Customers continue to downsize and outsource services to specialists who can perform these services more efficiently than their own employees. The repair, maintenance, and upgrade of electrical power, communications, and control systems in commercial, industrial, and institutional (CII) facilities are prime candidates for outsourcing because most customers, including property managers, view this work as outside their core business.
At the same time, the amount of information technology (IT) in buildings and its importance to the customer’s business is increasing exponentially.
What do customers really want?
Customers want single-point responsibility for their power, communications, and control systems. Increasingly, these systems are converging and becoming physically interconnected and operationally interdependent. The growing complexity of these systems demands that they be installed and serviced by a single source that has the knowledge and ability to address all types of systems, from low- or no-voltage (fiber optic or wireless) communications and control systems to medium-voltage power distribution systems.
Customers’ businesses are global and increasingly involve business-to-business e-commerce, business-to-consumer e-commerce, or both. These businesses must operate reliably seven days per week and 24 hours per day (24x7).
The contractor must be able to design innovative contracting and delivery systems; use effective marketing and business development techniques; recruit and retain quality service personnel with the right knowledge, skills, and experience; and put in place an organizational and technical infrastructure to support and streamline service operations.
Successfully entering the service contracting business requires a paradigm shift for contractors. One has always viewed service work as a “necessary evil” and never expected to make a profit on their service department. At best, the service department helps offset home office overhead expense in some firms and, at worst, increases home office overhead at others.
Many contractors view their service departments’ main function as handling warranty work on contract construction projects. However, successful service operations not only generate steady income streams and high profit margins from service work, but also use service as a business development and marketing tool that can lead to lucrative negotiated new construction, renovation, or expansion projects with the customer.
An important part of ongoing services is providing contract construction, which includes new construction, renovation, and facility expansion. This is a shift from the prevailing belief that the electrical contracting firm is, first and foremost, the provider of project electrical services, and secondly, the provider of ongoing customer service and support.
What is service contracting?
Service contracting is the repair, maintenance, modification, or extension of the customer’s existing power, control, and/or communication system(s). Service contracting can either be a one-time engagement or long-term relationship.
Repair. Repair or corrective maintenance is the act of fixing equipment that has failed and either is not operating at capacity or not operating at all. It will be a necessary part of the electrical contractor’s service business, but it won’t be what distinguishes it from its competitors and wins it profitable long-term service contracts. Corrective maintenance often involves one-time or infrequent customers that may not be profitable. To ensure its profitability, the electrical contracting firm needs to convert its one-time and infrequent corrective maintenance customers into preventive or predictive maintenance program customers.
Maintenance. The Institute of Electrical and Electronics Engineers (IEEE) defines maintenance as the act of preserving or keeping in existence those conditions that are necessary in order for the equipment to operate as originally intended. Maintenance can be divided into two categories: preventive and predictive.
These services are designed to reduce the amount of corrective maintenance a customer needs. However, corrective maintenance will never be eliminated because there will always be equipment that fails unexpectedly or for reasons other than just wear and tear. Other reasons for corrective maintenance include accidents and acts of God.
Preventive maintenance. Preventive maintenance is the practice of conducting routine inspections, tests, and servicing so that impending trouble can be detected and reduced or eliminated. Today, preventive maintenance should be the cornerstone of the electrical contractor’s service contracting business. Preventive maintenance involves performing scheduled maintenance on the customer’s equipment before there is a problem and the equipment fails. Preventive maintenance programs can result in profitable long-term service contracts.
Predictive maintenance. The IEEE defines predictive maintenance as the practice of conducting diagnostic tests and inspections during normal equipment operations to detect incipient weaknesses or impending failure. Predictive maintenance replaces neither corrective nor preventive maintenance; rather, it adds another layer of protection for the customer. Periodic infrared scans, for example, are performed to detect problems in operating electrical equipment.
Using today’s computer networks and commercially available system control and data acquisition (SCADA) systems, the firm can remotely monitor the status of the customer’s equipment. Early symptoms of looming equipment problems can be detected and alarmed at the company’s offices. The electrical contracting firm can diagnose the problem instantaneously, then contact the customer. Possible corrective actions and timing can be discussed, and a corrective maintenance plan that minimizes the impact on the customer’s operations can be developed. Predictive maintenance can greatly improve the availability and reliability of the customer’s overall system by monitoring the status of individual pieces equipment and correcting problems before they impact the overall system.
Predictive maintenance will become more sophisticated in the future. By taking advantage of the electronic intelligence that will be built into even the most mundane electrical and mechanical equipment and state-of-the-art diagnostic software, the electrical contracting firm will be alerted to out-of-tolerance equipment parameters in real time, which will allow the impending equipment failure to be detected earlier, more reliable prediction of equipment time to failure and failure mode, and the development of service strategies that better address the customer’s needs and production schedules.
Modification. Modification is the act of changing or upgrading equipment to increase its functionality, extend its useful life, or enhance its reliability.
Extension. Extension is the act of adapting the customer’s existing system to serve its organizational needs. Typically, systems are extended to accommodate more users or to serve a greater physical area. However, extension also applies where the existing system is reduced because the customer’s organization is downsized.
Service versus project contracting
The line between service contracting and project contracting is often blurred, especially when service contracting involves either the modification or extension of an existing system. Both have the potential to serve the same customer base and should be viewed as a continuum of services that the electrical contractor can provide. However, there are some important differences between the two, which include the following:
* The customer typically expenses service contracting expenditures in the accounting period when they are incurred. The customer capitalizes project-contracting expenditures and then depreciates the cost of installation over time. When the customer expenses service contracting expenditures, they are deducted directly from that year’s income. On the other hand, project contracting expenditures are capitalized and expensed over a period of time.
* Service contracting expenditures often come from the customer’s annual operating budget, whereas project contracting expenditures are often part of the customer’s capital budgeting process. There is a different approval process with different decision makers.
* Service contracting expenditures are often controlled at the unit level in the customer’s organization, whereas project contracting expenditures are often controlled at the organizational level.
* Service contracting involves short-term assignments, whereas project contracting typically involves long-term engagements.
* Service contracting addresses the customer’s current operational needs, whereas project contracting addresses future operations.
* Service contracting assignments are often poorly defined, leaving the electrical contracting firm to define what must be done to meet the customer’s stated and implied needs. Project contracting is typically defined prior to the start of work through a set of contract documents that include plans and specifications on traditional design-bid-build projects.
* Service contracting often involves less labor, equipment, and materials than project contracting, so smaller, more diversified work assignments lower the firm’s risk.
* Service contracting can offer higher margins than project contracting when the service work is negotiated or carried out on a regular ongoing basis.
* Service contracting works within the bounds of existing equipment and systems including extensions, whereas project contracting typically involves installation of new equipment and systems.
Service and project contracting are complementary
Service contracting and project contracting are complementary services. Service contracting should lead to negotiated project contracting, which should lead to ongoing service contracting. Both should position the electrical contractor as a full-service provider that can support the customer’s power, communications, and control systems from installation to replacement that results from obsolescence, outgrowth, or changing needs.
Service contracting elements
Three interrelated elements must be present for the electrical contracting firm to be successful in service contracting: service strategy, service infrastructure, and service process. These elements’ relationship is shown in Figure 1 and described below.
Service strategy. Simply stated, service strategy is what your firm is either doing or going to do in the service contracting market. It also addresses what services your firm will provide customers and how they will be marketed to existing and potential customers. Service strategy is the basis for the other two service elements: service infrastructure and service process.
Every electrical contracting firm has a service strategy, although it may not be written down anywhere. If it is not written down, then it probably resides in the heads of upper management. Even if the contractor elects to only offer warranty and guaranty services required by its construction contracts, this is a valid service strategy. However, if the company plans to expand its service operations, it should develop a written business plan that can be used to guide its service operation expansion and measure its success.
Service infrastructure. Service infrastructure is about having the resources in place to successfully implement the service strategy.
People are the most important part of any service organization. These people certainly include qualified service personnel who perform the work at the customer’s site. However, if the service personnel are going to be effective, they need to be supported by a number of other people that provide logistical support in the form of dispatch, materials, and equipment for installation; tools and construction equipment; technical expertise; accounting; marketing; and other necessary support. In addition, manufacturers and distributors can also provide valuable product and technical support.
Service infrastructure also includes equipment, materials, and capital. Needed equipment includes not only fully stocked service vehicles, but also hardware, software, and communications equipment both in the home office and in the field needed to support service operations.
Service process. Service process is how the company organizes and uses the service infrastructure to implement the service strategy. Service process is a collection of processes and procedures that describe how the company gets its service work done. Among other things, service processes and procedures actually define the following:
* Service organization in terms of size, organization, and other parameters
* Responsibility and authority of each individual within the service organization
* How work will be accomplished that includes not only the actual service work for the customer, but also all of the logistical support necessary to support service personnel in the field as well as customer interface
Every electrical contractor performing service work has service processes and procedures that are often unwritten or are unique to individuals within the same organization. This can result in inefficiencies, waste, and poor morale which impacts customer service, revenues, and ultimately profit. In order to provide a consistent quality of service to the customer and a baseline for continuous improvement, service processes and procedures should be consistent across the organization, written down, and followed.
Establishing service as a profit center
A service operation must be established as a profit center. Even though the contractor’s year-end financial results are reported as a whole to both owners and the Internal Revenue Service (IRS), the service contracting business needs to be tracked as a separate business internally. This requires a management accounting system that can not only track the direct costs of its service contracting business, but also identify indirect costs that can be attributed to service work as well as faithfully allocate general overhead costs to the service contracting business based on a reliable activity base.
Without establishing service contracting as a profit center, there is no way of knowing if it is profitable. Determining reasonable overheads associated with service work, as well as pricing service work can be difficult if the company is not able to track its service contracting business separately. Also, not keeping the service contracting business separate from the electrical contracting firm’s contract construction business can result in overburdening contract construction bids with higher overheads.
This article is the result of an ongoing research project entitled Developing Innovative Service Contracting Strategies that is being sponsored by the Electrical Contracting Foundation, Inc. The authors would like to thank the Foundation for its support.
Glavinich is Chair and Associate Professor of Architectural Engineering at The University of Kansas. He can be reached at (785) 864-3435 or firstname.lastname@example.org. Fertig is a Graduate Research Assistant in Architectural Engineering at The University of Kansas. He can be reached at (785) 864-3434 or email@example.com.