This is the second of two parts to a blog about metrics you should consider to manage your service contract selling process. the first segment of this blog post, I discussed the five metrics for the service contract sales process that I think are most important:
- Data base accuracy
- Orders received ($)
- % Offers accepted
- Contract and warranty decided before expiration
- Customer satisfaction with the contract sales process
Once you implement some or all of the metrics discussed in Part 1, you may want to add a number of these metrics to get a more complete picture of your contract selling process:
1. Percent of orders received outside the sales process – They are usually called bluebirds because they unexpectedly fly in through an open door (or something like that). Two reasons that you might get a bluebird are:
- The customer thinks he renewed and when he finds out he is not covered, he immediately signs up.
- A time and material (T&M) customer convinces you to put him on a contract during an outage and you agree. The agreement may be because they have lots of equipment and it all goes under contract when only one needed a repair or they purchased a multi-year plan and you believed the total revenue was worth the current cost.
2. If the percentage is in the low single digits that is a good thing while a high percentage is an indication that there something is seriously wrong in the selling process.
- Year-to-date value of contracts not renewed and warranties not converted – These metrics make the value of “lost business” highly visible. When business “is lost”, it is imperative to assign a reason code for the customer not accepting your offer. Each lost business stream should be analyzed to identify the root cause of not capturing this service revenue.
- Percentage of contracts booked at list price – This one is a little tricky. When creating your price list, it is important to quantify all the earned discounts possible. (Earned discounts are those you willingly grant in exchange for something of value to your business and are available to all purchasers.) At times, your selling people may feel pressured to extend a discount to close a sale; this is poor practice and should generally be avoided. This metric allows the team to be better monitored to avoid the lost revenue situation or to add a new discount to your price list. More on this in another post.
- Sales cycle length in days – Here we are calculating the time from offer to acceptance or decline, not to incentivize or pressure the selling team, but to manage the end-to-end process. For example, if you determine that 90% of all decisions are made in 75 days, then you can launch your sales effort 2 ½ months before a decision is needed with a very high probability of getting resolution in that time; the stragglers will always take longer. A shorter cycle cuts down administration time and is less likely to annoy the buyer!
- Percent of initial product purchase orders or license agreements with an attached service contract – For most companies, this is a very big deal. The ideal time to sell the contract is when the customer is buying the product; they have money and it is frequently easier to include it in the order than to go back a year later and try to get the money. A recent TSIA (Technology Services Industry Association) report indicated that 67% of all sales included contracts (89% of enterprise software and 58% of enterprise hardware orders). Of course, many of us are not selling products that are mission critical to the whole business and so we generally see a much lower percentage across the board. However, no matter how critical your product is, you should be working with the product sales organization to land contracts with the initial order.
- Time (in days) from book to cash – Cash collection is critical to the business and if the accounts receivable days outstanding is excessive, your finance group may ask you to include an early payment discount on your price-list. This is an example of an earned discount that can strongly help your company.
In this and the prior post, we have discussed 12 metrics that provide a well-balanced look at your overall contract selling process. This list is not all encompassing and not every business needs to track all 11 metrics. However, you can see that different metrics provide insights into areas of your process that you may not have considered and so keep your own eyes opened for opportunities to deploy metrics that work for you.