The expense of supporting a product in the field can easily bankrupt unprepared companies. Every sale carries with it the liabilities of breakdowns, returns, parts inventories, legal action, call centers, training, etc, liabilities which lag - often by more than a financial year - the actual sale. Holding back a percentage of each sale to pay for those past sins is a sensible business practice, otherwise you'll find yourself scrambling to cover old debts with current money, kind of like today's big banks.
Reserves are an accounting trick to take some revenue offline, hold it from taxable income until such time as it's either spent fixing problems, or taken back to the bottom line. What's the right amount? Planning is everything. Too big a reserve, planning too conservatively, robs you of profits you could be taking today. Too little held back and you run the risk of running out early. It's all product based, usually in the range of two to three percent of OEM price. Products with short lifespans are tolerant of reserve mistakes because warranty periods are short and the problem goes away faster. On the contrary, large systems and infrastructure can last for decades. Think about it: Under no circumstances do you want to be funding product support for a ten-year-old system with today's money. Better plan accordingly. . .
Reserves should overlay liabilities as precisely as possible. Holdbacks should be just enough to cover trailing costs, no more. What's the formula? Established OEMs with plenty of experience usually get it right. New companies sometimes forget reserves altogether. Big mistake. . . Getting the right answer is easy for established businesses with a history in a particular technology. For example, every Ethernet router manufacturer knows, almost to the day, the MTBF of a 16-port hub. On the other side, however, emerging technologies can be a real guessing game. In that case the trick is to constantly monitor every aspect of post-sale cost during ramp-up, then respond fast with adjustments in reserves, usually on a month-by-month basis. Obviously, step function changes in sales volume can mess up the best of plans on either side of the formula; Small sales mean not enough data. Big sales mean it's too late, the horse is already out of the barn.
Shipment volume contributes to problems in other ways, too: For example, rapidly increasing volume makes is easier to cover past reserve mistakes because the impact on current margin is less on a per-unit basis. However, a formula for disaster rears its ugly head when volume declines, particularly near end-of-life. Last year's unforeseen costs wipe out this year's profits when not that many units are now going out the door. What's worse? Managers who try to cover problems on products no longer made by 'borrowing' margin from today. That should never happen. Profit and Loss accounting should always be rigorously applied at the product level.
Continuous improvement systems, like all quality methods, are the key to controlling post-sale liabilities. Mechanisms as simple as holding specific departments financially liable for the top five call center issues can make a difference. Post-sale managers who constantly push visibility of customer problems back into the enterprise - and enlist executive sign-up - shifting everyone's thinking back into proactive space, taking care of stuff before it leaves, have a profound effect on the bottom line. Design For Serviceability (DFS) is a product feature often neglected in the rush to get new products out the door. Remember that the cost of fixing a problem in the field can be 100x higher than fixing it in the factory. Big money. . .
A big problem results when aggressive managers exploit a gap in financial oversight that lets them distort P&Ls by taking reserves to the bottom line too soon, in effect stealing from the bank of the future to paint a prettier picture today. Proper financial controls mean that NO manager should ever be permitted to tamper with reserves without sign-off from the reserve manager and CFO.
Strategically, the ideal situation is one in which a post-sale revenue stream is developed to offset trailing liabilities. Opportunities abound to sell extended warranty, upgrades, downloads, special offers, insurance and more. Infrastructure businesses are particularly adept at selling services, usually in the thirty percent range. Also, dollars from sold services are amplified by good product quality, and vice versa. A winning strategy builds even greater value by bundling services into complete care packages for whole businesses, not just one or two boxes.
Great organizations run the post-sale customer experience as a business by itself, with its own P&L, thus decoupling financials from any single product's success or failure. Fueled by reserves and sold services, the customer experience then settles into consistent expectations. Too often, in difficult financial times, customer service is the first ballast thrown out of the sinking balloon. Running it as a separate business keeps product managers honest, prevents them from offloading cost or otherwise faking the numbers.
Good post-sale business execution translates directly into new product sales. When customers are happy - doesn't matter why - they come back. Wrapping a suite of non-device values around a commodity product like a cell phone differentiates you in a tough market. These days, with some consumer electronic margins below 10%, OEMs can't afford to make post-sale mistakes. Every penny counts. Brand equity hinges on your product standing out. The post-sale customer experience, in many cases, is what makes the difference. - 15224
Reserves are an accounting trick to take some revenue offline, hold it from taxable income until such time as it's either spent fixing problems, or taken back to the bottom line. What's the right amount? Planning is everything. Too big a reserve, planning too conservatively, robs you of profits you could be taking today. Too little held back and you run the risk of running out early. It's all product based, usually in the range of two to three percent of OEM price. Products with short lifespans are tolerant of reserve mistakes because warranty periods are short and the problem goes away faster. On the contrary, large systems and infrastructure can last for decades. Think about it: Under no circumstances do you want to be funding product support for a ten-year-old system with today's money. Better plan accordingly. . .
Reserves should overlay liabilities as precisely as possible. Holdbacks should be just enough to cover trailing costs, no more. What's the formula? Established OEMs with plenty of experience usually get it right. New companies sometimes forget reserves altogether. Big mistake. . . Getting the right answer is easy for established businesses with a history in a particular technology. For example, every Ethernet router manufacturer knows, almost to the day, the MTBF of a 16-port hub. On the other side, however, emerging technologies can be a real guessing game. In that case the trick is to constantly monitor every aspect of post-sale cost during ramp-up, then respond fast with adjustments in reserves, usually on a month-by-month basis. Obviously, step function changes in sales volume can mess up the best of plans on either side of the formula; Small sales mean not enough data. Big sales mean it's too late, the horse is already out of the barn.
Shipment volume contributes to problems in other ways, too: For example, rapidly increasing volume makes is easier to cover past reserve mistakes because the impact on current margin is less on a per-unit basis. However, a formula for disaster rears its ugly head when volume declines, particularly near end-of-life. Last year's unforeseen costs wipe out this year's profits when not that many units are now going out the door. What's worse? Managers who try to cover problems on products no longer made by 'borrowing' margin from today. That should never happen. Profit and Loss accounting should always be rigorously applied at the product level.
Continuous improvement systems, like all quality methods, are the key to controlling post-sale liabilities. Mechanisms as simple as holding specific departments financially liable for the top five call center issues can make a difference. Post-sale managers who constantly push visibility of customer problems back into the enterprise - and enlist executive sign-up - shifting everyone's thinking back into proactive space, taking care of stuff before it leaves, have a profound effect on the bottom line. Design For Serviceability (DFS) is a product feature often neglected in the rush to get new products out the door. Remember that the cost of fixing a problem in the field can be 100x higher than fixing it in the factory. Big money. . .
A big problem results when aggressive managers exploit a gap in financial oversight that lets them distort P&Ls by taking reserves to the bottom line too soon, in effect stealing from the bank of the future to paint a prettier picture today. Proper financial controls mean that NO manager should ever be permitted to tamper with reserves without sign-off from the reserve manager and CFO.
Strategically, the ideal situation is one in which a post-sale revenue stream is developed to offset trailing liabilities. Opportunities abound to sell extended warranty, upgrades, downloads, special offers, insurance and more. Infrastructure businesses are particularly adept at selling services, usually in the thirty percent range. Also, dollars from sold services are amplified by good product quality, and vice versa. A winning strategy builds even greater value by bundling services into complete care packages for whole businesses, not just one or two boxes.
Great organizations run the post-sale customer experience as a business by itself, with its own P&L, thus decoupling financials from any single product's success or failure. Fueled by reserves and sold services, the customer experience then settles into consistent expectations. Too often, in difficult financial times, customer service is the first ballast thrown out of the sinking balloon. Running it as a separate business keeps product managers honest, prevents them from offloading cost or otherwise faking the numbers.
Good post-sale business execution translates directly into new product sales. When customers are happy - doesn't matter why - they come back. Wrapping a suite of non-device values around a commodity product like a cell phone differentiates you in a tough market. These days, with some consumer electronic margins below 10%, OEMs can't afford to make post-sale mistakes. Every penny counts. Brand equity hinges on your product standing out. The post-sale customer experience, in many cases, is what makes the difference. - 15224
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