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Ripe Bananas, Seat Miles, and Service Labor Hours

Billy Marshall
August 27, 2013

What do these things have in common?  They all represent “perishable inventory.”  Ripe bananas have a short shelf life – sell them or throw them out.  A flight that takes off without being full means seat miles were available and not sold.  A service labor hour without a corresponding service invoice is likewise “perishable inventory” that is lost forever.

In the case of both food distribution and airlines, the large companies that sell these products have spent lots of money for systems that help optimize revenue relative to each dollar spent on “perishable inventory.”  Most services businesses are local, owner operator businesses without the capital means to consider huge investments in systems.  However, I have seen some interesting and creative strategies during my time at ServiceTrade:

Tech Commissions – In many cases, service businesses turn a significant portion of technician pay into commissions.  This strategy lowers inventory expense, and in theory it creates incentives for optimizing revenue.  It likely works as well as the profile for the technicians you hire.  If they are highly motivated by money, it can work.  Generally speaking, however, the population of technicians that are highly motivated by money AND well organized to manage a schedule is probably pretty low.  Highly organized folks that are motivated by money probably don’t often self select into a technician job.  The best technicians I have met are not as motivated by money as they are motivated to do meaningful work for the customer.  I see this trait in software developers as well.  Doing good is more important than doing well.  They are also likely not the most organized people in the world, so non-billable expense (i.e. travel time, administration, etc.) is likely to be high.

Subcontract Everything – In my former business, DunnWell, this strategy was very successful.  The inventory cost in this case is zero – we used others’ inventory to service the customer.  The total opportunity in the market, however, is lower as the only sales opportunities available are customer prospects with sprawling service locations where the complexity and scale of delivery is not manageable by a local firm.  DunnWell grew rapidly because there were no capital constraints on growth once the company made the commitment to invest in ServiceNET, the service delivery and management platform that forms the basis of ServiceTrade today.  DunnWell was never able to sell to regional customers because our costThe  model could not match a local provider.

Aggregator Fill-In – The other side of the DunnWell coin for the local provider is taking in work from national firms that subcontract for delivery.  If you can align the third party work with the routes for your current business, the lower margin on this work can be a great way to support an extra truck or two of incremental capacity.  The challenge is knowing how to “blend” the work into the existing routes in a manner that makes it profitable.  If you have to go out of your way at all, you just lost money.  And the extra burden of the administrative requirements for some of these opportunities can be ridiculous.

All of these strategies for optimizing revenue relative to “perishable inventory” have some merit, but they also have their drawbacks.  In my opinion, the best “mix” of these strategies looks something like the following:

Organize the Work – A commission or a very nice bonus plan will work well for some techs, but you will benefit most as the owner if you help the technician organize the work.  Provide enough office support on scheduling and customer service to maximize the revenue opportunity and minimize travel time and administrative burden.  It’s great when a tech is willing to work 12 hours, but when 5 of those hours are travel time burning your fuel, wearing out your tires, or doing job planning/organizing, no one wins.  Organize the work and give the tech tools for maximizing billable hours during a set period of time and you will both win.  The optimum outcome is for the tech to make more money while the owner also gets more profit.

Maximize Revenue Per Call – A really good field management system will track opportunities for your customer locations.  Anytime you have an opportunity to send a technician out for any reason, you should offer the customer as many services as possible.  You should also have the technician catalog any new opportunities while onsite – ideally with photos and other data-rich evidence.  Optimize every trip to the customer site.

Say “Yes” to the Customer – Subcontracting everything is not the solution for most businesses, but you should have the capability to extend your scope and reach for good customers by subcontracting work.  If your administrative and customer support systems do not seamlessly enable you to say “yes” to the customer and get trusted business partners involved in delivering the work, it is time to change systems.  This capability is a key part of our value proposition at ServiceTrade, and it is critical to our service company customers.

Rightsize your Core – If you do not have a healthy profit at the end of each month, you probably have too many technicians.  Get rid of some and get your core utilization up.  Use subcontractors to grow strategically until you can support more technicians with your customer base (see say “Yes” to the customer above).

Accept Aggregator Business Carefully – There is nothing wrong with taking down national account business through service aggregators so long as it is deliverable within your core service area.  It if feels like a stretch instead of a yawn to deliver, you are better off giving it back.  Or charge significantly more for “out of the way” locations.  Chances are if you have a hard time getting to it, so does everyone else.

Service businesses have more in common with airlines and grocery store chains that most folks see on the surface.  What they do not have is the extraordinary capital for systems that optimize revenue relative to “perishable inventory.”  The good news is that Software as a Service (SaaS) and low cost mobile computing (Android, iPhone) can help with all of the strategies above without huge outlays of capital.  If ServiceTrade can help you enable any of these, I would love to hear from you.

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