The Managed Print Services business is growing, but is it growing as fast as it should be? And what’s holding those in the office imaging industry back from embracing this offering?
The same four copiers you sold last year are selling for less this year, making it hard to grow your business by selling copiers alone. Developing your MPS offering using a bundled approach is one way to evolve and offset that fact. But an MPS strategy that doesn’t include bundling isn’t much of an MPS program at all.
I’ve been engaged in this industry since I began my career with the D.C. Hey Company in Minneapolis. In 1985, after my father’s death, I became the president and owner of the company. My business partner Todd Johnson was Senior Vice President of Acquisitions of Global Imaging Systems before it was recently acquired by Xerox in 2007. Since 2010, we’ve worked together at Strategic Business Associates (SBA) helping independent dealers grow their businesses profitability by evaluating operations, working with management to develop action plans, and providing advice as they embark upon the future.
SBA also conducts financial surveys for four dealer peer groups. Members use these surveys to improve their performance. Collecting and analyzing the data provides independent dealers with industry benchmarks to measure their success in key areas of their business. We’ve found that while 88% of total revenue is imaging, only 12% of that is MPS. To be maximizing the current MPS opportunity, our data suggests MPS revenue should be closer to 20% of the imaging revenue.
So why haven’t dealers jumped on the bandwagon at a swifter pace? Wouldn’t you expect a gold rush of sorts into MPS?
MPS is a Different Ballgame
The fact is, selling MPS is quite different than selling your standard copier/printer/MFP. The MFP sales process includes selling the equipment, getting the lease documents squared away, bundling the services, equipment and supplies, and moving on to the next deal.
However, MPS is a bit more complicated. It requires a very different sales approach and access to specialized resources. It is, after all, called ‘Managed Print’ for reason - it requires a managed services approach. A true MPS solution involves assessing, planning, and integration for each client environment, so traditional copier dealerships need to evolve if they hope to capture the MPS potential.
What Does It Take to Successfully Administer an MPS Program?
The dealers succeeding in this arena make a commitment to MPS starting at the top – from the owner on down. These dealers have dedicated specialists (SMEs) that arrive at the office every day with a focus on promoting MPS within their current client base and with new business opportunities.
These dealers are also realistic about what it takes. They understand that in order to deliver a successful MPS program, they need to invest in the process and gain access to the right resources and know-how. They need qualified talent trained to go in, collect the data, perform the assessment, and make strong recommendations that will help secure MPS business.
And the commitment doesn’t stop there. Once secured, they embark on the ongoing management process with the client. Depending on the size of the environment, this could mean minimally a review quarterly or semiannually where they assess what’s happened over the previous timeframe to optimize and direct volume to the appropriate output devices. Dealers who are used to the “one time sale” may struggle to understand the level of ongoing commitment and consulting that must be maintained through this process.
The State of Bundling: If It’s Not in Your Default MPS Sales Pitch, It Should Be
Though not all, many of my clients do utilize bundling, as they should. MPS by its very nature is, or should be, a bundled strategy. The majority of the successful dealers are well-versed in bundling - it’s automatic. They see that their clients appreciate how bundling simplifies what could be a complicated billing and reconciliation process. They also understand the positive impact a bundled strategy can have on them, as the dealer.
Bundling Helps You Overcome Challenges on the Admin Side
Bundling takes the complexity out of the invoicing process. No longer do you have to worry about two separate invoices, one for the equipment costs and another for the service and supplies. Bundling combines the two, which creates a nice time-savings for your administrative staff. When your leasing company bills the client and handles the reconciliation process, you take that off the plate of your own back office.
Almost 90% of dealers are on e-automate. These dealers can use GreatAmerica integrations to feed their data directly from the ERP for seamless processing and invoicing. It fully automates the process, saving you at least one or two people administratively. This technology enables more efficiency and more ease of scalability for dealers.
The Positive Impact of Bundling on Cash Flow
Bundling can have a positive effect on the dealer’s cash flow. By billing a minimum number of prints upfront, you can create an influx of cash each month. Additionally, handling a bundled contract in this way makes it easier to implement the necessary annual escalations to ensure your high level of service can be maintained as the cost of doing business continues to rise.
Increased Enterprise Value
Dealers who bundle also tend to see growth in their enterprise value. As the industry continues to buzz with M&A activity, dealers that are looking to buy or sell see the use of bundling as a positive attribute. As a rule, dealers who bundle are more profitable and have a higher level of operating income, which can be very attractive to prospective buyers.
What Challenges Do Dealers Face With Bundling?
Poor Practices in Bundling Administration
There are right ways and wrong ways to bundle. The biggest issue I’ve seen dealers have with bundling has largely to do with the way these contracts are billed and collected. For instance, some dealers bill the CPP charges in arrears instead of upfront. This negatively affects your cash flow and it can cause administrative headaches, diminishing some of benefits of a properly bundled program.
Accounting Processes That Are Less Sophisticated
Even leasing and financing companies can struggle with bundling, so it’s important to understand their capabilities when it comes to bundling. Many finance companies have not figured out how to bundle accurately and timely, leading dealers to consider doing it themselves. However, this can be a problem if they don’t have the right capabilities in-house. In these cases, they need to be instructed on how to do reconciliations and how to get into e-automate. When it comes to MPS, the billing and reconciliation process is a lot more complicated and companies with less sophisticated accounting capabilities will struggle with this process. This is a common barrier to entry, but if you can partner with a finance source who has the capabilities and knowhow, like GreatAmerica, you’ll find it much easier to successfully administer your program.
Customer Objections to MPS and Bundled Contracts
Since bundling is much more effective for you as the dealer, it’s important you understand how to position the bundled solution as it benefits the customer:
• 1 lease agreement!
• 1 invoice!
• 1 payment process!
But even then, not everyone will understand the value of a bundled MPS program straight out of the gate. In fact, it’s quite common that dealers struggle winning deals of this nature. In these instances, the key is to not give up on getting them to agree to a bundled arrangement, even after they turn down the first proposal. Go ahead and sell them on a CPP deal and get them on contract, but revisit 90 days later after you assess their environment. At that point, you can go in with a secondary pitch:
“We’ve been tracking your volume, it appears stable. Why don’t we make it easier for you and combine your equipment, services, and supplies on one invoice for the volume that you’re doing, rather than the way we’ve been doing it the past year?”
So What Does Good Bundling Look Like?
As dealers evolve their businesses from hardware sales to full MPS offerings, bundling can certainly play a role. However, depending on the finance institution you choose, you’ll find that there is a spectrum of options, approaches and capabilities offered. How do you know you are getting the most out of your program?
Use the Industry Benchmark Model
The Industry Benchmark Model is a management tool that can help dealers understand what good looks like. There are 30 benchmarks in the model which allow you to see what you are doing well and where you are falling short. There are a few in particular that dealers can use to set their own benchmarks when it comes to bundling.
Services & Supplies Profitability
For service, 52% gross profit is considered good. On the supply side, you should shoot for 44% gross profit. Bundling is crucial to driving profit in the aftermarket because dealers make most of their money on services and supplies. A properly administered bundled strategy can help dealers reach and surpass these benchmarks.
Equipment Revenue Line Profitability
The reason bundling is so effective at driving profitability in the aftermarket is because it does not expose the price, easing any competitive pressure to whittle down profitability. If equipment, services, and supplies are all lumped together as one price, dealers can negotiate on the equipment piece, while protecting margins on their service and supplies costs. This protects your aftermarket profit while still allowing the flexibility to stay competitive on the pricing of the hardware assets being sold.
With that in mind, 11.5% gross profit should be left in the equipment category with 17% admin expense. On average, a dealer can expect to lose about 5.5% every time a copier is sold. Since the profitability comes through the aftermarket revenue generated on the services and supplies costs, bundling is crucial to protecting aftermarket margins.
Implementing High Level Compensation Plans
Some orders are more valuable to the company than others, like long-term bundled contracts. It’s important to remember, sales people are coin operated, so you must compensate accordingly. If your sales rep is unable to hold the price of the aftermarket, he/she will earn a lower commission. That’s why, if you are thinking about embarking on your own MPS program, you need to consider how you can compensate your programs to motivate your sales representatives to protect the aftermarket.
For example, an order with a five-year lease and a bundled aftermarket at published lease rates and aftermarket rates will pay a much higher commission than an order with a shorter-term lease and discount aftermarket pricing. Depending on the transaction the commission could be twice as high on the non-discounted order.
Bundle on Long Term Leases
As mentioned, five-year leases are more profitable than two or three year leases. If you are doing annual increases, years four and five are the most profitable years of the contract.
Sales reps, on the other hand, tend to like three-year leases because they can churn their base. If they focus on longer leases, they are forced to find net new. Churning the base could make the manufacturer happy, but it’s not good for driving profit in your core business. If your reps are focusing only on churning their base, they are not spending time on the net new business you need to grow your business.
Long term leases on a bundled contract will increase service and supplies revenue. Contracted, longer term relationships are key because, in reality, you can’t depend on the sales rep to maintain the relationships with your customers. Turnover in the sales department is a fact of life, and long term bundled leases add a layer of security into your client relationship.
Do or Do Not – There is No Try
In my opinion, there’s really no reason for a dealer to do anything but bundle. An MPS strategy without bundling isn’t really a true MPS strategy at all. In a nutshell, bundling offers more control and better protection of your customer base. Everything, including the commission programs you have in place, should be set up to encourage and support a bundling strategy on long term leases. If you want to evolve into MPS, build stronger, more secure relationships with your customers and gain a competitive edge to grow your business, it’s time to commit to the offering, invest in the resources, and get comfortable with bundling.
John Hey began his career with the former D.C. Hey Company. He later became president and owner of the company. After reorganizing and repositioning the forty-year old family business, the company was acquired by Alco Office Products (now a part of Ricoh).Mr. Hey was responsible for growing the Minnesota based office equipment dealership from $5 million to over $170 million in sales with more than 1000 employees and ten branch options. This profitable growth was accomplished with a clear focus on client service and through aggressive sales and marketing strategies. In addition, Hey completed more than a dozen acquisitions and consolidations that helped create one of the largest office equipment dealerships in North America. Mr. Hey currently devotes his time to Strategic Business Associates (SBA), a management-consulting firm he founded in 2001. Hey, along with his business partner Todd Johnson, helps companies and industry trade associations analyze, benchmark, and implement successful profit and growth strategies. SBA conducts conferences and provides educational programs focused on the financial model, management training, and organizational development. SBA also assists owners with business sales and acquisitions.