5 key pieces to solving the service profitability puzzle

By Bob Clements

If you surveyed 100 outdoor power equipment dealers and asked them, “What is your biggest headache?” 90 percent would respond by saying their service department. If you then asked them, “Why is it your biggest headache?” they would give you a wide variety of responses, but, in most cases, they would have to do with the following two reasons: lack of control and low level of profit.

“Service shop complaints” that we hear from dealers across the country include:

You can’t make money because you can’t find good help.
We can’t charge enough to make money because of the shade-tree mechanic down the road that does part-time work and only charges enough to make some extra pocket money.
The manufacturers won’t pay enough to let us make money on warranty work.

Do any of these complaints sound familiar?

As we work with dealers, many times our first challenge is to get the owner to understand that the service department is not only the heartbeat of the dealership, but it can and should be one of the most profitable parts of the entire business.

#1 Adjust your attitude

So how do you turn that “black hole” you call a service shop into a money machine? It starts with your attitude as an owner. You have to be willing to accept the responsibility that — more than any other reason — the shop is (or is not) profitable because of the standards you establish and what you allow to occur during day-to-day operations. As an owner, you set the labor rate, hire the techs, establish the compensation program, decide what an acceptable level of performance is, and train your customers on what they can expect. 

If you don’t like where you are at, then you have to make some changes in what you are doing and decide what numbers you are going to manage to. We ask our dealers to manage their service department to at least a 50-percent gross profit margin. About 35 percent of that should be going to pay the salaries and bonuses of the techs and somewhere around 15 percent should be used to cover the associated costs of running the department, including the cost of a service manager or service writer.

Skyline Lawn and Garden, Chattanooga, Tenn., redesigned its shop to reduce bottle necks and improve efficiency.To get your service department to that level of profitability is simple; it’s just not easy. It is simple in that operating a service department is fairly straightforward. Someone brings in a piece of equipment to be worked on. The service department does the work and lists on the service order what it did, the parts it used, and the time it took to do the work. The customer is then contacted, pays for the work, picks up the equipment, and the process is finished. Simple and straightforward, right? Well, if it were only that easy. 

There are a lot of things that can and will happen between the time that the customer drops off the piece of equipment to be serviced and the time that the service is paid for and the equipment is picked up. What happens between the beginning and the end is what is called your “process.” Your ability to define and refine that process is what makes the difference between a service department that loses money and one that becomes a cash machine.

#2 Set proper shop labor rate for your area

The process starts with an understanding of what you should charge — your “posted labor rate.” I have seen the complex worksheets that some manufacturers have given to their dealers to help them determine what the labor rate should be. In those, you take all the costs you have, determine what you would like to make over your costs, and bingo — a number magically appears. It looks great on paper and, granted, it’s a valuable exercise in looking at what your expenses are. But, I believe there is a better way. 

First, you have to understand that it’s car dealerships, not outdoor power equipment dealers, which determine what a fair labor rate is for a given area. Do you want to know what to charge? Call up your local car dealership, and ask what its labor rate is. Reduce that number by 15 percent, and that is the rate you should be charging for your work. For example, if your local car dealer is charging $90 per hour, then you should start moving your labor rate to within 15 percent of its rate, or somewhere near $75. Car manufacturers have spent a lot of money and time in determining for their dealers what a profitable labor rate should be for each particular area. Your goal is to get as close to that number as possible. 

Keep in mind, though, that if you are going to charge at that level, you have to have a service department that looks like it should be getting that much money. That means having a service department that is well lit, with clean walls, service bays and a clean floor. You have to have your techs in uniforms, and make sure they are well groomed. If your guys look like they have been living in the mountains for three years by doing such things as sporting earrings and “Born to Die” tee-shirts, no one is going to pay you a premium for your work.  Changing your rate doesn’t mean you should run out and move from $50 per hour to $90 per hour, but it does mean that you need to seriously look at what you charge and then, over the next two or three years, get more aggressive in moving your posted labor rate to where it should be. 

With any price increase, timing is everything. You should make incremental adjustments on your labor rate during your busy time of year, not during your slowest time. If season is in full swing, whether it’s snow or grass, customers are not nearly as concerned about the cost of service or repair on their equipment as when it is slow and they aren’t in a hurry.  

For many of you, warranty work will represent 20 percent or more of your total billable hours. Make sure that as you change your labor rate, you notify your manufacturers of the new rate. Most of them will require copies of two or three customers’ bills to validate your rate. Some will tell you that they will only pay up to a certain amount. Take some time to check your state laws. With just a few exceptions, manufacturers are required by state law to pay your rate. Don’t get shortchanged. Remember, it costs you more to do work for most manufacturers than it does regular customers. All work, including warranty work, has to be profitable. 

While we are talking about profit, let’s talk about giving estimates. Here’s the scenario: A customer named John Doe brings in a $99 string trimmer or mower or snowthrower that he purchased at a box store and wants you to repair it. He tells you that he just wants an estimate, and you let him drop off the equipment, knowing in your heart that he is not going to be willing to pay what it will cost to repair it. You invest 30 minutes of service time in looking at the equipment, and call the customer, who says, “No, that’s more than I want to spend. I’ll stop by and get it.” Yeah, right. You and I both know that 90 percent of the time, those customers won’t be back to pick it up, and you wind up throwing it away three years later. 

Let’s stop the problem before it begins. If you haven’t already done so, you should have a minimum charge for an estimate, and require the customer to pay it upfront with a check or credit card. For handheld equipment and consumer walk-behind mowers, the price should be 60 percent of your hourly rate. For ride-on and other large equipment (e.g. tractors, rear-engine riders, zero-turn mowers and commercial walk-behind mowers), the minimum charge should represent one hour of your shop rate. By charging and collecting this upfront, you will find that 60 percent of the junk will never hit your shop, and you will be paid for the time that it requires to provide an estimate. I know that some of you believe that people won’t pay it. But every dealer that we work with does this, and I don’t have one who hasn’t made it work.

#3 Establish a performance-based compensation program

Speaking of work, let’s focus some time on your service techs. Having a profitable shop is only possible if you have a compensation program for your techs that is performance based. What level of performance should you expect from a service tech? The minimum we would tell you to accept is six billable hours out of an eight-hour day. Most technicians fall way below that number. 

One dealer who started using our process for his own shop started with four techs producing less than three billable hours per day as a 12-month average. We changed his shop layout, implemented our service shop module to identify inefficiencies in his service area, made adjustments to his labor rate, added menu pricing for over 100 standard service items, and initiated a compensation program that combines a base labor rate with a performance hour rate. 

Through that process, we have already eliminated the need for one service tech and can possibly reduce that number to two. The techs now have the ability to pick how much they want to make per year with a guaranteed base. Before the changes, a service tech’s income would top out at $35,000. Now with the menu pricing, the techs have the ability to bill more than 10 hours in an eight-hour day and can earn well over $60,000 per year. Plus, the changes have improved the overall shop efficiency and increased profits.

From left, Jeff Cox, owner of Mountaineer Mowers Inc., Beckley, W. Va., and Eddie Hoge, service technician, mark the floor of the service department with tape to reduce bottlenecks.Twelve months ago, Jeff and Lydia Cox of Mountaineer Mowers Inc., Beckley, W. Va., went through the same process, and the change in the attitude and performance of their techs has been extraordinary. As one of the tech’s said, “Before the change, I saw a piece of equipment as just another thing to work on. Now, with the new shop structure, every piece of equipment looks like an opportunity.” Jeff and Lydia will tell you that not only has the attitude changed, but also the profitability has greatly improved and they have service techs coming to them for the chance to work in their dealership. Mountaineer Mowers is a great example of what can happen when you decide as an owner to make your shop the money machine it should be.

#4 & #5 Relentless desire to reduce paperwork and refine processes

A shop becomes profitable when you put the right processes and strong levels of accountability in place. Your parts department has to be in tune with your service department. The paperwork has to flow seamlessly from the front, to the service department, and back to the front for customer billing and pickup or warranty billing. All of the parts have to be accounted for and billed to the customer. Those are all processes that have to be defined and refined to make your shop the absolute best it can be. With every refinement you make, your profitability and your service techs’ earnings will increase. 

If you want to master your shop, you have to master the technology that is available to you. Most dealers’ shops get lost in the paper shuffle. Who has the paperwork? Has everything that has been done been recorded? How do you know? The ultimate goal in your shop is to eliminate the paperwork altogether.  Let’s be honest, with the technology available today, is there really even a need to create a physical hard copy of the work or repair order. Shouldn’t the only piece of paper generated in the service process be the bill that the customer receives?  

Is it possible to have no physical paperwork in your shop? Sure it is. Our goal for all of the dealers we work with is to move them to a more efficient, non-paper process. For most dealers, the software they use can give them the ability to have all the information the service tech needs on the computer by their service area. They use it now to look up parts, so why not have the work or repair orders in an electronic format right at the tech service area?  

Like each of the service technicians at Southland Engine Co., Inc., Lafayette, La., Bob Jennings has a computer at his service area to not only look up parts, but also to track and complete repair orders electronically. As a result, the shop has gone completely paperless and has the ability to produce at over 100-percent efficiency.Lynn and Glenda Pesson of Southland Engine Co., Inc., Lafayette, La., have their service department set up to run just that way. Each tech has a computer at his service area and completes the repair order on that system. As the equipment moves from customer drop-off to staging, service, and finally back to the customer for pickup, it is tracked electronically. At any point, anyone can look up and find out where a customer’s machine is at in the process. There’s no running around, looking frantically for a chain saw or mower. There are no interruptions of the service techs, trying to find the status of a piece of equipment. Lynn and Glenda have refined their service process so that there is no lost time. Because of their processes, their shop has the ability to produce at more than 100-percent efficiency.

So, can you make your service department a rich source of profit for your dealership? Yes, it starts with a change of attitude, setting the proper labor rate for your area, establishing a performance-based compensation program for your techs, and a relentless desire to reduce the paperwork and improve your processes. If you are up to the challenge, success will be yours.