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. . .

Hold-backs should match lifetime liability exactly. How do companies get it right? Mature companies have enough history to estimate accurately. Established technologies like digital cameras have enough field data for a reserve manager to guess right, Products based on new, untried technology are the riskiest of all, especially in the hands of a start-up that may neglect trailing costs entirely. Without history, a wise policy is to constantly monitor, in detail, every aspect of post-sale cost, then rapidly adjust reserves - as often as monthly - to compensate. Incremental changes in shipping volume are easy to adjust for. However, large changes are a problem because significant damage is already done by the time you figure it out. The trick is to extrapolate future liabilities carefully.

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.

A big problem results when aggressive managers exploit a gap in financial oversight that lets them distort P&Ls by taking reserves to the bottom line too soon, in effect stealing from the bank of the future to paint a prettier picture today. Proper financial controls mean that NO manager should ever be permitted to tamper with reserves without sign-off from the reserve manager and CFO.

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.

Great organizations run the post-sale customer experience as a business by itself, with its own P&L, thus decoupling financials from any single product's success or failure. Fueled by reserves and sold services, the customer experience then settles into consistent expectations. Too often, in difficult financial times, customer service is the first ballast thrown out of the sinking balloon. Running it as a separate business keeps product managers honest, prevents them from offloading cost or otherwise faking the numbers.

I cannot tell you how many times I've heard the complaint, always internally, that asking customers to buy sold services detracts from device sales. That is simply not true. People inherently value what they pay for. Also, getting sold services into its own P&L, and profitable, funds continuous improvement. Here's the truth; a good portfolio of post-sale, non-device offerings often provides cover for a deficient product. Even when the product itself is mediocre, as long as the aggregate customer experience is still positive, the 'Willingness to Recommend' metric, the most important customer metric of all, stays in positive space. Optimizing post-sale financial reserves and building a portfolio of sold services is a great way to extend product margins in commodity markets, to differentiate your company from competitors. Leading your customers to constantly interact with you is one of the best ways to build brand loyalty and the bottom dollar.