Jul 1, 1999 12:00 PM, Alan Kruglak
You are probably familiar with Ripley and his collection of "Believe It OrNot" stories. Although I do not claim to have superseded his notoriety, Ido have a collection of believe-it-or-not stories. For example, take thetelevision program Star Trek. Do you realize that Star Trek, which alsobecame the benchmark for all future space travel movies, was almostcancelled after its first season? Another great believe-it-or-not story isthe mystifying question surrounding why older men wear their pants up totheir chests. The answer is because men shrink with age, and for the mostpart, men are utilitarian and do not like to buy new pants, especially ifthe old ones fit.
The most incredible believe-it-or-not story, however, is enough to turneven the most successful business person's world upside down. More than 80%of low-voltage contractors do not sell service agreements. This is in spiteof the fact that a strong portfolio of service agreements can stabilizeyour cash flow, improve profitability and increase client satisfaction andthe value of your company.
There are many reasons why companies do not sell service agreements,including beliefs that they are unnecessary, unwanted by the client, or arip off for the client. Although there are dozens of excuses to not sellservice agreements, they are, nevertheless, just excuses.
At my former low-voltage contracting company, service agreementsrepresented more than 25% of my annual revenue, and they helped us toachieve a 54% gross margin, one of the highest in the low-voltagecontracting industry. If you want to follow in my footsteps, pay attentionto this article. Although it may not fit the business profile for everylow-voltage contractor, many of the strategies and steps outlined here canbe adapted and successfully applied to your business.
To implement the right sales strategy, you must identify the potentialclients for your product-your service agreement. In a broad sense, thereare two types of possible clients for this plan-prospects (potentialclients who have not yet done business with you) and existing clients(clients who you already service on a T&M basis). Both groups are ripetargets for service agreements, but each requires a different salesapproach. This article focuses on selling to prospects.
To sell a service agreement (along with an installation proposal) to aprospect, three parts of the sales puzzle must be assembled into a program.The first is seamless integration of service into the proposal process,where both installation and service are perceived as inseparablecomponents. The second part of your program involves leveraging the keyfeatures and benefits of service to win the entire sale. The programbecomes complete with the integration of your sales force-motivating yourteam to sell long-term service agreements.
Integration into the proposalAll of us have endured that awful scourge of adolescence-the datingprocess. Some of us may be in a stage of life that has us watching on pinsand needles as our teenagers go through it, or we may still be datingourselves. We all know how it is. We see someone attractive, but we areafraid to ask them out. I can relate all too well, but looking back, I viewmy past fear and inaction as just another lost opportunity. It took someyears and failures, but I eventually overcame this fear and developed a newattitude and policy about dating: If you do not ask, you do not get. Withmy new attitude, when I was attracted to someone, I simply approached herand asked her out-I asked for it. The worst that happened was that theobject of my desire was disinterested, and I would have to brush off my egoand move on to the next possibility.
I ultimately learned that the same philosophy applies to business. If youwant an order, you have to ask for it. If you do not, the chances are youwill not get the order-virtually guaranteeing failure. The "ask for it"policy is easily integrated into your service agreement sales process. Forthe policy to be successful, the service agreement must be integrated intothe base installation proposal so that it and installation are perceived asa single, inseparable package.
Let us examine the steps necessary to fully integrate the service agreementinto your installation proposal. The first step is the creation of adedicated section that specifically defines and describes your serviceagreement. This section should be brief (two to three pages) and shouldinclude a narrative overview outlining your approach to service and theresources available to support your plan. The key features that we includedin our service agreement were 24 hour-a-day availability, priority responseof two to six hours, a fixed price with all labor and materials included(except consumables), instant loaners and preventative maintenance. Theexclusions were acts of God and consumables. For one-of-a-kind items, weeven excluded some products.
As the next step, throughout your proposal, insert references to the keyfeatures and benefits of your service capabilities. This strategy can besuccessfully deployed to leverage a key feature that you view as importantto the prospect. Likely proposal sections in which to include references toyour service agreement are your corporate qualifications or a sectionfocusing on why a client should choose your company.
Next, every proposal must include a section on price-the section where youask for it. Below the price for the installed system, insert the price forthe service agreement, along with the term of the agreement (i.e., numberof years). In the prospect's mind, presenting these prices together inseparably links the installation project with the service agreement. This simplestep makes it easy for the prospect to purchase your service agreement bytaking the path of least resistance. As a result, when the prospect agreesand signs your proposal, they are making a de facto purchase of yourservice agreement. It is simple, easy to do, and it works. Do not presentthe service agreement as an option. If you place it with the options,clients will be more likely to decline its purchase.
Most commercial clients recognize the importance of service agreementsbecause they are preconditioned by various automation trades-dataprocessors, computer integration, copier companies-to buy them. If you aska prospect to purchase a service agreement on the page that includes yourprice for the installation project, the chances are high-at my formercompany, they were greater than 90%-that the client will never question theline item for the service agreement and will sign the order for the entirepackage.
Also, make it easy to sign. Throughout the 80s, we had two distinct sets ofcontracts-one for installation and one for service agreements. This createdproblems-when clients were confronted with too many pages of legalese, theybecame weary and reluctant to quickly sign off on a project. Even worse,they forwarded the entire proposal to their counsel for review, delayingthe project and generating legal expenses because suddenly, our lawyers andtheir lawyers needed to talk.
It is likely that a prospect's attorney gets paid by the word or the hour,and he may be in no particular hurry to resolve the issue peacefully.Consequently, days may be spent trying to resolve insurmountable issues. Ihave too many painful memories about the process.
We solved this problem quickly and simply in 1991. My partner Glen handledall of the company's contractual issues. While reviewing the two contracts,he noticed that both documents shared many similar terms. In hindsight,Glen came up with a simple, but brilliant, idea: Why not merge bothcontracts for installation and service into a single document? Simple, sowhy had we not done it before? As a result of Glen's observation, wecompressed the terms and conditions of the two contracts into asingle-sheet, double-sided document, calling it our "Sales and ServiceAgreement."
The benefits derived from this simple action were amazing. The number ofproposals sent to prospects' legal counsel fell dramatically. This meantthat more proposals were approved quickly, and our legal costs dropped, achange that was reflected in our budget numbers. Can you imagine running a$20 million company and spending less than $10,000 a year for all of yourlegal expenses?
After you incorporate the previous steps into your proposal, it is finallytime to standardize the proposal process for your entire company.Distribute the proposal as a template, requiring all sales representativesto use it in presentations. Train your sales representatives on the sellingprocess-why clients make buy decisions and why the service agreement has tobe integrated into the installation proposal as a single package. The logicis simple, and your representatives will shake their heads wondering whythey did not think of it before.
Leveraging service agreements to sell systemsThe major reason a prospect requests your proposal is usually to fulfill aninstallation need, not a service requirement. In most cases, the price ofthe installation, not price of the service agreement, dominates thediscussion because it is a much larger expense with a greater financialimpact on the prospect. What most service providers fail to understand isthat although the price of your service agreement has a much lower profilethan the larger installation price, its features and benefits can havetremendous bearing on the prospect's final decision about which vendor toselect. Usually, prospects heavily weigh the value of a vendor's servicecapabilities and track record.
The impact of service agreements on the sales process is strictly a function of the added value, whether real or perceived. Added value can take the form ofreducing risk, or it can be leveraged as a direct economic benefit. Severaltechniques we used follow.
The extensive use of reference letters praising your company's service,especially when they come from a prospect's industry, can mean thedifference between winning and losing a bid. Prospects assume that if youdid a good job for other companies, then you will perform for theircompany, providing added value by reducing risk.
In another example, I remember when a prospect wanted to select us, but hadreservations because our installation price was significantly higher thanour competitors'. We did not want to cut our price-the project margins weremodest, and the effort would consume a lot of technical resources. To makeus more competitive, we leveraged our service agreement, providing one atno charge during the first year. The prospect appreciated the economicvalue of our gesture as well as the fact that they won some concessions. Inthe win-win spirit, he awarded us the contract. Our service agreement was atool to wedge our foot in the door to capture the installation revenue andthe additions that occurred over the next five years.
Driving salesIntegrating the service agreement and its price in your base proposal is astep in the right direction. To ensure that it is actively sold, however,you must incen-tivize your sales representatives-financially and otherwise.
Most sales representatives will sell anything-just give them a product andturn them loose. They will get the best results, however, only when theyare educated about-and believe in-the benefits of their products. Thesebenefits are not only in the best interest of the client, but support yourcompany and its sales representatives as well. You may believe that thisstep is unnecessary, but experience taught us otherwise.
One of our representatives believed that service agreements were nothingmore than a way to rip off the client. As you might guess, he never soldservice agreements, nor did he find a home at GIC because he was a poor fitfor our corporate culture.
Education about the features and benefits of the service agreement is goodfor all parties, providing a common ground from which everyone can work.There is the obvious financial reward from the sales commission, but thebenefits go far beyond that.
One of the most neglected benefits of service agreements-one that directlyaffects your sales representatives-is client satisfaction. One of oursenior salespeople approached me out of the blue one day and said, "Alan,I've noticed that my clients who purchased our service agreement seemextremely happy with our business relationship, while our T&M clients seemless satisfied." I had never given it a moment's thought before, butsuddenly it made complete sense.
Service agreement clients receive a higher level of service, producinggreater client satisfaction. This is an important barometer for the salesforce because, although they generally focus on financial rewards, theyalso want to sleep peacefully at night, knowing their clients areadequately supported. Besides, even the greediest sales representatives getpositive strokes from helping others. So, keeping clients happy is its ownreward and makes the day-to-day contact between sales representatives andclients more pleasant, not to mention that it is well understood bysalespeople, especially the good ones, that improved client relationshipsusually mean increased commissions down the road.
The compensation plan clearly drives sales. The same process thatincentivizes sales representatives to sell installation projects appliesequally to selling service agreements. Salespeople should be financiallyrewarded when they sell in congruence with the sales mandates of thecompany. We established two objectives for the sales compensationplan-offer rewards for selling service agreements and provide greaterrewards for selling longer-term service agreements.
We structured our compensation plan on a graduated scale. The longer theterm of the agreement, the higher the commission. It was that simple. Guesswhat? More than 80% of our service agreements were three years or longerwith more than half covering five-year terms. Our goal of capturing therecurring revenue of long-term service contracts was achieved largely bydesigning a compensation plan that told our sales representatives what todo-to sell long-term service agreements.
Some things are hard to believe. Can you imagine? Selling serviceagreements to more than 90% of our clients? It is true. We integrated thethree pieces of the selling puzzle-proposal integration, leveragingfeatures and the sales compensation plan-into a plan that made ourcompetitors green with envy. You can do the same thing at your company. Ifyou do not believe me, ask Captain Kirk.