Before You Go . . .
Service Contracts Doing a Disservice?
BY ERIK CAGLE
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.