Document Imaging Industry Braces for Economic Slowdown

February 27, 2008 - To find out how the economic slowdown might affect the document imaging industry, BLI interviewed representatives at four major manufacturers and the Photizo Group, an investment research firm that specializes in financial analysis of the industry and a leading consultant to manufacturers on growth strategies. What we learned is that while the sluggish economy will present some challenges, not all is doom and gloom for the industry. In fact, it'll undoubtedly present some opportunities be it through offering certain kinds of products, focusing on specific vertical markets or by providing services that can help customers reduce costs and solutions that add value.Edward Crowley, founder, chief executive officer and managing partner of the Photizo Group, used a familiar analogy as cause for optimism. "People drive cars regardless of whether there's an economic downturn or not, so gas will always be a premium commodity," he said. "The same rings true for document imaging. Despite workflow being more electronic than paper-based these days, companies need to print and are producing an increased amount of hardcopy output, which means they have to buy supplies. The margins for ink and toner are much higher than for hardware, thus protecting this revenue stream-but only to a degree. Because the loyalty rate in terms of aftermarket consumables is lower due to third-party vendors, manufacturers will really have a do an impeccable job of pleasing their customers."

Tom Salierno, senior vice president of acquisitions for Global Imaging Systems, also expressed optimism, pointing out that approximately 1 million copier-based MFPs are sold every year. That figure translates into a lot of money and doesn't even factor in printer-centric products, as well as scanners, faxes, consumables and cost-per-click charges. Still, the current recession, which some experts don't believe we're in but many do, looms over the industry. "Nobody's dominating right now," he said. "If a business has quality salespeople and is focused on improving efficiency and productivity, it can be ‘recession proof' by growing within the existing market and increasing its share-if only by a little," he said. "A company that has an 80 percent share will probably be subject to the recession, while an organization that has a share of 20 percent or less will end up stealing some away from the competition."

More From The Photizo Group

"The symbiotic relationship between manufacturers and dealers will be interesting to watch," Crowley said. "The field is already very competitive, but in all likelihood there'll be an elevated sense of friction. My feeling is that both sides will act more aggressively because there should be fewer contracts to be won."

Crowley believes that it will be a challenging time for everyone in the industry. "Businesses tend to be conservative during recessions and stay the course instead of going a different route and purchasing another brand's equipment," he said. "This will, in effect, limit manufacturers' abilities to increase their market shares. Profits will be there if the operation is run well, but I see the trend of mergers and acquisitions playing a major role in growth rather than it coming organically via introductions of new devices and product refreshes."

"I expect that hardware sales won't be as strong in the U.S. and Europe in 2008, but manufacturers will more than likely continue to see a demand for their products in Asia, which is quickly shedding its ‘emerging market' label," Crowley continued, adding that lower-end devices-laser printers especially-will fare better than those targeted toward large workgroups. "Realizing that a recession was imminent and that placing hardware in the SMB (small and medium-size business) space would be key were reasons why Océ and Xerox bought Imagistics and Global Imaging Systems, respectively."

Samsung

Samsung is the world's second largest manufacturer of laser printers and the fastest growing global brand, according to Jay Shears, director of office automation for Samsung Electronics America's Information Technology Division. Although he acknowledges that the industry is experiencing a "constrained" economy, Shears emphasized that the company is focusing on markets that have a strong growth trend for printing-the healthcare, education, governmental and legal markets, for example. "The voice of our customers drives our product, solutions and program development in these emerging markets, which allows us to meet our customers' needs while supplementing our existing portfolio with new technologies."

Shears used the healthcare and legal markets, which "are printing intensive and will experience growth despite the economic constraints," to illuminate how Samsung's multifunctional printers can be a good investment for businesses. "We've seen a trend toward organizations consolidating the costs associated with their fleets and more and more businesses converting to printer-based letter- and legal-size MFPs versus A3-size printing systems because of the less expensive total cost of ownership (TCO)," he said.

A second interesting part of this discussion is how managed print services are changing the paradigm on business printing costs. "The most critical challenge for our customers is to understand that there's a convergence happening from the traditional copier and dealer cost-per-click models with printers," Shears said. "Managed print services level the brand consideration and place the focus on TCO and our channels' ability to meet the customers' service, relationship and cost requirements. Since we manufacture most of the hardware and software technology used in our printing engines, we're uniquely equipped to quickly and efficiently meet customers' demands."

In closing, Shears said, "Samsung doesn't sell hardware direct to the user. To be successful, we must align our strategy, support, solutions and products with our dealers' and resellers' business plans so they can be successful with our printing systems. Despite changes in the economy, we'll remain flexible to meet our customers' printing needs."

Sharp

Ed McLaughlin, president of Sharp Imaging and Information Company of America, has a similar viewpoint as most regarding satisfying customers. "We as an industry always need to keep our eyes on the customer, but even more so when there's an economic downturn," he said. "Service becomes critical because businesses are slow in ordering new equipment and they'll typically try to do more with less. Therefore, we provide the means for our dealers to ensure that people remain happy."

Because recessions put added pressure on manufacturers' distribution networks, McLaughlin added, dealers will experience longer sales cycles and require more support. "The current economic landscape will contribute to the ongoing independent dealer consolidation," he said. "Last year we built a direct organization through Sharp Business Systems in major markets like San Francisco, San Diego, South Florida, Indianapolis and Arizona. We'll intensify this objective and look further at financially solid businesses in appropriate markets that could benefit from our enterprise support."

McLaughlin pointed out that Sharp was one of the first copier manufacturers to be awarded the U.S. General Services Administration (GSA) Schedule 36 Contract renewal through 2011, which is designed to provide federal government agencies purchasing access to office equipment, supplies and services. "We invested in the rigorous federal review process and successfully met their high standards as a contractor," he said.

According to McLaughlin, the company is increasingly looking to partner with dealers and independent software vendors who understand that the future of the industry lies in technology. "There'll always be a demand for features, functions and software that improve workflow," he said. "We aim to offer distinctive products that are exceptionally reliable, highly productive, easy to use and customizable. Anyone who's merely selling a commodity product is going to find it tough. But the Sharp OSA (Open Systems Architecture) development program provides a strategic opportunity for dealers and ISVs to differentiate themselves by providing personalized solutions. Fresh applications are driving productivity so capturing these clicks enables us and our dealers to grow."

Toshiba

"We view the economic slowdown as part of a cycle and we believe that things will rebound," said Mark Mathews, president and chief operating officer of Toshiba America Business Solutions, Inc. "For us, it's all about holding steady and continuing to display a commitment to our strategy and channels."

Mathews agreed with others' assessment that businesses, particularly larger ones and enterprises, are taking their time making decisions and that there's a somewhat decreasing demand for products. "We're not necessarily losing contracts, but customers are being very cautious with their funds," he said. "We've seen a tightening of money since last summer, as well as it being increasingly difficult to obtain credit. Our industry is heavily leased and the economic downturn has impacted people's ability to get funds or have their credit approved."

"Adversity really shows who's doing well and who isn't," he continued. "A lot of people benefit when the market is rising, and those who aren't well prepared for a recession suffer the most-this weeds out weak performers. Toshiba focuses on what customers need during any type of business cycle and, by extension, earnings and profitability. We're always pushing managed print services, which are designed to alleviate problems and improve bottom lines. A recession plays to this theme very well."

The company is careful about cost control and hiring, and proactively takes steps to ensure that it doesn't dramatically increase spending or add unnecessary people in an economic downturn, according to Mathews. "We're very tight about our asset and expense management and we fine-tune our products and services," he said. "The idea is to have good products at the right time. We're well positioned for 2008 or for however long the slowdown lasts to make it through successfully while growing our profitability."

Mathews acknowledged that the company's dealers will each have a slightly different story depending on whether they're in a rural area or a city, if they're major account-based or small business-based, or if they have a certain vertical market emphasis. "Our dealers go through the same process we do as far as reviewing their business plans and making sure their expenses and controls are in place, then perfecting their marketing message," he said, noting that a dealer he'd talked to recently mentioned that it used to sell to real estate attorneys but is now focusing on bankruptcy attorneys.

Xerox

According to an executive in Xerox's Global Communications Group, the company won't be severely affected by the economic downturn. "We operate an annuity-based business with about 70 percent of our revenue stemming from recurring funds such as supplies, service and consulting, while about 50 percent of our revenue stems from outside the U.S.," the executive said, adding that during December, Xerox's enterprise customers in this country gave them mixed signals: there was a modest slowdown in decision making on large purchases but an increase in signings for the company's document management services. "This tells us that more businesses are looking to reduce costs and improve productivity, and our service offerings tend to be in higher demand during tougher economic times."

The executive also pointed to the acquisition method preferred by businesses during this economic downturn. "Many of our enterprise customers are now doing business with us through operating leases instead of outright capital purchases," the executive said. "This means that they can spread out payments over time and bundle the purchase of the devices with supplies and services. We've especially seen an increase from customers in the graphic arts market preferring this approach. Companies see the value of operating leases where they can hang onto money for other investments and also realize productivity savings."

The executive noted one other reason why Xerox is confident that its business model can weather volatility in the current economy. "We operate in diverse markets, including enterprises and the public sector, as well as the SMB space and commercial printers, which gives us broader coverage should economic concerns hit one market more than others," the executive said. "The breadth of our product line at different price points and with different levels of functionality gives us and our dealers the benefit of offering businesses more choices than anyone else in the industry."

Xerox also believes that managed print services and document assessment will be of increasing importance. "Oftentimes during tough economic downturns, people are looking to reduce costs and tend to uncover hidden costs like document management-that's where we come in," the executive said. "We work with our dealers to help customers consolidate their document technology with MFPs that provide an immediate savings. Given the times, this value proposition becomes that much more compelling."

..........................................................................................................

This article was originally published from BLI and can be found at http://www.buyerslab.com/news/viewarticle.asp?article=38070.