Service contracts – How much Money are you losing if you’re not using them?

How would you like to make an extra 10%, 15% or even 25% on every product you sell?  Now how would you like to make that every year?  Service contract are a great tool that every aftermarket business should be using as a revenue generator.  Nearly any product that you sell can offer some form of extra service.  Take a look at the following list.  Are you currently offering any of these?   If not, could you?

• Yearly maintenance
• Yearly maintenance/calibration
• After hours Support
• Loaner/exchange processing
• Additional call center support (silver, gold, platinum level support)
• X% discount on all service and parts for 1 year, if you prepay.
• Etc

The service contract allows you to collect all of the data you need to determine profitability, and more importantly, collect your revenue.

SAP Contracts are a very versatile sales document in ERP.  Some of the things you can do with contracts include:

• Start and end dates by line item.
• Ability to connect multiple technical objects to a contract line item.
• Ability to connect a billing plan to bill at any interval the customer needs.
• The ability to recognize revenue on a particular line item, either at a time based or milestone basis.
• The ability to connect to any document in the document flow.  Notifications, repair sales orders and call off orders are the scenarios available in standard SAP.
• The ability to directly kick off a service order from the contract (given the correct item category).  This allows for easier profitability analysis for a contract due to settlement rules that can settle directly to the contract.  This would work in the same way that the current field service sales order behaves.

Contracts also have several out of the box reports that can be run at any time:

• VA45 – Contract List (this will behave like VA05)
• VA46 – Collective Subsequent Processing of Contracts
• IW74 – Change of Servicable Item Contract
• IW75 – Display of Servicable Item Contract
• V.06 – Display incomplete contracts.
• SDV1 – Expiring Contracts
• SDV2 – Expired Contracts
• SDV3 – Completed Contracts

There are 2 types of contract, each providing different functionality, maintenance items or quantity items.    We will talk about those two types of items next.

Maintenance Contracts Items

The maintenance contract is used for general service over a time period.  An example of some things you would use a maintenance contract for:

• Extended maintenance where all parts and labor are covered for 1 year.
• Unlimited tech support calls or emails.

The maintenance contract is very useful when you don’t have a limit to the number of times a customer can request service.  You can still follow the standard repair process, field service process, or even just create a notification in order to track the services provided.  Typically, a maintenance contract is invoiced only from the contract, unless the terms and conditions state that all parts must be paid for by the customer or any other variation like that.  In those instances, it may be required to use time and expenses billing on the repair sales order (using the DIP profile) rather than flat rate pricing.

Quantity Contracts Items

The quantity contract is used for any service that you are selling in a limited quantity.  An example of some quantity contracts may include:

• 3 calibrations to be used any time over the next 3 years
• Yearly onsite inspection
• 5 repairs for any of 5 pieces of equipment over the next 3 years.

The quantity contract is useful to keep track of how many service calls a customer has paid for in advance.  It can also be easily tied into revenue recognition (milestone).  Each time a call off order is created with reference to the quantity contract item, it can signal revenue recognition that the item has been used and can now be moved from deferred revenue.  You can also quickly look at the quantity contract and see how many items the customer has outstanding.  Please note, this is a dynamically generated quantity field, so you will not be able to pull this field directly from a table if you are doing any custom reporting.

Technical Objects – Make sure the contract contains these

One of the most important aspects of the service contract is the ability to track the serial numbers that are currently supported for the contract line item.  For example, your customer may own 6 products, but only 2 are under extended warranty.  Do you want to provide support for all 6 products?  If you don’t track your serial numbers, you could be.

Just select the line item, go to extras–>technical objects, and then enter in your serial numbers, equipment numbers, etc…

Something to keep in mind is if you offer any sort of exchange process.  This could mean that the serial numbers owned by the customer change whenever an issue is encountered.  This isn’t any major work, but if you offer the option, be sure to keep your master data up to date.  Contact us for more details on Renovation by JaveLLin Solutions, which can automatically update the serial numbers when an exchange occurs.

Taking your Contracts to the Next Level with Variant Configuration

A very cool enhancement that you can make to your contracts is the use of variant configuration.  It allows you to limit the number of materials your customer service organization needs to enter on a contract.  At the same time, if gives you the complete flexibility to pick and choose the exact options you will be offering your customer.

In addition, you can use Variant Configuration to quickly drive your pricing in an option driven manner.  If you would like more details on setting up a variant configuration contract, please contact us.

Service Notifications

Service notification integration is very easy using contracts.  The default settings for notifications are to automatically determine the contract number as soon as the technical object is entered.  If you need to turn this functionality off, go to transaction OIM9 (this is the shortcut to the IMG activity).  Enter in your notification type, and then uncheck the AutoContractDet.  This will still allow you to manually select the contract from inside of the notification, but it will not be automatically selected at the time of notification creation.

One potential enhancement may be to add an action to the notification that would allow you to generate a Call Off order directly from the notification with minimal input required (many fields could be pulled from the notification).  If this functionality is of interest to you, please contact us for more information on the Renovation Notification Toolset, the JaveLLin Solutions notification enhancement product.

All other aspects of the notification remain the same.

Revenue Recognition

This is always a an “interesting” topic in SAP, and thus why SAP must turn this functionality on for the client after the client submits the proper request to “justify” the use of revenue recognition to SAP.

Once the functionality is activated in SAP, it is a relatively easy exercise to activate the item category that the revenue needs to be deferred.  The maintenance would be time based & and quantity contract would be milestone based.

The following transactions are used for revenue recognition:

• VF44 – Edit Revenue List
• VF45 – Revenue Report
• VF48 – Compare Report
• VF46 – Maintain Cancellation Report

Since revenue recognition is such a big topic, I’m not going to go any deeper into this.  If this a topic you’d like more details on, please contact us, and let us know you’d like to see a bonus lesson on Revenue Recognition.

 Tracking Contract Profitability

In my opinion, this is the most important aspect that people often overlook in dealing with contracts.  If you don’t know the total cost of the contract, how can you possibly price it accurately?  Like everything, you are looking the perfect balance of a fair price to the customer so they are willing to buy it, and still make some of profit on the exchange.

There are many pieces you need to take into account for this reporting.  Here’s some of them:

• Repair sales order cost/price
• Free of Charge Sales Order cost/price
• Call Out Sales Orders
• Service order cost
• Production order cost
• Invoices/credit/debit memos linked to the contract

In addition, you probably want to see how the costs break down in terms of:

• Labor
• Materials
• Subcontract
• price

Every business has it’s own set of metrics, but if you’re interested in an out of the box dashboard to track your contracts, contact us.  Our service management dashboard now includes Service Contracts.

I hope this has helped demonstrate the revenue generation you can get from service contracts.  As always, if you’d like more help with this, please simply reply to this email and we will do our best to get you up and running quickly.