WHAT’S AFTER MPS? BECOMING A SERVICE PROVIDER Every imaging systems vendor, to varying degrees, is attempting to change their face to the customer by moving to managed print services and, through this, to a pure strategies play. More often than not, this is accomplished through the purchase of an existing provider. While not cheap, it is much faster (speed is everything in this market) than starting from scratch. For example, Konica Minolta purchased All Covered, a national IT services provider. In a prepared statement at the time (January 2011), Konica Minolta stated: “The All Covered acquisition will build upon Konica Minolta’s current Managed IT Services offerings and allow Konica Minolta to extend the reach of solutions and services it can offer its customers. As a result, customers will be able to count on a single source for a broad range of products and services – ranging from industry-leading MFP products, comprehensive workflow solutions to Optimized Print Services and Managed IT Services, all while delivering exceptional value and support.” Analysts in the industry were generally favorable toward the move. For example: “As the printing and imaging industry continues the trans-formation toward a more services-led model, it is imperative for market players to integrate more IT-related services as part of a comprehensive product/services package,” said Keith Kmetz, Vice President of IDC Hardcopy Solutions programs. “Konica Minolta’s forward-thinking move to acquire All Covered gives the company instant legitimacy in providing customers with a wide range of the necessary IT services/ support offerings, along with an already well-established roster of printing and imaging solutions. The combination puts Konica Minolta in a solid position to capitalize on this market’s transformation.” Ricoh LTD took a somewhat different approach by building a services-based business (MDS) internally through the investment of $300 million over the next few years. Success is slow but steady with the company indicating that they have begun 10 customer engagements since April, 2011. A recent press release from Ricoh indicated: “Ricoh is uniquely equipped to help customers achieve their goals through an adaptive, customer-focused approach that includes holistic, vendor-agnostic infrastructure management and a global force of 30,000 professionals reaching 95 percent of the Global Fortune 500. Solutions address a wide variety of challenges around documents, including the growing concern of environmental sustain-ability.” Recently, the company expanded their MDS program to include their dealers through an internal program called Champs. We could touch on virtually every vendor and find some movement into the services business. Still, every one of them will tell you, if pressed, that the services business exists to help them sell (and manufacture) more hardware. Is it working? Well, let’s examine what’s happening with Xerox Corporation. The scale of their services efforts makes it easier to assess its impact on their business model. Two years ago, Xerox Corporation coughed up $6.4 billion to acquire Affiliated Computer Services, Inc. (ACS) then generating $6.5 billion in annual revenue. Many industry observers felt that the two cultures and business models were so divergent that the expansion into the services market (BPO or business process outsourcing) would meet with limited success. Many recalled the company’s acquisition of SDS (Scientific Data Services), which it eventually sold resulting in a loss of hundreds of millions of dollars. There were enough similarities between HDS and SDS to make many uncomfortable. Fast forward to Xerox’s latest quarterly (third) earnings report and we find startling differences in the performance of the Technology (copiers, printers, supplies, service, etc.) and Services groups. From the Technology group: • A4 Mono MFD installs DOWN 19% • A4 Color MFD installs DOWN 16% • Color Printer installs DOWN • Mid-Range B&W MFD installs DOWN 6% • High-End B&W installs DOWN 8% • Digital Pages DOWN (color and B&W) DOWN 3% Yes, there was some growth noted in the color market segment (3% high end, 40% mid-range), but the overall impact was a revenue decline of 1% in constant currency. Services, on the other hand, showed revenue growth of 5% in constant currency. So, let’s accelerate the Services business. Right? Not so fast. First, we note that the gross margin on Services is 11.9% versus 32.7% for the company overall. The lesson? The greater the Services revenue, the lower the overall margin. But wait … there’s more. There are important differences in the way revenue from these two groups will be “booked.” I’m not an accountant (although I did stay at a Holiday Inn last night). When a copier is sold or leased, the total revenue from that transaction is booked at the time of the sale. Service and supply revenues are booked as provided. When a Services contract is closed, revenue will be booked as those services are provided – over the life of the agreement. Yet, there are significant startup expenses incurred up front. The result? The faster you go, the more behind you get. What does this mean for all of our dealer friends? Well, you’re not stuck with the need to continue to manufacture copier products. You’re not even obligated in your business to sell them, if you can find another revenue/profit source. We think you’ll eventually move through the current MPS phase to that of a services provider, whether or not you participate in your vendor’s program. But, do this with your eyes wide open. The business models, as you’ve seen, are very different. • Traditional MFP sales model – up front revenues with deferred expenses (service). • Services sales model – up front expenses with deferred revenue. There is no doubt that you will have to change your business model in order to continue. But, be ready for significant differences in margins and cash flows as you begin. Lou Slawetsky is the CEO of Industry Analysts, Inc. Much of the company’s research and testing results can be viewed on their website www.industryanalysts.com.