Service Providers

Service Providers


Service firms provide seemingly intangible products to satisfy human wants and needs. Service providers run the gaunt from the accounting, legal, and medical professions to federal, state, and local governments to window washers, gardeners, and taxi drivers. Service providers procure capital equipment, products, and service as well as hire employees and provide employee benefits such as health and life insurance.


Like all businesses, service firms enhance profitability by increasing sales at a faster rate than costs, maintaining sales and reducing costs, or increasing sales and reducing costs while maintaining the desired quality and timeliness. Understanding what drives the cost of overhead expenditures is crucial to any service business. Service revenue must cover the direct costs, material and labor, and overhead to generate a profit. Depreciation is a key element of overhead. We define depreciation as the systematic transfer of the cost of a capital expenditure to an expense. Another important cost element is the cost of maintaining capital and operating equipment. A TCO analysis of equipment purchases may help reduce expenditures for maintenance and parts over the lives of the investments.


Another important consideration in service businesses, as well as in retail and manufacturing businesses, is the total cost of maintaining the employee base. Paying the lowest wage does not necessarily result in the most cost-effective employees. He cost of getting a new and inexperienced employee “up to speed” can be high, and the learning curve can be long. Paying more for an experienced person with a short “ramp-up” tie may be the best long-run solution for a position. A total cost/total benefit analysis of company-sponsored health insurance programs can reap rewards in terms of lower per-person total costs, greater benefits for covered employees, and improved morale.



The considerations that apply to service businesses also apply to retailers. Retail businesses sell a product that often must be ordered, received, inventoried, sold, and perhaps delivered to the customer. The choice of a system that facilitates the processes involved in inventory ordering and turnover ill influence the total cost of inventory ownership. Many major retailers have empowered select suppliers to manage their product inventory for them, thus reducing purchasing overhead and inventory carrying costs without necessarily increasing product cost. Embracing the just-in-time (JIT) philosophy is another way to improve QCT (quality, cost, and time) while reducing TCO. Lowering the cost of goods sold and the overhead costs associated with procurement, inventory carrying costs, and sales improves the bottom line. It is often easier to lower costs than to increase sales in a competitive business environment.


A retail business may own a product for a short time but may be responsible for after-sale adjustments, warranty claims, and the maintenance of general customer satisfaction for an indefinite period. If a retailer selects and item or product for sale solely on the basis of price, thus ignoring reliability and product liability issues, customer satisfaction and future sales may suffer. Further, the retailer may incur an increased risk of financial and/or moral liability. Retailers must know their customer base and tailor the products they sell to satisfy that base. Retailers also must consider the long-term effects of every purchase made for resale.