from Buyers Lab.
April 8, 2008 - BLI recently gave executives at four manufacturers the opportunity to comment about the current economic conditions in the United States. There were slightly different responses to a few of the questions posed to them, but they all agreed that the lynchpin to their companies’ strategies is keeping customers satisfied and that managed print services (MPS) will grow to be even more vital. As a follow up to that article BLI spoke with representatives from five dealers, and although they had similar thoughts about customers and MPS, some of their answers ran contrary to what the executives said a month ago. Here’s what BLI discovered…
Have You Been Affected?
The debate over whether or not the United States is in a “recession” rages on, with every expert and talking head on television or radio offering up his or her opinion. By and large, the dealers feel that the economy is constrained, but that their companies are nevertheless increasing their profitability.
“At this time we haven’t experienced any significant impact from the current conditions,” said Sam Kress, vice president of marketing for Associated Business Systems (ABS). “Businesses related to real estate [housing, mortgage, etc.] have certainly fallen on hard times, but other sectors seem to be doing okay. That said, it’s still too early to tell if the broader economy will be impacted by the slowdown.” With several locations in Oregon, ABS is a multi-line dealer—Canon, Ricoh, HP and Kyocera—that specializes in MPS (see October 2007 issue of Digital Imaging Review).
Hunter McCarty, chief operating officer of RJ Young, which is based in Nashville, TN and sells Canon, Océ, Ricoh, HP and Muratec products, was also positive in his outlook. “Through the first three months of this year we haven’t seen any change,” he said. “Our business has been up and we’re working to ensure that it remains that way. We have a growth plan in 2008 and we don’t see any problems with meeting our objectives and building our share. Everyone knows the industry is ‘flat’ right now, but companies have to turn it around and take advantage of the situation. As a result, some will win while others will lose.”
With his response Gerry Perillo, president and chief operating officer of Integrated Document Technologies, a Konica Minolta and Xerox dealer in northern New Jersey, brought a noteworthy factor into the equation. “Better than 95 percent of our customers are leasing their equipment,” he said. “Therefore, when an agreement is over we’ll do our best to sign them to a new contract. We currently benefit from a 92 percent retention rate, so with a figure like that I don’t envision losing much business—and haven’t.”
Andrew Ritschel, president of Electronic Office Systems, which is also in northern New Jersey and sells a bevy of different manufacturers’ copier MFPs, printer-centric devices, wide-format models and Muratec faxes (see March 2006 Digital Imaging Review), preferred to talk about “spurts and stops” rather than an out-and-out downturn. “For two- or three-week stretches the phones will be ringing off the hook, but then we’ll be dead for a week or a month,” he said. “SMBs [small and medium-size businesses] are still purchasing devices because they’re investing their profits back into their businesses, and their owners aren’t relying on their stock portfolios for wealth generation.”
Then there’s Mike Steinhoff, owner and president of Rhyme, an exclusive Sharp dealer with four offices in Wisconsin (see August 2007 Digital Imaging Review). “We don’t even talk about if there’s a slowdown,” he said. “My feeling is that it would be negative advertising for the economy, and during rough patches many people use it as a crutch. There has been a reshuffling of revenue with our company recently, but what we’ve lost in monochrome copy volume has been replaced by printing. We’ve also had a spike in color usage.”
Challenges And Opportunities
“If the slowdown becomes more broad, new sales will be more difficult to come by and we’ll have to adjust our growth strategy to compensate for the shortfall,” Kress said. “For our industry, the good news is that there’s a heavy aftermarket revenue stream that’s very resilient against an economic downturn, which acts as a buffer for a decrease in hardware sales.”
McCarty concurred with that sentiment. “As of today procurement has been neither delayed nor put off, at least in my eyes, but if the economy worsens then there’s a serious chance of that happening,” he said. “For us, the idea is to do more with less and boost productivity by introducing businesses to document management software and fleet management. The slowdown presents an opportunity for us to continue doing an excellent job of upgrading customers to newer products and technologies, once their existing leases come to term.”
However, Perillo had a different take. “The challenge is as it always is, regardless of the economy: finding solid people to work for us, in sales and all the other departments,” he said.
Ritschel expanded on this notion. “For us, the biggest challenge is hiring salespeople who are savvy about technology but can also effectively sell products,” he said. “They have to be rewarded well though, and in an extremely competitive marketplace where revenues and margins are being driven down by too many product births and not as much demand, they’re having their margins and pay scales challenged.”
Steinhoff came across as upbeat in his answer. “These are the best times to be aware of how you’re going about your business and look for ways to improve,” he said. “The industry is in a great place because we can bring more positive change to customers than they’ve experienced before.”
Managed Print Services
Ask most anybody at a manufacturer or dealer and they’ll admit that MPS is the future of document imaging—and the future is now, as the cliché goes. Therefore, it was no surprise to BLI that this was a hot subject of discussion and solicited some of the most heartfelt responses from the representatives.
“Managed print services, especially with larger corporations that are looking to tighten budgets, open up a fresh revenue stream for dealers, but only those that comprehend the market and customers’ needs,” Perillo said, adding that his company’s MPS business will grow by an estimated 30 percent over the next year. “I believe that the industry is changing rapidly, and building strong relationships with customers and understanding their needs will be crucial to our success moving forward. Solutions and MPS make sense for businesses because they’ve been proven to cut costs, which ultimately provide dealers with more profit—even in a challenging economy.”
Steinhoff boiled it all down to a simple approach. “Managing every printing aspect for a business, as well as removing confusion from output-related expenses, makes it easy for our customers to focus on what they want to do, which isn’t worry about their equipment,” he said.
There’s typically a human element even to document imaging technology, and Kress focused his attention on this. “Managed print services usually offer better service and improved asset management, at a lower price to boot, so why wouldn’t this be a solution many would implement?” he said. “Because it’s a different way of doing business and changes the way customers operate. This human dynamic is a moving target—you’d think that MPS would be a smart step for businesses to take, but people don’t always make logical decisions. We’ve added more dedicated resources to pursue managed print services, and as a result generated more interest and landed larger contracts, but whether sales of MPS will increase during a downturn, I just don’t know.” Kress projects that ABS’ MPS business will improve by no less than 20 percent during 2008. “It shouldn’t matter whether times are good or bad—it’s all about staying in touch with your customers and helping them solve their business problems,” Kress said. “If we stay in tune with their needs our approach and recommended solutions will vary during a downturn, but as long as our solutions have value our overall revenues should be sustainable.”
“We’re just scratching the surface of managed print services, and it’s imperative that we drive home the rewards of it to all customers,” McCarty said. “MPS provides the dealer with an instant stream of recurring revenue where the cost of placing the product has already been absorbed. The most compelling case for MPS during downturns is that businesses have one supplier, fewer invoices, automatic metering and competitive pricing, not to mention better reporting and accountability. We’ve signed several of these contracts already this year and we believe they’ll grow by at least 10 percent from 2007.”
“We’ve found that businesses in northern New Jersey are leery of allowing people to access their data for document audits,” Ritschel said. “We use either PrintFleet or PrintAudit software for data harvesting. As an authorized HP dealer we sell a lot of their printers by default, but we’re very dissatisfied with the margins we’re afforded by HP, in contrast to the prices advertised on its Web site and those of online stores. We don’t pull out our Japanese-manufactured Segment 3, 4, 5 and 6 A3 products from our accounts and put in decentralized A4 HP MFPs to lower the cost of the hardware component, but we do sell clone laser printer cartridges and offer free service labor with the purchase. We also offer blanket fleet cost-per-print (CPC) maintenance agreements on copiers and printers, but our goal is to evolve into a true monthly or quarterly CPC supplier for our mid-size and large customers that would cover equipment, parts, supplies and labor.”
Hardware
With managed print services so high up on the “to do” list of manufacturers and dealers, what about hardware? Equipment still needs to be sold, and manufacturers routinely introduce new products and refresh existing ones in hopes of having the most complete portfolio in the industry.
“The products that will appeal to businesses during a downturn will be those that offer the most value for the investment,” McCarty said. “I can see where the users would prefer a smaller footprint with more features, and scanning is becoming more important in the workgroup. I don’t see a reduction in equipment or supportive technology in the immediate future and we can throw in color for very little more today. Our hardware sales are on plan to increase by 14 percent in 2008.”
Used equipment is viewed as an inexpensive alternative to newer products and fits in well with startup and smaller businesses that might not be able to obtain credit.
“So long as the hardware is put through a thorough refurbishing process and is covered by a competitively priced service agreement, used equipment will continue to be a solution that meets the needs of approximately 15 percent of businesses,” Kress said, adding that the lower price points will now be more attractive. “Margins on used equipment are usually equal to or greater than new. The ability to package refurbished devices with new products can be an attractive solution; some areas within an organization—the executive staff level, for example—typically require new equipment, while other areas—the warehouse, for example—are very satisfied with used. We expect our used/refurbished hardware sales to increase by 25 percent this year.”
“We sell refurbished machines because the margins are higher and offset the much lower margins on newer machines,” Ritschel said. “Today, most equipment comes back from lease and is then sent off to reclamation centers. We’ll purchase some and make good money [on the resale], but it still affects our purchasing power with the manufacturers because we have to hit our rebates to make any equipment margins in our market.”
Perillo had this to say: “Used equipment is a quick fix and is pure profit, but the cost to service these devices may outweigh the initial profit—a real dilemma.” He went on to explain that his company’s sales are pretty much broken down by hardware at 70 percent and MPS making up the rest.
“We’ve never sold much used equipment and probably never will,” Steinhoff said. “Selling old technology goes against what our industry is able to provide people with and we don’t want to be a part of it. Plus, we’ll continue to see a solid blend of revenue derived from both new hardware sales and managed print services.”
Overall Strategy
It goes without saying that the representatives BLI interviewed dove into their companies’ business plan to further show how, despite the slowdown, each will make it through—hopefully unscathed.
“The norm in business is that the CEO has a great vision for what the company is doing better than its competition, but there are hundreds of cases where this message isn’t being translated in the street,” Steinhoff said. “Our strategy is to help our customers improve their processes while reducing and controlling their expenses. I’m not sure if others are faltering during the downturn, but we’ve met our growth objectives every year, and this one should be no different.”
Kress is equally confident in the ability of ABS to succeed. “We’ll adjust our marketing and sales strategy to fit today’s business environment,” he said. “If the economy worsens and we feel an impact, then we might get more aggressive with our packaging and pricing. ABS started 10 years ago with a “0” customer base and now services over 10,000 clients. We’ve always provided premier solutions at a competitive price, with superior service; it’s worked so far and our approach won’t change.”
“Our growth strategy for 2008 is two-fold, and we think it’s a solid plan to combat and make it through whatever the economy does or doesn’t do,” Perillo said. “We’d like to penetrate the document management market and focus our efforts toward production print. Vertical markets like this play an interesting role, but dealers have to be wary. The mortgage industry, which was hot a year ago, has seen a drastic slowdown; dealers who took advantage of penetrating this market have now seen volumes dwindle and their monthly service revenue is falling. But with more businesses streamlining their operations, print for pay is an ideal replacement for businesses that don’t want such high-end gear in their offices. In turn, copy shops will probably receive more jobs, and that’s a big reason why we view copy shops and production environments as a key to our plan.”
Although McCarty was optimistic about RJ Young being profitable in 2008, he preferred to talk about other parts of its strategy. “We’ll be making some image changes as a way to stay on top of our customers’ and potential clients’ minds, including a new logo to freshen our brand identity and rolling out 80 new cars for our technicians, all of which double as RJ Young billboards. We feel as though this is a unique opportunity that boosts productivity while giving us plenty of advertising.”
“Being a dealer of multiple manufacturers’ products, it becomes a daily challenge to hit our rebate targets, but it’s an insurance policy to carry all of these products at the same time,” Ritschel said. “We’ll continue working with our select manufacturers, but it’s a struggle to keep each of them and us happy.”
Hiring
With consolidation in the industry leading to layoffs, BLI thought it important to pursue the topic of hiring practices, which elicited some varying responses.
“Our model is to hire the best people in each department, provide them with the tools they need to succeed, empower them to make good business decisions and pay them for performance,” Kress said. “Many businesses handcuff their staff in one way or another, and these employees often become unhappy with their working conditions and leave. We have been the recipient of several such situations.”
Ritschel spoke about the big picture. “We’ll grow one year, then we might plateau during another, then we’ll grow again and then we’ll fall back,” he said. “If we lose a high-quality sales rep, it can be a difficult task to replace the person and that creates a hole in our territory coverage. And if sales reps aren’t meeting their income goals due to manufacturers’ branches’ predatory pricing, they might just go to another industry. We hire very tenured reps from our competition, as well as brand new people and teach them the business. Salespeople don’t get laid off—they leave organizations either because they’re not making enough money, their compensation changes or upper management changes. It’s a challenging job.”
Said McCarty, “We’ve increased our sales personnel in hopes of further penetrating the SMB space and enterprises. We don’t anticipate picking up people from the competition as we prefer to grow and develop our own personnel in all areas.”
“We’ll continue to hire people from outside the industry who are a cultural fit and are committed to following through on the promises they make,” Steinhoff said. “We’ve been fortunate on that front. Finding people that are naturally good at servicing clients during both good and bad times is difficult, because the bad times send people running for cover and avoiding their problems. These people don’t make it in our industry.”
Perillo added this insight: “The flip side is that the slowdown has given us an opportunity to recruit from Wall Street, with many qualified and hungry executives looking for security and growth.”
Thoughts About Manufacturers
And then there’s what the dealers think about manufacturers, whom they have to align with, put all their trust and faith in, and work with to get results—and profits—for themselves and their parent companies.
“Manufacturers must reduce the cost of equipment while increasing the reliability of the equipment, thus reducing their profit margins,” Perillo said. “If dealers are selling boxes instead of solutions, this will work against them and hurt profit margins.”
“The industry has been and continues to go through consolidation,” Kress said. “Over the last 20 years, many independent dealers have been purchased by manufacturers or the large independent distributors. Distribution is the lifeblood of manufacturers, and as more and more independent dealers are gobbled up the remaining distribution is reduced. As a result, the larger independent distributors have become an endangered species, which poses a significant long-term problem for those manufacturers that have been sitting on the sidelines. Global Imaging is a classic example and serves as huge wakeup call because it was one of the largest groups of independent dealers in the U.S. Now that this network is owned by Xerox, what do you think is going to happen to the distribution of the manufacturers’ products they used to sell?”
Said Ritschel, “Manufacturers don’t want a middle man—they want to control customers. They’re struggling with declining placements because demand is waning, but production of new machines is still high. There are also manufacturers that are, in essence, dumping products below dealer wholesale costs into the U.S. marketplace, which has many dealers furious. These manufacturers are driving the whole MFP state into where the product is becoming a commodity.
“The dealer channel is being eaten up, and manufacturers can’t afford to do that much longer,” he continued. “I do believe there’s a place for direct sales, but it should be more on the level of the Avaya model. Their direct sales reps sell mainly to enterprises, directing SMBs to a dealer instead; Avaya simply acts as an umbrella under which all of its dealers operate—they don’t compete with them on down-the-street business and mini-majors.”
“I believe the manufacturers are in a turf war over product placements,” McCarty said. “The emphasis by manufacturers on direct operations, as well as buying market share, proves this. There’ll be fallout from the manufacturers and there may be additional mergers similar to Konica Minolta. We may even see another purchase similar to that of Xerox and Global Imaging.”
“Manufacturers have to deliver consistently high quality service that makes their customers better in some way,” Steinhoff said. “Many aren’t, and they might blame it on the economy. Product features and marketing don’t win contracts, but working hard and following through on your promises does.”
--
This article is re-posted from Buyers Lab. Buyers Lab retains the copyright to this article.
