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In the Search for Savings, Don’t Fight Inflation
Inflation will ultimately win, and quality will lose. Fight ignorance to discover savings that last.
The deflationary experience of the past 3 years may lead some to believe that fighting inflation will continue to yield rewards for those that manage service trade expenses. The rates for skilled labor, quality materials, and fuel have generally declined in the face of higher unemployment and slack demand (fuel being the exception thanks to Chinese consumption). I will argue, however, that fighting inflation is futile over the long haul. Attacking labor rates and material costs, and even, ultimately vendor profits, will prove to be an unsustainable strategy for savings. When demand improves and supply tightens (i.e. unemployment drops), the savings will disappear – replaced by poor service and low quality outcomes.
It is right for big customers or others that consolidate demand in the market to expect price reductions in the face of slackening demand (i.e. 2008 – 2011). The advantage of being big is the ability to survive downturns by leveraging size to realize cost savings when demand slackens. But assuming that a buyer’s market will last forever is folly. When demand improves, service trade vendors will pick up work in their local market – construction work, local retailers, local restaurants – and the national account or consolidator work that was so valuable in sustaining them during the tough times will become a dog’s breakfast. To sustain the savings achieved during deflationary times, tier 3 and tier 4 vendors come into play, or fraudulent charges are submitted (3 hours billing for 2 hours labor), or the scope of work is hacked. When you fight inflation too long, quality and service will eventually suffer.
So what is the answer? When deflation begins to dissipate and inflationary pressure mounts, the solution is clearly to use information to lower the expense burden. Unlike service trade delivery input costs, which will relentlessly march upward over time, the cost to collect, transmit, and process information is always in decline. Moore’s law states that information processing power doubles every 18 months. The same pattern holds true for digital storage, pixel density in cameras, bandwidth, and smartphones. If these things are getting relentlessly cheaper, harnessing them to discover opportunities to lower service trade expenses seems like a no brainer.
Here are a few examples of how cheap and pervasive information can lower service delivery costs:
- Trip Charges – I have witnessed innumerable cases where a lack of information regarding the equipment or service history at a customer site leads to multiple trips in order to properly diagnose and repair a problem. If prior to dispatch, the service trade company has access to the equipment and service records for the location, the odds of dispatching the right technician with the right parts goes up significantly. And costs go down.
- Fraudulent Labor Charges – Fluffing up the labor quantity associated with a service call is a classic response to an unreasonably low labor rate. Sadly, it is a very common practice in many service trade industries – especially when procurement professionals are happy to accept unsustainably low labor rate bids and then turn a blind eye to the consequences. Well, it is difficult to fluff the hours when a computer captures your arrival and departure time from the location via a phone call from the location or a mobile GPS unit. The hours at the location are then undeniable.
- Inflated Repair Quotes – In the arena of consumer goods, Google is an incredible tool for determining how much a given gadget should cost. The quantity of labor required for a qualified technician to replace a given part on a particular piece of equipment is a bit more opaque. However, if your service records, or the service records of others, were structured such that they became searchable for similar work history (it is rare that you are the first to encounter a broken whatsahoosit), it could theoretically become much easier to determine fair price. Stay tuned, as we are working on this solution here at DunnWell.
Bottom line is that service trade costs associated with labor, fuel, parts, and equipment will soon be getting more expensive, while information collection, transmission, storage, and processing costs will always decline over time. Which fight do you want to join to win the savings war? Fighting inflation? Or fighting ignorance? I know my answer.
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