Selling Diagnostic Labor Profitably
by Robert "Bob" O’Connor* The year 2000 is just moments away, yet the majority of mechanical repair shop owners use the same methods of charging for services and products as were used in the 1950s! Prices are still being quoted in terms of labor rate and hours instead of dollars and cents; orders for work are still being taken instead of employing sales techniques that provide options for the customer; and the compromising of charges for the technician’s labor efforts continues to exist due to lack of confidence or nerve. The only significant changes that have occurred are that labor rates and parts prices have increased!
Surviving and prospering in our industry means we must realize that we are in a constantly changing and highly competitive age. We must be open-minded, continuously fuel our minds with knowledge, and prepare ourselves and our employees to embrace and effectively implement changes that are beneficial to all.
To begin with, we have to understand what business we are in. Are we in the business of repairing customer vehicles or are we in the business of buying and reselling labor, parts and other products and services for profit? When asked, most shop owners respond that they are in the business of repairing customer vehicles and desire to do it profitably. I believe we are in the business of buying and reselling labor, parts and other products and services for profit, and that repairing vehicles is the process by which we accomplish these sales!
Recognizing that the largest profit "leak" in our industry is due to our inability and/or unwillingness to sell our technicians’ labor, it should become imperative that owners and staff ensure that technicians are kept busy with income-producing work -- and that this work is sold profitably.
Tracking Time
The primary step in selling diagnostic labor profitably is to understand and track four basic types of time. The first type is "available" time. Available time is the time that the technician is ready, willing and able to perform income-producing work, normally eight hours daily or 40 hours per week. The second type is "actual" time. Actual time is the time the technician spends actually performing each task on a repair order. The third type is referred to as "E" or "W" time, which is time that is non-income producing. An example of "E" or "W" time may be the time spent sweeping floors, shuttling customers, chasing parts, etc. The fourth type is "sold" or "billed" time. Sold or billed time is the time for which the customer is charged.Tracking the four types of time enables shop owners and technicians to measure two important elements: technician and shop "productivity" and shop "efficiency."
"Productivity" is defined as the time a technician spends on a customer’s vehicle performing income-producing work (actual) vs. the time he/she is at work (available). Productivity is the measurement of how well management keeps the technician busy on income-producing work. Example: A technician is at work 40 hours (available) and spent 30 hours of billable time on customers’ vehicles (actual). Computation: 30 hours (actual) ÷ 40 hours (available) = 75 percent productivity. The industry benchmark is 90 percent.
"Efficiency" is defined as the time it takes the technician to complete tasks (actual) vs. the time the customer is being charged (sold). Efficiency is the measurement of how quickly the technician accomplishes the work in the allotted (sold) time. Example: A technician spends 30 hours on customer vehicles (actual) vs. the 32 hours for which customers were charged (sold). Computation: 32 hours (sold) ÷ 30 hours spent (actual) = 107 percent efficiency. The industry benchmark is 125 percent.
"Proficiency," often used synonymously with the term productivity, is the measurement of productivity and efficiency combined. Proficiency is the relationship of "sold" hours vs. "available" hours and does not take into consideration the critical element of actual time. Computation: 32 hours (sold) ÷ 40 hours (available) = 80 percent proficiency. Proficiency is the most common measurement that exists in our industry because these two types of time are relatively easy to track; however, the problem with measuring proficiency instead of productivity and efficiency, is that when it comes to problem- solving you cannot determine whether management is failing to provide enough work and/or the technician is unable to perform the tasks in the time allotted (sold).
If you are not measuring time, or are measuring it incorrectly, it becomes very difficult to effectively charge for diagnostic labor.
How does a shop owner measure the four types of time? Time can be measured through use of time clocks and cards, bar coding systems and some shop management systems.
Once you have a system of tracking time in place, you must address your "emotional bank account." Persons in the position of service advisor, most often owners or advisors with a technical background, frequently fail to fully charge the customer for the technician’s efforts and time--not to mention expertise. I hear reasons offered such as the advisor lost confidence in the technician’s ability to perform the task in a timely fashion and therefore cannot charge fully for services rendered, or they assume that the task could have been accomplished in a much shorter time if performed by another technician or at a dealership and therefore charge accordingly. These reasons are all withdrawals from the "emotional bank account" and many shop owners are significantly overdrawn! My question is, why was this task assigned to a technician in which the advisor lacked confidence? And, if this practice continues, how much revenue will be lost compared to the investment of training this technician or attracting another technician in which confidence could be placed?
During our management workshops we often present the following example. Let’s assume a customer brings in a vehicle for diagnosis because the right turn signal is failing to operate. Let’s further assume this vehicle goes to three different shops for this problem and at each shop the problem was diagnosed by a technician who was familiar and fully trained in electrical. Shop No. 1 performed diagnostic procedures and found the source of the problem within 45 minutes. Shop No. 2 performed the diagnosis and found the source of the problem within 90 minutes. Shop No. 3 performed the diagnosis and found the source of the problem within 120 minutes. Assume that shop labor rates were the same and that each of them charged for the actual time it took technicians to diagnose the problem. Which shop charge is correct?
The majority of shop owners will say all three shops are correct. I agree! The point is, when it comes to diagnosis, each technician will have a different approach to diagnosing a particular problem based on experience, and each shop will have different equipment and resources available. Most shop owners with a technical background will impose their own skills upon the job and judge the technician performing the task by those skills and charge accordingly. More often than not, charges will be for less time than the technician has in the task! If a technician has 120 minutes in a job, but the shop owner or service advisor charges only 60 minutes for the job, the effective labor rate charged is cut in half. Is this the road to financial success?
Selling Labor
Understand that our industry is driven by the selling of labor and if you don’t first sell labor there usually are no related sales. Parts, towing and sublet are, for the most part, derivatives of the labor performed. That is why there is another important measurement called "parts-to-labor ratio." This ratio indicates the percentage of related parts that are sold relative to every dollar of labor sold. The parts-to-labor ratio is determined by dividing total parts sales by total labor sales. Example: $70,000 total parts sales ÷ $100,000 labor sales = a ratio of .7-to-1. The industry benchmark is a ratio of .8-to-1. If your parts-to-labor ratio is higher than the benchmark, it usually means your labor sales are lower than they should be. If your parts-to-labor ratio is lower than the benchmark, it usually means you are performing too many "labor only" jobs or that you are not charging enough for the parts.This brings up the issue of selling diagnostic labor profitably. Almost all shop owners agree that expensive investments in shop equipment, technical training and information systems are required to perform diagnosis on today’s vehicles. In addition, most owners also agree that diagnosis is usually performed by their highest paid technician(s). Assuming this is true, why do almost all automotive shops earn less on diagnosis than they do on routine repairs and maintenance?
Here’s how it happens. Let’s compare one hour of diagnosis only with one hour of service sold involving a part replacement. With the hour of diagnosis, all you are generating is the one-hour labor charge. However, in a service job involving a part replacement, a shop would multiply the cost of the part by its parts-to-labor ratio to arrive at its revenue per hour. If a shop had a parts-to-labor ratio that followed the industry benchmark of .8-to-1, the calculation of .8 multiplied by the cost of the part, added to an hour of labor, would be the shop’s revenue per hour. Understanding this revenue per hour concept is central to the question of charging for diagnostic time.
To get the proper revenue per hour with no parts sale attached, you might have to charge up to double your normal hourly labor rate. Time estimating guides do not provide times for diagnosis and most repair shops cringe at the thought of doubling their labor rate for diagnosis. So, I suggest that you create your own preliminary diagnostic times and charges by determining a starting dollar cost to the customer to begin your diagnostic procedures. Then convert that dollar cost into hours and allow your technician(s) to spend only half of that time on the task. If the problem is not found within the preliminary time allowed, continue to sell to your customer in dollars only, and then assign to your technicians in hours or portions thereof. In this manner, you quote the customer a fair dollar price for a valuable service, while assuring that your technicians complete the task in an efficient and profitable time frame.
If your technicians are like most, they will lose sight of time and most generally exceed the allotted time. We have been successfully training technicians to use egg timers since 1982. We believe the $3 investment is well worth it, don’t you?
* Robert "Bob" O’Connor is president of R.L. O’Connor & Associates, Inc., an automotive operations and management training and consulting firm based in Seattle, Wash. He is best known for his effective automotive management training workshops and his continuous improvement of Bottom-Line Impact Groups. O’Connor is an Automotive Service Association Management Institute (ASAMI) instructor. For more information regarding his services call (800) 755-0988.
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AutoInc. Magazine ®, Vol. XLIV No. 7, July 1996