12 month service contract financial practices

The rule on any service contract, when your customer wants the service free to win the deal.

 

How do you apply a rule to service on product or software?  

Generic rules around the percentage of service to product on an annual contract uses a 15-20% allocation of the total offer revenue. 

 

Create a set of service items with financial charge account codes to apply the appropriate business unit credit against the transactions created with the item in the offer. 

 

The item would trigger a percentage of the overall offer to a service account into the contract system, by marking the item template indicators.

 

Example;

Write to install base? Yes or No

Invoice item?  Yes or No

Eligible for renewal? Yes or No 

 

Transaction behaviors

1. The item template would represent a single year with a quantity 1
1. 1 year of coverage. 
2. 12 generic objects make up the item composition 
3. The template is a generic service item
4. The programs will change based on the offer the item is sold in.
1. The programs will not change the item, the systems managing the campaigns will assign an activity code to the offers in the transactions.
2. Not forcing unique items in the systems
2. The coverage begins after the customer downloads or registers the products.
1. The service item becomes a placeholder on the install base, linked for activation on based on the download event.

The item itself and purpose of the item, to generate the same revenue behaviors on the item when sold in an offer. 

Generic re-usable items
Think of the service item as a container for adjustments before the financial processes begin. 

1. This is only speaking to the service applied equally to a 12 month period.
1. Typically hardware replacement-faster response increases the 15% by increments up to 19%. 
1.  48 hour replacement
2.  36 hour replacement
3.    8 hour replacement next business day 
4.    4 hour replacement  

 

Cost of Poor Quality Defects

• Automatically ensure your company has met the key control criteria for each of the following;
• Key controls around setup of item cost
• Key controls around discount setup
• Key controls around the accuracy of revenue according to revenue recognition rules.
• Accuracy on the financial statements for 404 assurances

What would I prescribe? 

• A really smart company allocates the service dollars in a manner that's totally transparent to the customer.
• A really smart company doesn't penalize sales by deferring the payment of their commission. 
• A really smart company includes this non-invoice type item in the offer, with an option to override the non-invoice to present the item on the invoice with the sell price.   

By including the item in the offer and making this accounting practice transparent to the customer and sales, your change impacts are lower and easier to influence buyin. 

 
Customer expectations
You have brought your organization closer to the voice of the customer and have become easire to do business with. 

Immediate Savings

1. Remember this design has just saved you on the tax over payments for at least 15% of the tax you were paying.
1. Consider the savings on taxable revenue removes 15% of the current payments
2. Insurance expenses reduce your valuation of the product by 15% saving on the cost to insure the shipment.  

Assume you will take these factors through a Lean Six Sigma project to measure the return on this simple service solution for basic service contracts (re-active).