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February 2001
Service Contracts Doing a Disservice?


He holds his breath and hopes for the best, but really he has little choice in the matter. David Brooks, president of Brooks Litho & Digital Group, has to look out for the best interests of his company. That means the Long Island printer has to say "no thank you" to manufacturers who offer him service contracts with their brand-new digital printing equipment.

Brooks Litho does less than $10 million in annual sales. It has earned a reputation for quality work in the New York Metro area. The company has served as a beta site for digital printing equipment. And David Brooks is not afraid to negotiate tough with manufacturers when it comes to getting the best deal possible. But the subject of service contracts angers and frustrates him, and for good reason.

"Service contracts," Brooks says, "are unaffordable for the small companies."

They need not be, but they are quite crippling to some of the smaller companies who simply cannot be financially competitive while shouldering the monthly albatross. For example, Brooks purchased two pieces of equipment: one from Manufacturer A for $200,000, another from B for $525,000. The equipment from Manufacturer A requires a $2,000 monthly service contract for the first year which, for all intents and purposes, is a $24,000 premium, or 12 percent, on top of the negotiated price of the machine. When a service contract is required toward the purchase of equipment, it is no longer a contract, it is a one-way street. It's like getting charged $1,000 by a car dealer for undercoating as an option when it is already there.

Manufacturer B's unit comes with two service plans: one is full parts and labor at $3,500 a month, the other is shared maintenance, where someone from your company is trained in the maintenance and repair of their equipment. That is a $2,500 monthly fee. Full parts and labor comes out to $42,000 a year, or 8 percent of the total cost. Shared maintenance is $30,000 per year, on top of the fact that one of your employees is taking time away from the plant to learn this particular skill set.

Numbers Don't Add Up
Almost everything Brooks has heard and read, from industry professionals and publications, uses 4 percent of the total cost of equipment as a benchmark in determining expected annual maintenance and repair costs. The reality of service contracts is a lot different than what's on paper, he says. It is an area of the industry that perhaps is most in need of reform.

"When we purchase the equipment, manufacturers often help us establish hourly rates and costs of operation by supplying us with a spread sheet that says the rule of thumb is between 3 and 4 percent of the purchase price is what (printers) should expect to pay in repairs," Brooks notes. Most contracts he has seen are double, even triple, that figure. It may not be an exact science, but it seems the numbers could be a little more closer to the pin.

While a car dealer may offer a five-year, bumper-to-bumper warranty on a new automobile, a warranty on some equipment lasts only 90 days.

The warranty for these digital machines, which cost $250,000 to $500,000 or more, is often as little as 90 days. Brooks points out that a new car dealer will give a five-year, bumper-to-bumper warranty for a $30,000 automobile. Some warranties are good for 10 years. Not that manufacturers should be modeling their warranties after the auto industry, but Brooks feels they should at least show a little more faith in their own equipment. Is one or two years of parts coverage, he wonders, too much to ask on a new machine?

So Far, So Good
Brooks rolled the dice and went without the service contracts, and so far it has proven a smart choice (he canceled the mandatory contract at the first opportunity). The laser, a part that can command from $50,000 to $100,000 to replace when it fails (their estimated life span is 18 months, give or take), has not been a factor thus far. He upgraded Manufacturer A's equipment while the laser was still in good working order. Manufactuer B's unit has required some maintenance cost, but not nearly enough to justify the service contract.

The flip side to not having a service contract is paying for service on a case-by-case basis. Brooks has had the good fortune to make precious few calls to the manufacturer, another good thing, since travel time runs in excess of $100 per hour. If a manufacturer needs to trek 21⁄2 hours one way, for example, Brooks is out $500 before the tech rep even looks under the hood.

Parts can also be crippling and unreasonable for those who have limited contracts or no contract at all. Brooks has been charged $100 for screws. Specialty screws, to be sure—screws, nonetheless. There's a metaphor in there somewhere if something big breaks down on one of the units.

Can't Be Justified
Brooks hopes that the day will come where he can justify a service contract. But 10 percent and 12 percent of cost cannot be justified. "This is doing nothing but making these companies richer," he says. "The costs don't improve the quality of the machine or the reliability. It doesn't provide any value-added service for us. It just adds more of a burden for the smaller printer, and I've chosen not to go that route."

He shouldn't need to hold his breath.


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