Friday, February 18, 2011

Negotiation – Thoughts On Out of Warranty Service And Support

If you have on-going support commitments to your customers or you are buying a product that will need to be maintained, serviced, repaired or supported, the best time to negotiate those Supplier obligations is before you agree to make the purchases that will need them.

If all you do is buy maintenance agreements to meet those needs, your primary concerns in the negotiation are cost, the length of the support commitment and the scope of the services (what they will do, when, how, the response times, and how problems will be managed and escalated etc). 

If you do self maintenance or perform service and support for others, as a minimum you need to be able to purchase Field Replaceable Units (FRU’s) and out of warranty repairs.

If you will do lower level support you may need to purchase of spare parts, training, tools, test equipment or programs and possibly back up support. The most important things you negotiate in all of this is the term and the cost.

The term is how long you can count of the Supplier to provide what you need. The cost is important because if you don’t have control over that in the future, the Supplier could price the support items where it is cost prohibitive thereby avoiding all the other commitments. The Supplier can use the fact that you are locked into them to substantially improve their profit at your cost.

Once the costs and term are locked in, the next most important thing is to negotiate response times and escalation processes to assure you get what you need when you need it and that you get the appropriate response when problems arise.

Since out of warranty service and support is a great profit generator for Supplier and provides them with a revenue stream year after year, when you negotiate the cost you need to be aggressive. Back in the 60’s when a car cost $3,000, if you purchased all of the spare parts to make that car it would cost well over $20,000 and I’m sure that the situation hasn’t gotten any better. Spare parts, and FRU’s will cost more than the production piece if for nothing more than the fact that they must be individually tested, inspected and packaged so an old rule of thumb was that there shouldn’t be any more than a 30% price premium.

The other thing that you clearly need to be aware of is that Suppliers will probably have the tendency of trying to charge more for the items that will need replacement more frequently and may try to charge less for those that have substantially less of a probability to fail just to make the overall cost look better. Consumable supplies clearly fall into the category of things you need to closely watch the pricing on to make sure it is competitive.

In negotiation of repair pricing you need to remember that repairs are just another manufacturing process in which tasks are performed and materials are consumed, so the cost you pay for repairs should be based on the competitive cost of those elements plus a reasonable contribution to their overhead and profit consistent with the industry.

Maintenance contracts also need to be looked upon as just another service. There are planned maintenance calls which have certain labor and materials associated with them and there are break-fix maintenance calls in which there is labor and in most cases the swap out of FRU’s that may need to be repaired.  In negotiating maintenance agreements the biggest unknown is the frequency of the amount of break fix activity. If you can estimate what the planned maintenance portion of the cost is, it’s then easy to back into what the Supplier has allotted for break fix as part of their annual fee to determine whether it is better to have an all inclusive maintenance agreement or pay on a per call basis. Since most Suppliers don’t want you to buy maintenance on a per call basis, they will usually overprice the per call rates and they may also use a connection between contract status and service call priority to try to drive you to a maintenance agreement where the odds are great that it will be more profitable for them. As long as you negotiate all of this before you make the initial commitment to purchase the product you have the leverage to negotiate a better deal. If the nature of the business is really structured in a way where the Supplier is dependent on the annuity stream that on-going support provides, always use that to get the best deal you can on support, and use any reluctance you have with them on giving you what you want for support as leverage to drive the initial purchase price down.            

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