the effective labor rate of $80 an hour. You should be able to say 15% of $80 is going to put you at about $12 going to your management costs.
As for net profit, Clements says you should expect 20% of every billable hour to go back into the net profit for owners.
“If your effective labor rate is $80 an hour, your posted rate may be $90. For every hour produced in the shop by every technician, I would expect $16 — or 20% of $80 — to flow back to the owners as net profit,” says Clements. “We look at a shop and I run those numbers, if the shop is not making money for the ownership something is wrong. Most times I will tell you your management costs are out of line. You’re paying a service manager too much for what the shop is producing, and I would say probably 70% of the time the management cost is out of line, and when the management cost is out of line, it impacts the net profit to owner.”
A vs. B Level Technicians
Technician efficiency can make the difference between your service departments running at 85% compared to 100%. Many times efficiency can be equated to if you have a level A or a level B technician on your staff. The first step, Clements says, is to examine your efficiency by examining the hours worked in the shop vs. the billed hours.
“This tells me quite a few things,” says Clements. “I would expect a B level tech to be at no less than 85% for tech efficiency. When you think of tech efficiency, if a service manager’s doing the right job, they’re putting the right techs with the right skill sets on the job they can handle. If a technician is less than 85%, it’s telling me we don’t have the skill set in our shop that we need. I don’t have a technician that can do this, and so my No. 1 objective as a service manager is to find a better diagnostic test, which would be an A level technician.”
If you have a technician struggling with doing hydraulic issues, or electrical issues, you will see only 85% efficiency, which is appropriate to label them a B level tech, Clements says.
“I would expect an A level technician on a job to be over 100%,” says Clements. “In the automotive industry it’s not uncommon for an A level technician to be billing out 12 hours in an 8 hour day. They’re doing flat rating as a part of that too, but again tech efficiency is wrench hours vs. billable hours.”
It’s Not About Price
When Clements is consulting dealers, he tends to get push back on dealership shop rates because dealers don’t want to be known as the most expensive repair shop in their area. If your dealership’s shop rates are high yet your customer service and over all quality in repairs reflects the pricing, you have nothing to worry about, says Clements.
“I find it fascinating that your customers pay basically the same amount for milk as every other community around you. They pay the same amount for gas. They pay the same amount for bread. They say they pay the same amount for tires, but you’re going to be the one that charges less than anybody else, I don’t get that,” he says. “I want people to walk away from a shop that we consult with and say, ‘Wow, they’re high, but if you want it done right that’s the only place to take it.’”
Clements says that, you’ve got to charge a rate that’s in line with what you’re going to have to pay the technicians to keep them. “It’s not about price. There’s a survey done on why people buy, and consistently only about 15% of the population out there care about getting the lowest price. It’s not about the lowest price. If they wanted to get the lowest price they’re going to go to Johnny Oaktree who has a block and tackle approach, and that’s where they’re going to go. You’ve got people who do that. They’re not right for your dealership. The people that come to your dealership aren’t there because they want a low rate. They want it fixed correctly, and they want to fix it in a timely way, and they want it brought back as close as possible to manufacture specs.”
Service managers should be able to handle cost and pricing questions for any customer and assure them that quality of work will match the cost. If for some reason you are running into issues with techs that run over time and are having difficulty with parts or a job, the service manager should always step in and address the issue immediately in order to keep cost surprises from the customer.
“Service managers many times don’t communicate to a customer correctly about [added time or expenses], so now we have a job that the customer thought was going to be a 8 hour job, and now it’s turned into a 12 hour job. And nobody communicated that to the customers. Now the service manager doesn’t want to have to explain why there’s an extra $320 of labor on a job that the customer never approved,” he says. “That’s a communication problem, that’s not a pricing problem. When I hear people say, ‘well, people complain about the price’ it’s because they didn’t communicate what it was going to cost to do the job. You told them something and then the dynamics of the job change, and you didn’t go back and communicate to the customers this new information.”
Once communication is established upfront, and throughout the repair process you can limit the number of upset customers when it comes to pricing. Clements is a firm believer that if proper communication is established, your customer won’t be upset with the pricing.