Service Contracts

People often ask me about the merits of buying a service contract for their computer systems.  In general, I don't care for service contracts, I don't think they serve the customer.

Many years ago (probably in 1984) when I was working for a computer dealer, a customer came to me and wished to buy a service contract on his computers.  I suggested against it.  He was quite surprised at my recommendation.  I don't recall all the prices for all the pieces of his system, but I remember a few.  He had four low-cost monochrome monitors.  The service contract on each one of them was about $35.  The cost of a whole new monitor was $120.  I suggested instead that he buy a spare monitor, rather than the service contract on the four, and pocket the extra money.

I think he still bought the service contract.  He didn't know why, but he knew they were "good", and I was the first person he had seen who advised against them, so he figured I was off my rocker.

Here are some facts about service contracts:

Here are some thoughts people have about service contracts:

The common belief is that when you pay in advance for service, you will get better service when a problem arises.  After all, the service contract and the money paid for it represent an investment in an on-going business relationship between you and your vendor, right?

Now, let's think about this, not from your normal perspective, but from the perspective of the organization selling the service contract:

Service Contracts will save money
You are a dealer.  You are in business why?  Answer: To make MONEY!  You are setting the price of your service contract...are you going to set it BELOW your cost of doing the expected level of repairs?  Of course not!  You will make a profit on it, and a fair chunk of the cost of the contract will be paid out as commission, so you will make a healthy profit.  So much for the service contract saving the customer money!

Service Contracts will result in faster service
You are a dealer.  Two service calls have come in, but you only have one technician available at the moment.  One is from a customer who purchased a service contract from you several months ago, and their system is down.  Another is a non-customer (we call these "prospective customers"!) and their system is down.  Who do you send your tech to first?  The customer with the service contract, of course, you probably think.  Think again.

The Service Provider will work harder
You are a dealer.  When your tech goes out to the customer with the service contract, what impact is there on the bottom line of your business?  Zero...or less.  All cost, zero income.  Ah, but you have their money already...  YES, THAT'S THE POINT!  You HAVE their money...rapid response to the call isn't going to help you at all right now.  You will send the tech out to the customer who is paying good solid cash first, in hope of impressing them with the service provided and selling them a service contract. The service contract customer will be taken care of, but later.   Sure, you can argue "Reputation!  What about their reputation?".  How long has your salesperson been working for the company?  Your tech?  How long has the company even been around?  Unfortunately, a lot of people in this business are playing for the short run...only.

What happens if this one tech who really impressed you and inspired you to buy the service contract quits?  The customer's implicit assumption is that your dealer is the source of the quality, and they will go out and get another really good tech right away.  Great thought, and I'm sure they would love to, but few dealers have the money to pay techs well, which is why your favorite tech quit in the first place.  They will hunt for a while, and finally grab some guy who thinks computers are Really Cool, but has zero understanding of how important they are to your business (but he probably plays a mean game of Diablo 2).  Mean while, you have a service contract with this company, and Tech Diablo2 is all they got to fulfill that contract.  When you got a problem, he'll be out to fix it, or at least stare at the problem for you.  He might even feel sorry for you.  But you won't be getting fixed rapidly.  Good technicians have an incredible turn-over rate.  They are poorly paid, they are abused by salespeople and customers alike, and big customers tend to snap up the good ones for internal support staff.  Few dealers pay more than "starting wages" for technicians.

Service contracts lock you in.  You WILL get your service from the provider you purchased the contract from, or you will pay someone else, but you won't get a refund on your contract.  So, in effect, you may end up paying for service TWICE.  Don't think for a moment that you are tops on anyone's list just because they have your money already.  In fact, you will most likely end up on the bottom of the service list, exactly because they have your money already.

The Promise
Look closely at the terms of your service contract.  Some companies are offering "Four Hour Response Time" contracts.  What does that mean?  Usually, nothing more than you will be talking to a sympathetic person within four hours.  Granted, that might be a nice improvement over some hold times, but it doesn't get your problem resolved.  You MAY see a technician in four hours.  They MAY be able to diagnose the problem (or guess) and put parts ON ORDER.  (Think about this...there is no tech running around with all the parts for all the computers any manufacturer has made in the last three years, right there in his truck.  Doesn't happen.  It would be absolutely impossible).  At least one manufacturer (o.k., I'll name names: Compaq) has a four hour REPAIR time promise.  Problem is, I've never seen it "work", and I have most certainly seen it NOT work on trivial problems ("The tape drive is broke".  Tech arrives more than four hours later (without tape drive), and agrees, the tape drive is broke.  Part ordered).  I haven't even heard any first-hand stories of it working for a small business, and it can only work in regions which have enough systems in the field to justify a large parts depot and the staff to manage it.

Look again at the contract.  What happens if they DON'T show up and restore your systems to operation in four hours?  Do they cover your business for any losses incurred?  Of course not.  Do they even refund the cost of the contract?  Again, of course not.  It is all risk for you, and very little benefit.

In short, service contracts are pushed hard by sales people for a reason: they make good money off their sale.  Your money.  Don't do it.

A Semi-valid reason:
Now, there is one semi-valid reason for service contracts: To lock in repair costs.  Some organizations have trouble with unanticipated costs, namely government, non-profit organizations, and other horribly inefficient operations.  These groups have one of two choices: A more practical accounting system or service contracts.  They normally go for service contracts.

An Exception: (sorta)
Dell offers a full coverage warranty on their laptops.  It isn't cheap, but it may make sense.  Warranty on laptops is normally a bogus concept -- what breaks on laptops is very rarely covered under warranty.  It is usually mechanical parts that break on laptops, and almost by definition, they are things that wouldn't have broke if you hadn't dropped it, spilled coffee in it, or other similar disasters that laptops are prone to.  However, for a non-trivial price (probably about 15% of the purchase price of the laptop), Dell will extend their normal warranty to three years and cover almost any kind of damage or failure for a modest deductible.  This makes some sense.  So, for this case, I will go as far as to say that either buy the Dell CompleteCare package -- or stick to the standard warranty.  Here, the reason this makes some sense is the parts of a laptop are outrageously expensive compared to those on a desktop.  Note that I am not endorsing this, I'm just saying it warrants serious consideration, as opposed to my "DON'T DO IT" advice I normally give on this topic.

So, how do I get a true guarantee of uptime and rapid repair?

O.k., this is the sleazy part of the article, where I turn good advice into a sales pitch.  The only sure way to ensure that you have no one part of your computer (and office!) systems that can not be realistically repaired or replaced within the time period you need.  For some businesses, a downtime of 24-48 hours may be acceptable.  Others, half an hour is catastrophic.  I recommend what I call Full On-Site Redundancy -- where you are your own provider of spare parts and service.  I tend to lump repair times into three categories:
15 Minute: For very time critical businesses, I've used this in large offices, but also at pawn shops and payroll companies -- places where 15 minutes down time is about all you can take.  In this case, all parts are quickly interchangeable by someone with no outside assistance, and usually no screwdriver.
Four hour: Average businesses -- down time is bad, but not catastrophic.  In this case, all the parts are on-site, but slightly expert assistance and tools will usually be required to implement the repair.  Hardware costs are typically considerably lower, however
24-48 hour: The "Whatever, whenever" approach.  Should something happens, we can probably do whatever needs to be done somehow, we'll worry about it then.  This is what most companies (other than my clients, of course!) actually have in place, regardless of what they say.  If the parts aren't there, ready to be put into use, you can count on at least an entire business day lost.  Note, there are ways to draw out repair times even more than two days, but it usually takes some work and effort -- not that I haven't seen it done.

Full On-Site Redundancy has to be done properly, otherwise any one part that can fail (which is just about everything.  Trust me -- in 19 years of professional computer service, I have seen plenty of "unsinkable Titanics") can shut you down.

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since August 1, 2001

(C)opyright  1998, 2001, Nick Holland, Holland Consulting

Published: 8/1/2001 based on a previously published document by Nick Holland
Revised: 8/1/2001