Most organisations finance their office automation equipment due to the associated high capital commitments. The problem here is that if there are issues with the equipment the corporate company cannot hold back payments or force the issue of replacement because the financial instrument still has to be paid to someone else, regardless of performance… By Billy Bell of Bell Output Strategies.
The finance company that completes the financial transaction is very often completely outside of the original negotiation even though they become the actual owner, in legal terms, of the equipment, claiming the depreciation for tax purposes against interest income.
There are no issues here as long as the device continues to operate efficiently for the life of the contract. The original supplier usually also signs the customer up for a separate services contract to maintain the equipment.
The question is “what is the problem then?” The problems arise when the device does not last the life of the contract. Before we discuss what can go wrong, lets first look at some wider issues.
The questions surrounding suitable corporate governance are relevant now to this activity due to the size of the capital commitment. Many companies are finding that their contracts have clauses in them that are just not good business practice. So how does this happen?
Often key people are presented with contracts that contain very onerous clauses written in such a complicated format and in extremely small fonts that are simply very difficult to understand. Signatures are applied by representatives without completely understanding the long term implications and contextual relevance of some clauses.
“Caveat Emptor” – let the buyer beware (From Wikipedia, the free encyclopedia) We believe the definition should be “be aware”, but in some cases the first definition is more relevant; The term implies that you have read and understood the document you are signing.
Some of the questionable clauses have some or all of the following effects:
* prejudice the clients options and choices at a future date
* provide for unaccounted for escalations of costs
* have automatic renewals that keep your commitment for periods beyond required.
What can happen?
Lets say your multifunction device is in the fourth year of a five year contract and is not functioning properly despite being used within the original specification since it was installed.
Usually a salesman will sell you an upgraded device (faster, more capacity) settle the original rental contract and include the settlement (rental multiplied by the outstanding months) at guess what!, a lower monthly cost. Looks like a good deal but if you take the new device and keep doing this transaction the settlement value will eventually be so far in excess of the market value of the device that you will sit with a huge contingent liability.
In addition now there is the service contract that also has to be settled and this is usually an annual contract, meaning that again you have to pay for the rest of the year even though you have returned the equipment. (this happens specifically when you change the brand or supplier)
The fact of the matter really is that if the machine was used within its monthly technical capacity and specification and has been serviced as and when required, then the service company are obliged to make sure the machine is in resonable working order until the end of the contract. What is reasonable working order? – certainly its not a weekly service call or five paper jams a day? (example).
If they can not repair the device up to acceptable working order, surely then the customer should get a relacement fit for the purpose (this may not be a new device). Many companies just fail to realise that this is their right. The reason that they have paid the service and maintenance contract and they should demand they have a machine available and in working order.
What are the clauses to look out for?
We will mention only some of these clauses, generally the client should ask for the supplier to go through each and every clause and have the relevance explained, or get outside opinion from a legal representative. The clauses to avoid (you would be surprised how many clauses are merely crossed out without question) include any “tie me in” based or ambiguous statements. Examples:
The “anniversary clause” – this clause states that if a client does not give notice to end the service contract three months prior to the anniversary date the contract automatically extends for another twelve months. So if you need to replace the device after missing the anniversary then usually you have to compensate the service company for their “lost income” even if you will never use the toner or services.
The “competitive copy maintenance price clause” – this clause states that the service company reserves the right, at their sole discretion, to increase the charges for each page, with a guarantee that the price would be competitive. We found a four year old machine on this basis at a charge of 12 cents per page excluding drum unit. On questioning the company we were told that this is competitive for a four year old device.
“Breach clauses” – here is an interesting debate. Lets review a scenario, you purchase a fleet of devices, sign with the rental company and the services company, and the services are not up to scratch. Lets say its so bad that the relationship is not retrievable.
Usually you are now in quite a position. You will still have to pay the rental, but what is the cost of finding another service provider? If the original service provider was the importer and national representative of the product usually there are no other service providers to choose from. Therefore you are stuck with expensive settlements or have to start importing your own toners and spares to avoid paying for expensive ornaments.
We urge our clients to ask for more cover and safety in their service level agreements. This will usually revolve around material penalties and guarantees.
“Page coverage clauses” – there are new clauses recently seen that state the costs per page in the services contract limited to a % of page coverage, else the company can claim higher costs. These clauses we see a fairly ambigious, however there is a real danger here. There are so many issues surrounding toner usuage that could potentially leave the customer in a difficlut position. Were the toner bottles properly filled? Was the fuser and charge wire at the proper settings? what are the calculations based on.
We believe the onus must be on the supplier company to prove that the documents that have been produced have exceeded the expectations that were included in the price calculation, and we dont believe the service company should have the ability to adjust the charge indiscriminately.
Minimum billing – companies that are signing for minimum billings using an overall cost per page are often in a worse position than if they just pay a rental. Usually a minimum billing situation is there to cover the recoupment of the capital elements within a cost-per-copy type contract.
In the first instance if the minimum billing is not reached the supplier adjusts the charge up to the minimums, however the adjustment includes toner costs not just the capital. Also if the minimum billing is on a machine basis you could have devices that are being overutilised and others that are underutilised, and on average you would be above the aggregate of all your devices, so why dont you sign an aggregated contract. Even more equitable would be a quarterly, six monthly or annual contract to cover monthly fluctuations.
Other dangers with this type of contract are that if there is a reason to end the contract the company would have to pay the minimum billing to the end of the contract which is even a worse position than just settling the usual rental contract as the toners etc. are also accounted for in the settlement.
Escalations – The copier industry has managed to keep the copy maintenance charges at 5-7 cents per page for almost a decade. One has to ask the question if a new device costs 5 cents per page and the parts are being replaced, why are there escalations? Nevertheless we must also ask the question about the %.
Obviously imported elements are subject to exchange rates (new prices seem to escape the influence) and every year the people doing the services should get increases in salaries, so there is a case, but the links tend to be extensive – say 8% and without explanation. We believe the imported elements should be separated and a CPI equivalent could be negotiated.
Life-cycle management – This is an area that has not been well handled by corporate companies and the industry. We believe it is intrinsic to optimising your investment and there needs to be some sort of call for this service when negotiating your services and maintenance contract. At the end of a contract the device should not have unused paid-for capacity when being returned, and we dont want to see machines that have exhausted their capacity well before the end of the rental.
Regular reporting on the utilisation of devices would allow the company to ensure devices are properly utilised. Over utilisation will imply that users are not productive and underutilisation implies that the rental elements per page are excessive.
The author of this article, Billy Bell, specialises in developing strategies for optimising document output in corporates. He can be contacted on (+27) 82 888 3218 or http://www.bellos.co.za