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To: Michelino who wrote (1974)	8/16/1998 12:30:00 PM
From: Spots	Respond to of 14778

Many readers are probably sick of service contracts, so this is an upfront warning to click "Next." Michelino, you made some good points. In many respects my comments were incomplete and/or misleading. I don't think we disagree fundamentally; I think we're talking about apples and oranges. My statement: >>If you can't afford the loss, whatever form "can't afford" might take, be it downtime or monitary or embarrassment or whatever, THEN you should definitely consider the contract. This is an individual decision which is completely outside the economic analysis of the service contract. Your comment >>No, it would appear to be integral to any economic analysis that would accompany the decision to use service contracts. I didn't make what I meant by the economic analysis clear. Specifically, I mean the service (including parts, shipping, in-house visits, whatever) that you get under a service contract versus the same service if you pay for it at as needed. The "economic analysis" is simply which version of the same service costs less in the long run. Whether you can "afford" the risk (in any sense of "afford") is individual. >> Besides, you are applying monetary value only to the parts and ignoring the economic value of the actual service and diagnostics. So this is one area where your overall analysis doesn't work for me: <<Either the contractor will make money at it on the average or will be out of business or unable to provide service when its needed. This is independent of the contract or its terms, by the way. Therefore, YOU (or anyone) will make money in the long run by giving these contracts a miss.>> Well, perhaps I could have said it better, but I was hardly ignoring the econmic value of the service. We seem to be discussing at cross purposes. I'm referring to the expected price one pays for the SAME service under and not under a service contract and the possible worst-case consequences of paying the non-contract price on an as-needed basis. >> Let me at first accept this categorization. There could be an extended period where the service organization is losing money and still providing adequate service. I have used such companies for a couple of years before they went (sadly) belly up. They lost money on me and the ten PC's that were covered. Not the other way around, my company made out quite nicely. Luck ALWAYS counts. Its part of the game. Perhaps you or any individual is shrewd enough to discern a good deal and clever or lucky enough to get the deal and get out. But suppose you had been the unhappy purchaser of a bunch of two-year contracts the month before our friends above went sadly belly up? Not so good. >>Now let me reject the premise. Correct me if I'm wrong (honestly, please do) but you seem to be implying that the contractor will make money only if the customer 'loses' it. What you are overlooking is that the contractor may be able to provide the service cheaper than the customer is able to do it. >> So while you as the customer may be able to perform the same service (what ever it is) and even easily afford the cost of not using a contractor, if the service organization can do the repair at a lower price than your internal costs while still making a profit, everybody makes out. Yes, indeed, I agree one hundred percent. Sometimes (often, even usually) you can contract out a repair or other service cheaper than you can perform it yourself. Like the flowers that bloom in the spring, this has nothing to do with <my> case, which has to do with whether you pay in advance for a hypothetically required service or whether you pay for each individual service as it's needed. My implication was not that the contractor will make money only if the customer loses it, but that the contracter will make more money on the service contract than on the same individual repairs as needed, other things being equal. A service contract is a form of insurance, and an insurer MUST statistically make money on premiums or be out of business. Moreover, an insurer must build up a reserve to recover unusually large unexpected losses or, as our friends above discovered, go belly up sooner or later. Assuming that the cost of the as-needed service is "fair" (and if not, the marketplace will take its revenge sooner or later), and that the cost to the contractor of the contract and as-needed service is the same, then you pay in the long run more for the service contract than for the identical as-needed service. Because you have to pay the cost of the service itself, PLUS you have to pay for the reserve maintenance against disaster plus the profit on the insurance portion of the contract. It is important that the services be identical; otherwise there's no valid comparison, and nothing I've said applies. I think this is the major point I haven't made very clear. There are lots of cases in which this analysis doesn't apply directly anyhow. Perhaps you are contracting for volume so economies of scale apply; perhaps a service is available only through contract; perhaps there is a critical component of training or continuity or personal service where there's no such thing as an identical as-needed service; etc. Similary, even if the analysis applies, it could be moot. Perhaps your risk cost of downtime is so high that you're willing to pay a premium to ensure service in advance of an incident; perhaps the convenience of the contract is worth the economic price to you (I have a service contract on my yard sprinkler system which costs more than it's worth in dollars, but it keeps my wife happy and I don't have to THINK about it so I'm happy too); and so on. And, of course, you could buy the contract and then be lucky enough to break the product frequently <G>. Spots