Technicians dread that awkward moment with the customer. You know, when the customer expects the cost of some item on the work order to be covered by their service contract, but the technician isn’t able to confirm either way.

Are parts included? What about consumables? Does the customer qualify for discounts on the labor rate?

contract leakageWithout readily available contract information, technicians are stuck. As natural problem solvers, techs want to fix the issue and make the customer happy. So, when the customer says, “This service is supposed to be included in our contract,” and your technician has nothing concrete in front of him to prove otherwise, what’s he likely to do?

Yep. Most often he’ll do the work … for free. And this lost income, or “leakage,” on a larger scale will undermine efforts to grow your organization’s service revenues.

What is Service Contract Leakage?

Service contracts are designed to expand upon a manufacturer’s product warranty in a way that helps customers more effectively control their equipment maintenance costs. These agreements also create lucrative recurring revenue opportunities for service organizations.

But if there is any confusion between the customer and the technician as to what’s included in a contract at the point-of-service, service contract leakage is likely to occur.

“Leakage is the ‘free stuff.’ It’s the lost revenue that should be paid by the customer, but you’re giving it away without realizing it,” says Dave Hart, vice president of global customer transformation for ServiceMax.

So, how do you track service contract leakage?

“Finding out the exact amount wasted can be difficult if you’re not keeping solid records,” Hart says. “It’s difficult to track leakage with pen and paper, and then educate service technicians. Service managers have to start automating the entitlement tracking process.”

What Causes Service Contract Leakage?

The root cause is lack of visibility into entitlement information, especially in the field. If your dispatchers and technicians don’t have immediate access to the latest coverage data, the odds are strong you’ll lose money on that call.

” … take the decision away from the technician with a system that determines automatically what is billable and non-billable for the customer.” — Dave Hart

“If the tech doesn’t know when the coverage period cuts off or what parts are covered in that contract at the time of service, guess what? It’s a free-of-charge service call, and you’re losing revenue,” Hart says. “Instead, take the decision away from the technician with a system that determines automatically what is billable and non-billable for the customer.”

What’s the Impact of Service Contract Leakage?

Service contract leakage can hurt your organization’s performance in these three areas:

  1. Loss of revenue and profit: A handful of instances won’t hurt too bad. But if you spread contract leakage across dozens or even hundreds of service calls, the mounting costs can be a major drag on both your top- and bottom-line performance.
  2. Poor customer satisfaction rate: Customers hate surprises. If they assume that a service is covered under contract only to find out later that they’re being billed, they likely won’t continue as customers.
  3. Lower employee morale: When customers are unhappy due to a misunderstanding with a contract, your technicians are the ones who take the brunt of their frustration. Over time, this can take a huge toll on your employees’ happiness — and productivity.

How Can You Eliminate Service Contract Leakage?

Start by equipping your technicians with mobile devices, which they can use in the field to quickly and easily access entitlement data.

This way when there’s a service call for a piece of equipment, your dispatchers and service techs will know precisely what coverage, if any, is available. This ensures you won’t give away service for free and eliminates unpleasant surprises for customers.

“It’s very important to capture the entitlement information correctly and make it easily accessible to the appropriate people,” Hart says. “When the call comes in to dispatch, the rep can confirm the customer’s contract details upfront by saying something like, ‘Just to let you know, your contract entitles you to a service technician for the first hour, but after that, any parts and any additional time will be billable to you. Are you OK with that?'”

Setting the right expectations with the customer from the get-go helps ensure your organization gets paid, while allowing your technicians to avoid those awkward conversations.

The Bottom Line

According to Aberdeen research from 2014, among service organizations that earned a profit in the previous 12 months, top performers more than tripled the service margins of laggards (35 percent and 10 percent, respectively).

A likely differentiator is that top organizations do a much better job of eliminating service contract leakage. With the right technology, you’ll gain the visibility you need to understand where the organization is leaking income — and how to effectively plug the leaks and boost profits.

ABOUT Sean Lyden

Avatar photoSean is CEO of Lyden Communications LLC, a content strategy and editorial consulting firm, and also serves as editor for Utility Fleet Professional magazine. A nationally recognized feature writer on sales, marketing, technology and transportation topics, Sean is also a contributing author to "The Ultimate Small Business Marketing Guide” and “The Great Big Book of Business Lists,” both books published by Entrepreneur Press.