by Norm McConkey

"Dealer fatigue." When I heard the phrase, it resonated with me in an instant. No explanation necessary. When a colleague of mine turned the phrase to describe his decision to move from a channel position he held, recruiting and training dealers on managed print services, to working for a dealer, I laughed. Then I got to thinking: is that what I'm doing? And, what if the reason for some dealers' lack of success with MPS wasn't their fault? Maybe the prescription was killing the patient. If it's as easy as I say it is, then maybe I should try it.

What follows is an article about a brand-spanking new managed services business: my managed services business. The timing has been perfect. I've been building the business plan over the past few months, and I would be interested to see what the thoughts are of those already "in the soup" of running an MPS business.

Not Another MPS Dealership?

The last thing the industry needs is another copier dealership. Indeed, you can't swing a cat (sincere apologies to feline advocacy groups) without finding a place to buy a printer, toner cartridge or copier. In Cleveland circa 2008, there were eight separate dealerships selling Ricoh machines, and that was before Ricoh bought IKON. HP hardware, which dominates the corporate landscape, is sold at cost,or close to cost, by the likes of CDW and Staples. Suffice it to say that if you need a printer, cartridge, or service technician, you can find one anywhere, and the profit margins available for dealers are typically below 10 percent.

On the other side of the IT equation, you have value-added resellers (VARs). Well, you actually have VARs and Eddie. Doesn't everyone have a cousin Eddie that knows IT? It would seem that when you try to approach a customer about their technology requirements, there is some relative that "helps" most small- to medium-sized businesses out. Help is the operative word here. Far too often, Eddie paints the customer into a technology corner through a series of bad strategic decisions.

I was once told that between distribution titans Ingram Micro, Tech Data and SYNNEX, there are 186,000 technology VARs in North America. Clearly, I am not getting into this business because there is some "green field" opportunity. So, why do it? The answer is simple: I think I can manage a corporate IT infrastructure better than any VAR, and I can architect a printing environment better than any traditional dealership can do. Bold statement. Who do I think I am? Well, read on.

Problems in Both Silos: Print and IT

Let's be honest: most copier dealerships are inefficient operations. They rely heavily on bloated sales and service organizations. The typical dealership is based on the almighty "box," although we call it by its fancy new title: MFP. Big, fast and expensive, and with a nifty built-in financing model that requires customers to turn them over every four years, these boxes are the main thrust of any sale. Sales representatives at copier dealerships earn far too much money for turning these assets over. As well, the hardware has been built upon an expensive service model. These high costs have been passed on to customers. Most copier dealers have begun looking at managed print as a way to bolster revenue. The worst part is that these inefficiencies will likely be passed on to customers, in the form of higher prices to cover their costs.

As far as traditional IT assets such as desktop, server and infrastructure management are concerned, the issue is not one of an inefficient supplier. VARs are traditionally very low-cost operations. Most of them house little inventory on-site, and hardware is offered to customers with small markups tacked on. They live on skinny margins and chronically provide their customers with free support.

The problem is more strategic. Technology is expensive. For environments that have fewer than 100 desktops, it's a massive problem. Small businesses are continuing to struggle with technology. If they have been lucky enough to get their own IT guy, that guy has been more of a technology firefighter than an asset. This person is typically an island unto themselves in a sea of technology neophytes. They are expected to know all things technology, and to lead their companies out of the wilderness. Eddie is taking care of software, connectivity, hardware, servers, telephony and websites—all for $40,000 a year. Yeah, good luck on that score.

So What Will My Company Do Differently?

Well, for starters, there is no longer a need for print and IT to be serviced differently. They are technology, which in my definition is not a differentiator in business these days. Rather, technology is a cost that needs to be managed, or in the case of printing, it is a necessary evil that needs to be managed as economically and reliably as possible. Office printing is like tone on a telephone. It needs to be there all the time, but then, systematically, companies need to set out getting employees to use it as little as possible. The company that has gotten "fat" (again, apologies to all obesity advocacy groups) for the past 20, 30 or 40 years is not likely the one that's going to wake up and tell you not to print. Similarly, the company that's been on the other end of the phone rescuing you from viruses and crashed hard drives, and pulling blue cable through your walls, is not going to put up its hand and tell you to stop.

The problem is that copier dealers cannot morph into managed service providers within their current cost paradigm, and VARs are traditionally not strategic enough to make the switch to pure managed service for both print and IT. My dealership will have no such problem. It will be built from the ground up to do both, and I am not alone. I have seen several industry colleagues head down this path over the past year, and I expect more to follow.

Some people say evolution, not revolution. I disagree. You need a revolution before these two cost pillars eat up your profits and drive your business to its knees.

The value proposition is simple:

  • Remote management of all IT assets for businesses under 100 desktops.
  • Print all you want on 2 cents per page in monochrome and 9 cents per page in color.
    • Keep no supplies inventory.
    • 99.9 percent print availability.
    • When you need hardware, either buy it from us, lease it, or buy it yourself.
  • Desktops managed for $50 per month.
  • Updates, patches, fixes, antivirus, upgrades, firewalls.
  • Additional services such as Microsoft Exchange Server hosting will be sold as upgrades.
  • Quarterly virtual-chief-information officer (VCIO) sessions.
    • Review the organization's print and IT strategy.
    • Outline opportunities for cost savings and process improvement.

I will rely heavily on avoiding costs with remote monitoring and resolution. Having built a leading print management software company (PrintFleet from 2003 to 2009) from the ground up, I am realistic about what you can expect remote monitoring software to do. Remember my initial point about dealer fatigue? Beyond collecting remote meters, most dealers are not leveraging all the functionality of the software. We are at a stage within the industry where there are various distributors of managed services offering a selection of programs, complete with software, such as N-able, Kaseya and Level Platforms products. As well, print management software from companies such as PrintFleet, FM Audit, Print Audit and Digital Gateway are also available in distributed programs. My assumption is that the licensing costs of these products can be reduced to almost nothing if purchased through a distributor, such as PartsNow!, Supplies Network or SYNNEX, in exchange for some purchase commitments of said companies' toner, hardware, and related IT components. These arrangements with distributors can go a long way in reducing the costs associated with providing managed services.

Costs: Managed Services

For simplicity sake, I will divide the business costs into traditional IT and managed print. I have also based my costs on several assumptions about the sales targets for my dealership in year one:

  • 1,000 print devices will be managed after 12 months.
  • 400 desktops will be managed after 12 months.
  • Two sales representatives will earn $60,000 each per year (base and commission).
  • One internal technician can remotely manage, supply and service 1,000 devices.
  • On-site emergency repairs will be kept below 10 per day, utilizing one technician.
  • Wherever possible, compatible toner will be supplied to deliver pages.

At this point, I am sure that this article will leave you with more questions than answers. As far as the numbers are concerned, I would be happy to provide you with some further backup for my business model. As an example, I have calculated the average pages per device at 4,000 per month. I realize this is higher than current averages, but then again, this is managed print. We will be downsizing most fleets to fewer devices than currently exist.

From a financial standpoint, one might ask about cash flow and break-even analysis. That is, of course, more important than profit to a new business. In this regard, it will take about 200 print devices under management from day one to give the business cash flow, and this would reduce my burn rate to below $10,000 per month. I plan on having those devices secured before the doors of the dealership are ever opened, through existing local business contacts.

The Business Justification

The following estimates the monthly revenue, cost of delivery, and gross profit after 12 months of operating a managed services business.

 

Line Item Units Revenue Cost of Delivery Gross Profit
Monthly pages 3,660,000 mono
540,000 color
$73,200
$48,600
$60,900*  
Hardware sales 20 units $35,000 $28,000**  
Desktop monitoring 400 $20,000 $6,000  
Parts and service labor $0.0035/page Included in monthly pages $14,700  
Remote monitoring labor: printer & desktop 2 people N/A $7,000  
Sales labor 2 people N/A $10,000  
Overheads Technology, facilities, admin N/A $8,500  
Totals   $176,800 $135,100 $41,700 (24%)

* Calculated at 50% gross margin.
** Only printer hardware is included. Initial IT hardware will be considered as the business model matures.

As well, you can probably tell that the IT side of the business is much more fluid. In fairness, I will initially partner with a traditional VAR to roll out the managed service portion of our business. The VAR has extensive network and desktop support expertise. They have some customers they provide break-fix support to that we will roll into a managed service contract. Since this VAR currently has no printer clients, we will approach those accounts with the MPS offering. The obvious benefit this VAR will bring to potential customers is that the seven or eight in-house technology employees far exceed the capacity of cousin Eddie, the sometimes-technology-expert in residence currently managing the infrastructure.

Not only do I envision combining managed IT and print services under one roof, but there are a cadre of other services that sub-100 employee organizations need help with. Web hosting and design, software licensing management, software integration, telephony and Internet connectivity, and system backup and storage are additional challenges for small businesses that can be outsourced to managed services providers.

Having run a 30-employee organization, I speak from experience when I say that technology is a hydra-like beast—every day another head grows out that requires your attention. It shows no signs of abating, and if companies are going to thrive in the coming years, they’ll need a strategy to master technology instead of becoming its servant. My dealership will mind the shop and keep technology at bay, and it will allow the small business to focus on whatever product or service it is that they sell.

As for Eddie, well, I'm coming after you.

One Size Doesn't Fit All

A fellow industry colleague and aficionado in managed services provides a snapshot of an alternative MPS financial model for consideration.

by Doug Johnson, Supplies Network

While Mr. McConkey's model for taking over existing fleets makes business sense, the challenge with managed print services is there are multiple valid business models, which by definition mean there are multiple valid financial models. This, I believe, is the crux of the challenge for dealers who are entering the MPS space. There is no "BTA approved" financial model for MPS for this very reason (the same issue applies for sales compensation models).

Business models for MPS range from taking over existing fleets using assumptive end-user cost models (similar to Mr. McConkey's approach) all the way to complete environment analysis, cost analysis, and fleet optimization. Under the latter model, output device costs are included in the cost per page, and the customer never buys another piece of equipment again. This is a "utility" model, where all document output costs are included in the cost per page, and the customer pays much like they would for any other utility—just for consumption. This type of model has higher revenue and typically higher margins, because the cost per page is inclusive of all document output cost variables. It is also a longer sales cycle, and it requires more sophisticated sales and operational capabilities.

 

Full Managed Print Services Model—End of Year 1
Revenue—Hardware

$960,000

Revenue—Service/Supplies

$343,200

Cost of Goods—Hardware

$624,000

   35%—GP typically ranges from 25 to 45%
Cost of Goods—Service/Supplies

$188,760

   GP typically ranges from 35 to 55%, depending on OEM/compatible mix
Total Gross Profit

$490,440

Sales Expense—Hardware

$76,800

   If paying on GP, typically ranges from 15 to 30%, depending on hardware profitability
Sales Expense—Service/Supplies

$17,160

   If paying an annuity, typically ranges from 5 to 7% of revenue  
Net Margin after Sales

$396,480

G&A

$130,320

   
Net Profit

$266,160

Net Profit %

20%

   
Average service/supplies revenue per page

$0.0220

Average pages closed per month

200,000

Average deals closed per month

4

Average hardware revenue per deal

$20,000

Average percent of hardware GP paid to rep

20%

I have seen many companies start with Mr. McConkey's model to lock down accounts, then over time move to the more sophisticated approach. Of course, none of what I've described includes helping the customers manage document workflow, nor helping them manage the entire life cycle of the document (including electronic document storage and retrieval), which is yet another level of service.

MPS, managed services: much time can and should be spent discussing the financials. Can we truly implement a benchmarking system? That remains to be seen. Until then, there are many ways to skin this cat. Stay tuned …

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