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. . .
In principle, reserves taken at the time of sale should exactly match the cost a product is likely to incur over its lifetime. How do you know? Mature companies with extensive product history can usually guess right. Start-ups typically don't. If a product is new, but uses established technology, then experienced post-sale managers can make educated guesses based on history in the same sector. If the product is truly ground breaking, with no comparative history, then it falls to managers to meticulously track field failure rates, call-center activity and returns during prototype and roll-out phases, then QUICKLY adjust reserves to compensate. Obviously, extremes in product volume can be problematic on both sides of the equation: Too little volume = not enough history. Too large a volume = too late to fix mistakes.
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.
Basic quality discipline is an easy way for companies to mitigate post-sale risk. Institutionalizing constant feedback and corrective action, as well as keeping the senior leadership involved in post-sale activities, sets the stage for fast and effective response. Being able to correctly identify the root cause of a post-sale problem, and then being able to negatively impact the incentive pay of those responsible, usually gets the product steered back on course. Metrics are important. It's also important that no more than five post-sale issues be aggressively pushed back into the enterprise at any one time. Fatigue and confusion kills corrective action when too many problems crowd everyone's plate.
Here's a real problem: Imagine what happens when fiscal discipline breaks down and unscrupulous managers, especially those looking to distort the P&L in order to misrepresent their performance, are allowed to pluck reserves from the money tree far in advance, in essence to borrow from the bank to paint a rosier picture. This should never be permitted. Good financial control means having post-sale managers, as well as the CFO, approve all changes in reserves.
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.
From an accounting standpoint, treating non-device sales as a separate P&L, fed by both warranty reserves and sold services, sets the stage for running post-sale as a real business. Too often, service activities are treated as an ugly baby cost center, a necessary evil that gets the first ax in tough times. Operating post-sale as a business unit, decoupled from tampering by product managers, lets skilled customer service managers build real value that adds to the total portfolio.
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. - 15246
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. . .
In principle, reserves taken at the time of sale should exactly match the cost a product is likely to incur over its lifetime. How do you know? Mature companies with extensive product history can usually guess right. Start-ups typically don't. If a product is new, but uses established technology, then experienced post-sale managers can make educated guesses based on history in the same sector. If the product is truly ground breaking, with no comparative history, then it falls to managers to meticulously track field failure rates, call-center activity and returns during prototype and roll-out phases, then QUICKLY adjust reserves to compensate. Obviously, extremes in product volume can be problematic on both sides of the equation: Too little volume = not enough history. Too large a volume = too late to fix mistakes.
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.
Basic quality discipline is an easy way for companies to mitigate post-sale risk. Institutionalizing constant feedback and corrective action, as well as keeping the senior leadership involved in post-sale activities, sets the stage for fast and effective response. Being able to correctly identify the root cause of a post-sale problem, and then being able to negatively impact the incentive pay of those responsible, usually gets the product steered back on course. Metrics are important. It's also important that no more than five post-sale issues be aggressively pushed back into the enterprise at any one time. Fatigue and confusion kills corrective action when too many problems crowd everyone's plate.
Here's a real problem: Imagine what happens when fiscal discipline breaks down and unscrupulous managers, especially those looking to distort the P&L in order to misrepresent their performance, are allowed to pluck reserves from the money tree far in advance, in essence to borrow from the bank to paint a rosier picture. This should never be permitted. Good financial control means having post-sale managers, as well as the CFO, approve all changes in reserves.
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.
From an accounting standpoint, treating non-device sales as a separate P&L, fed by both warranty reserves and sold services, sets the stage for running post-sale as a real business. Too often, service activities are treated as an ugly baby cost center, a necessary evil that gets the first ax in tough times. Operating post-sale as a business unit, decoupled from tampering by product managers, lets skilled customer service managers build real value that adds to the total portfolio.
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. - 15246
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