Does this sound familiar? One of your contract sellers comes to you and says “The XYZ contract expires tomorrow and I have been communicating with the customer for 3 months. Now he tells me that his boss is on vacation for 2 weeks and he has to sign the requisition. Then it goes to Purchasing and that can take a few weeks to process. The customer is so sorry he procrastinated but still does not want his coverage to lapse. What can I offer?” Well, I asked this question on a few LinkedIn groups and received a nice selection of recommendations, which I will share with you now.
- Before the advent of Sarbanes-Oxley, it was common practice to believe the customer and extend the service contract for a short (weeks to a month or so) time and, when the purchase order finally arrived, backdate the start of the contract so there was no gap. While this will still work if both parties are private companies, it is still not a great practice. There is always the worry that the P.O. would not come in or that someone in the customer’s organization would refuse to pay for the “gap” period. However, when I did it, I was never stuck.
- If your customer agrees to bridge a short lapse, you can charge a reinstatement fee. Although backdating does not work a reinstatement fee with a slightly smaller dollar amount then backdating could do the trick. With this direction, you then take full support responsibility for all services required.
- Another option is to tell the customer that you have no choice but to let the contract lapse until the purchase order is received. This will make your auditing firm very happy. But now you face the difficult part; you must tell the customer that before you implement a service contract where there has not been continuous coverage, you must do a paid pre-contract inspection. This is not a pleasant discussion but you can mitigate the pain as follows:
You create and jointly execute a side-letter stating that the pre-contract visit will be required but if the gap is less than 1 or 2 months, you will not charge for the visit. Instead, you will combine it with the PM. In this case, the customer must pay for any repair parts. This only works if you do your PM’s at the beginning of the contract period (read more here). If the gap is longer that what you consider acceptable, you must charge for the inspection and repair costs and do the PM within 1 month of signing the contract. Sort of painful but it prevents you from being a total sucker!
One thing to never do is start up a service contract without knowing the equipment is running and is supportable. This is because no one wants to sell life insurance on a dead person! In addition to verifying the equipment is operational, you must also ensure that any mandatory upgrades have been installed. Sometimes this is a problem if an OEM supported the equipment and they did not keep up with mandatory revisions. If these revisions would have been no charge to the end user, then the customer should not have to pay because the OEM did a poor support job. That is a whole separate discussion!
As with any contract preceding, you have the obligation to take care of your company but you must be cognizant of how your decision will impact a customer. And this customer not only purchased your product but also purchased a contract and wants to renew it for another term. In this situation, I’m sure your contract seller can make a compelling case for a multi-year contract to avoid the hassle and coverage gap!