Managed Print Services – Opportunity or Alchemy? “AS THE OWNER”, What You Need To Know About Hear all about it! Managed Print Services (MPS) headlines are everywhere. If you are not anxious about MPS opportunities and threats by now, you need to drink another coffee to get your heart-rate percolating. Yes, MPS is the talk of the industry – the hot topic at every trade show and the feature in at least every other trade magazine article. The industry’s most prestigious manufacturers and software companies - almost like medieval alchemists - are promoting MPS packages that do everything short of turning base metals into gold and transforming water into wine. Just listen to that buzz! You offer managed printer fleet solutions, remote diagnostics and just-in-time fulfillment of consumables through specialized whoop-de-do software at the push of a button. MPS sounds like a real gold rush opportunity. The purpose of this article is to warn the dealer owners – those guys and gals who are footing the investment in MPS initiatives – that they should exercise caution and professional skepticism. History has taught us the hard lessons - that although billions of dollars of gold were harvested from “them there hills”, few 49ers got rich and many endured hardships and perished in the pursuit. The folks who got rich were the individuals who set up businesses to support all of the prospectors. Sound familiar? The essence of MPS is to offer customers lower costs in return for additional dealer services and support. Make no mistake, while an opportunity, this offering represents a major fundamental threat to the industry. The very essence of MPS - its key marketing themes - is that customers will receive additional dealer services and support at a lower cost. This MPS attribute alone should get an owner’s heart pumping more rapidly. MPS definitely represents a real opportunity for some players. But, for many dealers, MPS represents a real threat to both the top and bottom lines of future financial performance. In a nutshell at a high-level, MPS represents: 1. An outstanding opportunity for strong copier dealers, especially those who have been unconscionably ignoring the printer opportunity for years. 2. A key opportunity for strong printer dealers to take additional share – both printer and copier business - from the copier guys. 3. A substantial windfall for MPS consultants, software vendors and manufacturers who have been rolling out solution after solution for dealers. 4. A significant threat for many printer and copier dealers especially those which do not have the wherewithal to invest and compete at MPS. Such dealers should prepare for their mid-market and larger customers in their base to be under continued assault for years to come by aggressive dealers seeking to control the network and all of the output devices hanging on the network. YES, MPS will ultimately prove very profitable for many MPS participants but many of the achievers will not be dealers. A large segment of the achievers will include the manufacturers, the software vendors, the industry consultants, and most important to the dealer – the dealer’s customers. Ultimately the strong copier and printer dealers will survive and even thrive; particularly dealers with the capability to provide customers with real business solutions. Of major concern however is whether this relatively smaller population of dealers will prosper at the expense of their less fortunate counterparts. Lowering customer prices in return for additional services and support will cause many industry players a great deal of financial pain. There is only so much net-new customer business available for dealers to pursue. Vendors and consultants seem very skilled at inventing and marketing new methods to chase and attack the same basic business opportunities. Often times, as is the case here with MPS, new technologies facilitate new methods – the cycle is inevitable and perpetual. With MPS being featured everywhere and to every dealer and customer, one vital question is whether there truly are new business opportunities available or just more sophisticated technological ways to chase the same old business – a business which may actually be declining rather than growing as copy and print growth slows. Dealer owners need to study and understand overall industry trends alongside predominant MPS themes and implications before jumping into MPS with two feet. Dealers, both individually and collectively, need to be careful not to “eat their own babies” at lower prices. While MPS buzz suggests opportunity is unlimited, amidst all of the hype, dealer owners need to read the tea leaves to interpret and determine whether MPS represents more of an opportunity or threat for them individually, especially for the long term. One obvious potential threat to all dealers is that the net-new business opportunity is limited and there is only so much customer opportunity to go around for the dealer community to target. Under this assumption, logic dictates that the dealers which in fact prosper will be extracting their pound of flesh from other dealer pockets, rather than capitalizing on discovering new business within the customer. MPS, despite all its hype, may primarily represent just a more sophisticated repackaging of the same dealer services and support for essentially the same customer opportunity. In other words, just because MPS is hot within the industry, it hardly means that there is a whole bunch of net-new customer opportunities available for the overall dealer community. Dealers participating in MPS ultimately may find themselves chasing the same old customer opportunities with repackaged services and support at a lower customer price. This is extremely dangerous to everyone in the industry. Dealers capitalizing on the MPS trend may prosper, but the prosperity may be short-term and at the expense of other dealers which suffer through a reshuffling of customer opportunity. While MPS consultants, trainers, and vendors make bunches of money, and customers save bunches of money, what business is left on the table for the average industry dealer? And, what will it cost to play this game and will any profits be illusory? As the old adage goes, there is no free lunch. Managing MPS transactions properly and efficiently will require lots of hard work along with investment in systems and capabilities in order to competently bundle and manage additional machines, software, services and supply offerings. Substantial investments will be required to experience increasing revenue and profitability. Frankly, dealers may be required to invest more just to remain status quo and to protect their existing base and market-share. Most increases, especially short-term, will likely only be derived from the other dealer pockets. And even those MPS dealers which ultimately succeed long-term will endure short-term increases in costs and investments and therefore lower short-term profitability. Lessons learned during conversion of analog to digital devices Dealer owners evaluating the MPS opportunity should be wary of any fuzzy math being used by third parties. MPS consultants are touting MPS tools and techniques that will enable dealers to be proficient, but owners should check their math. Offering customers lower prices for additional services and support requires application of a new math, or at lease new operating models and systems which enable dealers to become far more efficient to lower transaction costs to yield comparable profitability. We should have learned such fuzzy math lessons from the mid-to-late 1990’s and early 2000’s when analog machines converted rapidly to digital. A short history lesson is worth reminiscing about because it may prove analogous to the MPS revolution. The analog to digital revolution occurred relatively rapidly and was very painful for many dealers; even mega dealers who would eventually rule the roost. Many dealers experienced more economic distress than customer opportunity. Besides being stuck with large and expensive amounts of old analog inventory, many dealers experienced eroding top-line revenue and bottom-line profits when digital prices-per-copy were offered to customers at severe discounts. In many cases, the substantial increases forecasted for digital copy-volume either never materialized or was insufficient to offset declining revenue associated with lower customer pricing. Likewise, expected dealer efficiencies and lower costs-per-copy were insufficient to prevent eroding profit margins. The net result was that many dealers experienced substantial declines in both revenue and profitability. Many still have not recovered from the good old days of high prices-per-copy and resultant after-market profitability. Some folks just did not comprehend the fuzzy math. I vividly recall the turmoil being experienced by IKON during this analog to digital revolution. The dynamics and issues associated with the conversion was a hot topic of conversation at a critical meeting of the top twenty or so IKON executives in Valley Forge. This meeting clearly revealed the serious trouble and bumpy road ahead yet management ignored all these tell-tale signs. Three of the top IKON operating executives were all touting how new digital machines were enabling service technicians to become so much more efficient than when they were servicing analog machines. They told the audience that the introduction and placements of the more reliable digital devices was enabling service technicians to service substantially more copies. Most of this was true but the implications were not understood. The impact of digital devices were only being advertized to the audience as the most promising industry developments which would bode well for everyone in future – that it would lead to superior financial performance and shareholder value. Unfortunately, the audience drank too much of this punch. Basic mathematics and fundamental alarming facts were being ignored. In fact, IKON’s revenue-per-copy from digital offerings, like for most other competitors, was dropping precipitously. This declining revenue-per-copy caused rapid revenue declines which in turn caused dramatic erosion of bottom-line profitability. The pain was all self-inflicted. Despite the ability to service an increasing number of digital copies, total revenue-per-service-tech was dropping while technician compensation, digital training and other service costs were escalating. The ability to service substantially more digital copies per month was not nearly enough to offset lower prices-per-copy being offered to the customer. Anticipated increases in copy volume within customer accounts never materialized at forecasted levels. The math exercise and its implications could not have been more straight-forward, yet key decision-makers ignored the threat because they were relying on the wrong fundamental metrics.    Analog  Digital Change Revenue per tech         Copies serviced per month                                       750,000 1,200,000   Customer price per copy  $0.012            $0.0065   Revenue per tech per month $9,000 $7,800   Revenue per tech per year declined $108,000 $93,600 -$14,400         Cost per tech         Annual comp per tech  $45,000 $50,000   Digital training $2,000     Annual cost per tech increased $45,000  $52,000 $7,000         Profitability per tech declined $63,000 $41,600  -$21,400         # of techs 18,000 15,000           Annual service profitability declined $1,134,000,000 $624,000,000  -$510,000,000   Rather than comparing and managing the trend of revenue and cost profitability-per-tech, management was preoccupied and insisted to the audience that copies-per-tech was the key metric in managing the service organization. Relying on the wrong metric resulted in faulty conclusions followed by poor decision-making. The underlying industry dynamics had changed but were ignored. The math exercise is illustrated in the example below.   As the analysis illustrates, lower customer prices resulted in rapidly declining revenue-per-tech. This was exacerbated by increasing tech comp and other costs associated with the digital developments. As revenue and cost moved in the opposite and wrong directions, naturally, profitability-per-tech declined. Whether your dealer employed only handful service techs or thousands like IKON, these industry dynamics had dramatic negative effects on results. For an organization like IKON that employed thousands of techs, the chart illustrates the dramatic annual impact on profitability – over a half billion dollar decline in annual profits. You can imagine how such declines in profitability are perceived for a publicly traded NYSE company by Wall Street. The impact on shareholder value and the company’s stock price was severe. And, just as severe was the resultant loss in credibility. Many large, medium and small dealers across the industry experienced similar pain from earnings and value erosion. Another fundamental mathematical calculation which was overlooked in this equation during the analog to digital revolution was the effect of the reduction in the number of service techs employed by IKON. While IKON was persuading the audience that reducing their headcount by several thousand techs was testimony of capability and efficiency, management simply ignored a RIF (Reduction in Force) of thousands of techs who previously averaged over $100,000 in revenue and about $60,000 or so in profitability was hardly an encouraging development. All those dollars were gone. To overlook the amount of revenue and profit generated by these thousands of techs during the analog era was perilous in the management decision-making process. And to think that it was relatively simple industry dynamics analogous to MPS that resulted in such large amounts of revenue and profit evaporating. Customer prices-per-copy were lowered across the board. Net-new opportunities were limited. Expected increases in copy-volume and revenue from other follow-on services were not realized. Increases in dealer efficiencies were insufficient to offset declining margins for the revenue decline, which occurred so dramatically that dealers did not have time to right-size overhead. Owner action plan: Do your homework and focus on the details and fundamentals when assessing the MPS opportunity Hopefully the industry’s MPS experience will be far different than the digital revolution. MPS hype however does ring of déjà vu. Owners seeking to pursue a lower risk strategy and not wishing to dabble too deep into MPS should focus on tying up and penetrating their own customer base as much as possible to prevent competitive takeaways. Protecting your base strategies however could become exceedingly more difficult when competitors are willing to drop prices so low that customers cannot resist rolling over for this marketing pitch of lower costs, better services and more support. Copier dealers should focus extensively on the printer supply and consumable sales opportunities within their own customer base. Much of this printer opportunity has been left on the table for years. Tying up such opportunities will decrease the risk of competitive takeaways. Every copier and printer dealer of any substantial size should establish a web-store for selling consumables and low-end devices. One only needs to study Staples’ history for a lesson in how successful web-store sales can be. After its initial launch, in about five short years, Staples went from zero internet sales to about 40% of its revenue being generated from its internet store with no end in sight. For those dealers jumping onto the MPS bandwagon with two feet, based on our analog to digital revolution history lesson, owners should make sure to take at least the following steps: 1. Track MPS revenue, cost and profitability overall as well as at a transaction level. If your revenue per-print and copy decline, your costs-per-print and copy must decline at least at the same pace. 2. Enhance customer solutions offerings to ensure you are generating some net new business from customers and not just lowering the price. While always easier to say than to accomplish, if you do not offer real business solutions, you are increasing your risk of losing the account to a dealer which surely will offer such solutions. Focusing on high-volume vertical markets will facilitate solution sales success, because once you formulate an effective solution, you can leverage it across similar customers. 3. Measure and manage the trend of revenue-per-service tech and match against cost-per-tech. 4. Measure and manage the trend of other service efficiency metrics. Make sure your organization becomes as efficient and reliable as the machines you are selling and servicing. 5. Consumables, Consumables, Consumables – Refine your consumable sales strategy to make sure your existing customers are hooked before embarking on pursuing more expensive net-new business. After-market margins are still very attractive and lots of printer cartridge business is being left on the table within your existing customer base. In summary, hopefully, MPS will provide all dealers with more opportunity than pain. Hopefully there will be enough and plenty of net-new business to go around for all dealers. Hopefully copy and print-volume will increase at a pace to offset reduced customer prices-per-page and copy. Hopefully customers will not really request lower prices for more services and support. Hopefully your competitors will have the courage to hold their prices and profit margins at acceptable levels. However, owners should not hold their breath and just hope. You need to strategize about how you will operate going forward. You need to better utilize both your sales and service organization to capture the business available out there. Fundamentally, printers and copiers are becoming more reliable. Consequently, customers not only expect lower prices, but they are demanding lower prices for more services. In these tough times, customers may tend to be less loyal. Of course, there generally are dealers willing to accommodate even aggressive customer demands. But for most dealer owners, the fundamental industry trend of more reliable units at lower service prices is not all positive news. Since we cannot just go back to the good old days when copiers did two basic things, making copies and breaking down, it’s critical for dealer owners’ to carefully evaluate their current strategies and action plans to protect their customer base and profit margins. Mike Dudek, an attorney and CPA, is the founder & owner of Zygoquest which provides customized merger & acquisition services and valuation & due diligence services to buyers & sellers of companies.  Zygoquest is the #1 M&A authority in the office products industry. Mike Dudek & Rich Wisniewski are authors of over 400 consummated M&A transactions during their careers.  Prior to founding Zygoquest, Mike Dudek was VP of Acquisitions for IKON Office Solutions, a $5.5 billion NYSE company acquired by Ricoh Corporation.  Contact Mike Dudek at (610) 873-6555 or at mdudek@zygoquest.com. For more info, visit www.zygoquest.com.