Managed IT Services Increasingly Seen as a Key Diversification Strategy
by Business Technology Association (BTA) on Tuesday, September 15, 2015
Are you actively working to diversify your product and services portfolio with an eye on increasing the value of your dealership and ensuring its long-term success and viability? Like it or not, current document output trends, the changing workforce and ever-evolving technology are collectively providing compelling reasons for today’s office technology dealers to seek additional revenue-generating opportunities in order to ensure continued growth. For many, managed IT services has been embraced as one of the key strategies to achieve that growth.
"If you look at what is happening in the copier world as a whole, you can see that manufacturers are all positioning themselves to be more than just hardware providers," says Britt Siedentopf, manager of managed services for LeapForward Managed Services, a new offering from Muratec America Inc. "They realize that the copier and printer side has become more of a commodity than anything else. Sales are declining; people aren’t buying as much as in the past. That’s just the way it is.
"Look at Ricoh; they made a huge investment with the acquisition of mindSHIFT," Siedentopf continues. "And Konica Minolta, of course, bought All Covered. These companies know that whoever controls the customer’s infrastructure and the management of their data wins. We are all scrambling to try and do that, as are our dealers. Muratec sees this and, so, is looking to diversify what it brings to its dealers."
Michael Amiri, senior director of the dealer division at Continuum Managed IT Services, now partnering with more than 150 dealerships, offers a similar perspective. "You should transform your dealership so that it has a more diverse product and services mix," he advises. "We all know that copier and printer activities are flat, if not declining. All dealership principals are looking for additional sources of profitable revenue."
Amiri is pleased that dealers are increasingly looking to managed IT services as a key diversification strategy, noting that office technology dealerships are ideal for the services offering. "About four or five years ago, we did a pretty healthy amount of market research," he says, referencing Continuum’s search for its "next generation" of partners beyond today’s traditional managed IT services providers (MSPs). "We found that there are two main channels that are poised to be that next generation — one is the office equipment channel, the other is the telecommunications channel. Both of these channels are perfectly suited for success because they have large customer bases and today’s marketplace is demanding credible IT support from trusted advisors."
While MSPs still compose approximately 90 percent of Continuum’s partners, they generally have "many fewer sales representatives as compared to office technology dealerships," Amiri says. "When you bring in a dealership — with sometimes up to 50 or so sales reps — the revenue opportunities for both of us are so much greater than through traditional MSPs. From a revenue perspective, the office equipment channel is absolutely our highest growth provider year over year."
Amiri provides a sense of the amount of revenue that a dealer can expect from managed IT services over time. "Take a dealership that has 3,000 customers," he says. "If that dealership could get just 5 percent managed IT adoption among its customers in three years, that would be 150 contracts. With an average of $1,500 a month per contract, that represents $2.7 million in annual revenues in three years.
"What is reasonable and what can be expected?" Amiri continues, regarding the percentage of dealership revenues generated by the opportunity. "Our forecast would be that within three years, IT services should represent 10 percent of the dealership’s top-line revenue and, within five years, it should be 25 percent of top-line revenue."
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"A lot of our partners — especially the ones who are doing really well and achieving high profitability — envision growing managed services to at least 50 percent of their revenue over the next five years with our support."
Lindsay Dick, director of sales for Collabrance LLC, the managed IT services subsidiary of GreatAmerica Financial Services, reports even higher expectations and success among Collabrance partners. "A lot of our partners — especially the ones who are doing really well and achieving high profitability — envision growing managed services to at least 50 percent of their revenue over the next five years with our support," she says. "They want to have fewer customers, but more revenue per customer, which makes their sales costs lower and their profitability higher. This also improves their stickiness with customers for long-term relationships and positions them as true trusted advisors."
Though increased dealership revenues can be achieved in the short term, reaching profitability in managed IT services may take some time. Each year, Strategic Business Associates (SBA) surveys members of four office technology dealership collaboration groups, collecting details on their financial performance. "This year, that included 127 of the top dealerships in the nation, with $2.1 billion in total revenues," says Todd Johnson, a partner in SBA, noting that 60 percent (76 dealerships) reported some activity in managed IT services. "As a group, the dealerships reported a 6 percent operating loss in 2014. That is not to say that some dealerships aren’t experiencing a profit; 27 of the 76 dealerships were profitable, but their profits were far outweighed by the operating loss of the rest."
Third-party managed IT services providers — offering dealers and their customers such services as network operations centers (NOCs), help-desk support and remote monitoring and management software — acknowledge that it takes time for dealers to achieve profitability. Says Amiri: "You’re likely not going to be profitable in the first year, but your efforts should produce 60 percent gross margins with a mature operational model." Says Dick: "We inform our partners, ‘It’s a smart investment and your return will occur much more quickly in the first year or two if you follow the best practices, training and business-planning strategies we recommend.’"
Johnson says SBA is often asked why it takes some time for dealerships to achieve profitability in managed IT services. "We reply that the IT services business is quite unique compared to our traditional imaging business, requiring different skill sets across the whole organization," he explains. "We think dealers are paying the ‘dumb tax’ as they get into a space that has such a steep learning curve. Our advice to dealers is to make sure their core businesses are healthy before heading down this road. We also believe it is smart to partner first, and then progress to building the infrastructure."
Although he reports that many dealers are not yet achieving profitability with managed IT services (and even with the current "dumb tax" assessed for some as part of the learning curve), Johnson emphasizes that dealers should consider the opportunity — but only when they are ready. "There is definitely a place for BTA dealers in this space," he says. "It represents a great avenue of growth, but not all organizations are ready for the challenges today."
Meeting the challenges involves, in part, having properly trained personnel in the dealership, particularly when it comes to selling managed IT services. "We believe that sales training is equally important — if not more important — than training on the technical side," Amiri says. "The dealership’s success here goes hand in hand with its sales team’s effectiveness and ability to go into the customer location and tell the right story. Dealers who don’t emphasize IT sales training and IT sales support will struggle. Those dealers who place an emphasis here will succeed and ensure their sales teams will enter this marketplace with the utmost confidence."
Siedentopf likewise notes that the proper training of sales reps is paramount. Under the LeapForward offering — which includes providing the dealer’s IT customers with the necessary hardware infrastructure as well as live, U.S.-based help-desk/NOC services and Internet connectivity all under a monthly per-user fee — "‘Copier techs’ can perform the on-site service calls," he says. "It is more important to invest in the people who will be out there selling managed IT services. These specialists must have knowledge of the sales process and business acumen. This is more of a business conversation, not a technical conversation with the customer."
On the service side, most of the IT issues experienced by the dealer’s customers can be handled remotely by the third-party managed IT services provider in cases where the dealer opts to partner with such a company. Amiri, for example, reports that Continuum typically handles up to 90 percent of IT issues for a dealer’s customers, in a "white-label fashion," through the company’s 700-plus NOC technicians and help-desk engineers. Similarly, LeapForward’s dealer customers can expect to make "one on-site call per month per 100 users," Siedentopf reports. "So, it is very low."
Even with most of the IT service issues being handled by the third-party providers — as in the case of Collabrance, Continuum and LeapForward — the vendors emphasize that dealers moving forward with managed IT services cannot take the opportunity lightly and must recognize the high level of commitment that is necessary. "You cannot just put your toe into it," Siedentopf says. "You have got to be fully committed, and that commitment must start with the C-level in the dealership; if that individual isn’t fully committed, it’s not going to happen."
As dealers seek to diversify their product and services offerings in order to generate additional revenues, more may want to consider making the commitment to managed IT services, particularly given the growing number of partnering options. There are also the high expectations for the dealer channel going forward to consider. "If the past three to five years are any indication of the next three to five years, then we would fully expect the office equipment dealer channel to become the preeminent provider of managed IT services," Amiri says. "I think that if you asked the customers of dealers today if they would rather have more or less vendors, the vast majority would say they would like to have less vendors, as long at the vendors are trusted advisors. Again, that’s where dealers are perfectly positioned; they already have that trusted relationship with their customers."
Brent Hoskins, executive director of the Business Technology Association, is editor of Office Technology magazine. He can be reached at email@example.com or (816) 303-4040.
www.officetechnologymag.com | September 2015