FMI ENERGY AND TECHNICAL SERVICES CONFERENCE 2000-10-02

DAN ALAIMO

LA JOLLA, Calif. -- Fixed-price service contracts can make equipment maintenance more efficient, but retailers should take care to not eliminate competition among the contractors, said Randy McAdams, director of maintenance and utilities, Safeway, Pleasanton, Calif., speaking at the Food Marketing Institute Energy and Technical Services Conference here.

Many smaller contractors depend on big accounts like supermarkets, so when a chain centralizes its service contracts, that could put them out of business, McAdams said. "When you bring somebody in and push them out, they may not survive that shock to their system. All of a sudden, when it comes time to renegotiate the contract, you don't have quite as big a pool of people to pull from," he said.

There also is a shortage of skilled contractors on the horizon, he noted. "I am really worried about who is going to fix our refrigeration systems in 15 years. If you look at the average age of your refrigeration contractor, probably most of them are in their 40s now, and all the young hot-shots want to go into the Internet and the computer business. So we have to be conscious of how many service providers we maintain and support. That is a decision you have to be smart about," McAdams said.

But service contracts have many benefits, he noted. Chief among them is getting the contractors to take a sense of ownership in the equipment they are signed to maintain. The contractors are more likely to do preventative maintenance, emergency calls are reduced, travel time is optimized, the most qualified person is usually assigned to the job and overtime is minimized, he said.

"Often, time-and-material contractors go to the site at three o'clock in the afternoon so that the repair slides into overtime. With a service contract you can prevent that because their skin in the game -- if they go into an overtime situation, they generally have to eat the overtime," McAdams said.

Other advantages to service contracts versus the time-and-material or "fix-it-when-it-breaks" approach:

There is flat pricing for budgeting and planning purposes.

There is a single source for maintenance and repair, so that the stores know who to call.

Dispatching is easier.

The retailer's staff requirements are reduced.

There is reduced conflict over travel and overtime charges, eliminating a traditionally adversarial relationship.

"Usually you end up getting priority service. They know the contract is there so you become one of the main customers. You also frequently -- but not always -- get improved quality of work and service, because the contractor has the ability to act like an owner and do preventative maintenance work," McAdams said.

When choosing a company for a service contract, common sense issues need to be explored, such as whether the company has enough staff and trucks to do the work, and whether its service area matches that of the retailer. Also consider if the proposed contract is in that company's area of specialty, McAdams said. "I've learned from my experience that it is probably better not to try to train a dog to be cat. So if you need a dog, get a dog. If you need a cat, get a cat. There are a lot of contractors out there who do have the skills to do the work," he said.

There is a cost associated with going into a service contract for the contractor, he noted. "Are they financially secure? Can they handle the first year? Can they operate without making a dime for a year for the first year? Our experience has been that most service contractors don't make any money on a service contract, at least for the first year. That's one of the reasons you generally sign multi-year contracts," he said.

McAdams urged the audience to set realistic goals for such service contracts in terms of cost, service levels and downtime. "Maintenance is a big ship when it floats through the water, and I don't think you should expect to change the course of that ship instantaneously, he said.

"Clearly define your expectations. Understand what you want. There's an old axiom in our business: 'If you don't measure it, you can't manage it.' Know your costs before the contract. Measure your costs during the contract. And develop and understand reporting requirements before the start of the contract. I can't emphasize enough how important it is to understand your costs, because when the time comes to try to support or validate a contract decision, and you don't have your costs in your pocket, you are going to be in trouble," he said.

But overall, service contract represent a good opportunity for supermarket retailers, McAdams said. "If you are smart and a good negotiator, fixed price service contracts can make your life easier and improve service. If you have a good understanding of your current costs and you feel they are going up, then my suggestion is go for it. Just be smart about it."