Are Managed Print Services the future?

The 80/20 rule applies to printer sales just as much as it applies to any other aspect of business and 80 percent of the printers out there are being sold by just 20 percent of the resellers. Which side of the divide do you want your business to be on?

If 80 percent of the resellers out there are not paying much attention to printer sales it’s hardly surprising. The big growth area in the early part of this decade was in inkjet printers and much of that business went the way of the retailers. If you are not an Officeworks, Dick Smith or K-Mart, then selling a lot of low-end printers is probably going to cause you more trouble than it’s worth.

The low margin position of these products make them perfect for volume distribution and volume retail and selling to Mums and Dads, or even small business. A low-end inkjet is not going to do much more than pay for a few beers after work on Friday night.
“You would be mad to try playing in the retail space,” confessed Graham Harman, general manager at printer vendor Oki Printing Solutions. “It is a very, very congested and price driven market. The retailers are enticed to buy significant amounts of product by vendors who take turns at trying to buy market share. There is always somebody trying to buy that business,” he said.

“We have been there and found it a very expensive business to be in. The buyers are not huge consumable users and the money in it is so low that a reseller can’t afford to give any advice or deal with any problems that might arise later,” he warns.

As the decade progressed however, the impetus moved to multi-function devices and colour lasers where the SMB and corporate markets still held some margin for resellers. Harman points to the opportunities for colour in the SME and enterprise space suggesting that end-users have tried colour inkjets and now they want more. Colour inkjet printers have introduced office workers to colour at home and now they want colour in the office. They also want better colour, “dramatically better colour” he says playing to Oki’s strengths, but even colour margins have eventually begun to erode due to
the market entry of cheaper models in this space, according to Belinda Marsh, marketing manager, Kyocera Mita Australia.

Really, the useful margin from laser printer sales disappeared years ago and compression has become something of a cliché, points out Rishi Ghai, program manager ANZ for Hardcopy Peripheral Research at IDC Australia. Despite that, vendors still argue there is money to be made by savvy resellers willing to work to the market conditions.

“There are two ways of making money out of printers,” said Tom Lewis, marketing manager at Fuji Xerox. At one extreme is the low-cost, high volume model such as the retailers. Often the strategy is to use the printer as a value add on another sale such as with a PC. The printer is another element of the bundle. At the other end of the scale are Managed Print Services (MPS) or fleet management and servicing, he says. These specialists have a higher cost model, but enjoy an annuity income from the services they provide and offer a better margin to boot.

Both Harman and Lewis agree that if selling printer hardware is your strategy, then you are leaving money on the table if you are not working to maximise your connection rate on the consumables. Lewis estimates there’s only about a 25-30 percent connection rate between the consumables sale and the people who sell the printer, while Harman tells of one Brisbane-based reseller who is pro-actively trying to sell consumables into his installed base and still only gets about 50 percent of the business.

Even that can be a significant amount over the life of a printer where the consumables spend is likely to be anywhere between five and ten times the up-front cost of the printer. Much of this goes to regular office stationers because resellers – who sell the bulk of the printer hardware - are not doing enough to secure this business.

And the stationer’s are booming as a result. Harman said that as much as 45-50 percent of their revenues are in high margin IT consumables. “Most of them have never put a piece of hardware on any desk in Australia, they didn’t recommend it, they didn’t supply it, they didn’t install it and they don’t fix it,” he said. “Resellers are doing the hard yards getting the box out there with tight margins, but the easy consumables business is going to the stationer.”

Much has been written and said about this disconnect, but resellers are still hesitant to take action by pro-actively selling consumables. So to help the channel make money out of printers, they are increasingly turning to the second method – Managed Print Services.

There’s no doubt that getting a cut of the profit every time somebody presses the print button is attractive, but providing print services can be more difficult than it first appears. Before a deal can be structured the reseller has to work out what it will cost them to service the solution. That involves not only working out a cost-per-copy – which is problematic enough – but an audit of an organisation’s existing printer fleet is likely to uncover a vast un-managed group of disparate machines including everything from inkjets to colour laser MFDs from a variety of vendors.
Taking on such a fleet means not only being able to supply consumables and parts on demand for every machine, but also having the technicians available to maintain and provide break-fix servicing for the entire fleet – possibly in multiple locations. It’s enough to turn your average network- and server-focused reseller off the whole idea. That’s where the printer vendor steps in.

“Managed print services are not anything new of course, they been around they have been around for a while,” pointed out Ghai. “It is just that there wasn’t a very structured approach to providing these services in the printer market,” he said. “The large printer vendors have had a solid amount of MPS contracts in place, but in terms of go-to-market there wasn’t initially a clear strategy from most players.”

The shift to Managed Print Services is none too surprising. It follows what has become a familiar pattern in the industry as just about everything else seems to naturally migrate from product to service. It is the scale that is changing the landscape the fastest.

“What has been happening over the past 18 months is that vendors have been trying to build out a structure around MPS. The goal is to make it available to different levels,” said Ghai. “Where in the past it was only available to large key accounts, now the vendors are looking at providing it to smaller entities.”

“Naturally, that triggers a channel involvement. In the past the trend was for vendors to provide Managed Print Services themselves using their own staff. Now they are trying to make it broad-based they need the channel to partner with them and take the solution to a much wider audience.”

Lewis at Fuji Xerox said DataQuest research suggests that business printing costs can be characterised by a 3:2:1 ratio. Of the total printing cost, one sixth is the cost of the hardware, two sixths are soft-costs incorporating everything from walking too far to the printer to under-utilised asset cost, while three sixths , or half, is the cost of management.

It’s this half of the printing cost to organisations that represent the largest opportunity to resellers. And printer vendors for that matter. The actual cost of printing stuff onto paper only represents around 10-15 percent of the total cost. The channel can develop a win-win proposition by helping companies reduce their soft printing costs while also shifting the management burden to the reseller (for a fee).
This is the type of service that photocopier companies have been providing to business for years and that printer vendors and print specialists such as Imagetec have been offering to large enterprise in the last few years since multi-function lasers began to take precedence over copiers in the workplace.

But a considerable opportunity exists in the mid- and even small market not previously serviced by these print specialists or in-house vendor staff. According to IDC’s Ghai, the percentage of firms currently taking advantage of outsourced printer services in Australia is still very low. High enough to show there is some interest, but low enough to demonstrate a significant market potential.

“There is certainly a good level of interest,” said Ghai, who explained that two recent research papers; Australia Printing and Imaging Opportunities in Large Businesses and Australia Printing and Imaging Opportunities in Small and Medium Businesses, demonstrate the vast opportunity in the market.

IDC estimates that if you look at the Australian market overall, taking in small, medium and large businesses, there are currently about 20 percent partially or selectively outsourcing their printing requirements. Another 10 percent are fully outsourced. Ghai estimated that “leaves a relatively a large chunk” of organisations, maybe as high as 50 or 60 percent of all Australian companies who are likely to benefit from utilising Managed Print Services, but do not yet outsource any of their print services.

The market, he suggested, has not developed quite as fast as the printer vendors would have liked. With the largest organisations already targeted, signed and contracted for advanced print management, deals either direct with vendors or through the 20 percent of resellers who are ‘specialising’ in print, it has quickly come time to downscale the offering to expand the market.

Scaling this down to the mid- and small business market is not straightforward. There are significant barriers to entry for resellers as described earlier. Think about it, call centre, helpdesk and software management, software and a server for status monitoring, break-fix response to a customer’s premise with a service level agreement perhaps of only a few hours. In contrast the photocopier companies have the scale and infrastructure already in place to deliver this sort of service and a migration to laser printers has been relatively easy.

It is difficult to have a comprehensive on-call solution for smaller organisations that perhaps only have a handful of printers and certainly not enough to have somebody on site permanently. What’s needed for the mid- and small market is a tiered approach with the vendor and reseller sharing the responsibility and delivering their own unique part of the solution.

Before the IT channel gets involved it needs to review the type of programs on offer from the vendors out there and pick ones that both they and their customers are comfortable with.

The larger printer vendors started changing their strategy last year and now others are following suit, putting together packages that target smaller businesses. Marsh at Kyocera, for example, said her organisation is also looking at programs that can help resellers deliver Managed Print Services. “MPS clearly offers opportunities for growth to vendors and their channel partners who take the time to get it right up-front,” she said. “Those organisations that get in early and get it right will reap the most rewards.

“At Kyocera, maximising channel partner growth is critically important to our success. We see no reason why resellers cannot succeed with larger organisations in this space, when driven by a sound strategic approach,” explained Marsh.

Late last year, Lexmark launched TotalCare, a channel offering for Managed Print Services targeting small and medium Australian businesses. TotalCare bundles the printer hardware, toner supplies, maintenance and warranty services and charges it as a flat monthly fee. Lexmark takes care of the rest. It facilitates the finance and handles all the phone support, break fix and toner fulfilment. Like other programs, the deal trades-off a lower, fixed price for the customer that helps the vendor by stopping consumable sales leaking to grey or compatible products.

It also helps to ensure the relationship between customer and supplier remains close to reduce the chances of vendor churn when the life of the current printer ends. Rather than focus on an ongoing annuity for the reseller, the TotalCare program puts the margin straight into the hands of the reseller when the deal is first signed.

It seems all programs are different though. The go-to-market strategy at Fuji Xerox is based more on the pay-per-print structure familiar in the photocopier market. Lewis said the program, called PagePack, is “entry level” and designed to be suitable for end-user accounts with between 10 and 50 printers.

Once you get up around 100 printers or more in the enterprise space, he said, the requirements and deals naturally get more complex and so more skill is required on the part of the reseller. With PagePack there’s some skill required, but not much, explained Lewis.

PagePack is designed specifically to reduce the barriers to entry for resellers and customers. Think of it as a white label Print Management Service offering. Fuji Xerox monitors the printers, carries the consumable inventory, handles delivery, takes the coverage risk, provides break/fix servicing and then leaves the reseller to set the price to the customer.

Unlike the Lexmark offering which is a set price for the term of the contract, the Fuji Xerox service is a private labelled price-per-print solution. Fuji Xerox charges the reseller a wholesale price and then the reseller is free to invoice the customer at whatever margin they choose.

“You basically install the PagePack software and the meter reads are sent back automatically to us. There’s no manual process for the reseller or end-user. We then give the reseller an itemised summary of all the customer contracts they have sold and charge them a wholesale cost. They recharge the customer,” said Lewis.

The idea is to take the risk and most of the hassle out of the service provision. Delivering a managed print service yourself means carrying out an audit and taking the risk on the variable costs associated with page coverage. The industry standard is about five percent coverage on a page, but this is just a rule of thumb, when it comes down to individual customers this could vary considerably so entering into a print contract without an adequate audit could end you in hot water.

The Lexmark TotalCare contracts tackle this by bundling only a fixed amount of consumables into the deal. If the customer goes over their limit they will have to start paying again, but with PagePack, Fuji Xerox is taking on the risk itself.

“The supplies are paid for up front. We take on the cost of the infrastructure, the cost of holding consumables, the cost of fulfilment and the risk on page coverage. The software can then be reseller branded, they control all the communication with the actual customer and they control the margin. There’s a lot of value-add for the reseller,” said Lewis.

The contracts are only available with new printers and it doesn’t include the printer itself. “It is only a warrantee and pages contract, they can bundle it with the hardware or de-bundle it,” said Lewis. So the customer can pay for the hardware up-front or the printer can be purchased under finance and charged back to the customer at a monthly interval along with the page costs.

There’s a potential sting in the tail here though as Ghai points out. It seems likely the attractiveness of these sorts of deals will hold only short-term appeal for resellers. Ultimately the channel value will be eroded just as any other margin erodes.

While vendors are initially making these entry-level print solutions available to a select group of authorised resellers, ultimately it seems inevitable they will become more widely available which will re-introduce margin compression back into the sale.

“The danger is that making it so broad based it will become analogous to the hardware,” warned Ghai. “If those packages are floated in the market, as they will eventually be, the competition starts and the margins will deteriorate,” he said, adding that you can imagine reseller organisations selling vendor-fulfilled Managed Print Services straight over the Internet on a wholesale price plus basis.

It’s something the vendors have obviously already predicted. Lewis emphasised that Fuji Xerox is vetting the resellers who can access the PagePack deal to ensure they are able to add value to the partnership, but it seems inevitable that once vendors are comfortable with these services as product packages, then more resellers will be encouraged to take them on.

For this reason, Ghai recommended resellers who are interested in making print services a strategic business direction should seek to partner with vendors who are able to offer training and opportunities to participate in more complex management solutions. If vendors want to go through the channel, they will have to offer some intermediate service solutions and then some more complex services.

Overall I think the channel has the ability to do more than it does, said Ghai, but if their core focus is selling they might not want to move away from that to take on service provision. However, if the vendors explain it to them properly, if there is adequate training available and if vendors make it worthwhile, resellers will respond.

Those who see Managed Print Services as an opportunity should try to work with a partner that will help them raise their skill levels and introduce them into accounts where they can focus on more complex modes of engagement rather than white labelling a solution from the vendor.

There are a number of vendor options in the printer landscape, so resellers should shop around before committing. If the vendor partner can meet the reseller half way as suggested then it will mean profits for the vendor and healthy margins for the reseller, who can also supply other goods on top of the printer sales, such as PCs and a wide range of peripherals.

Those reseller organisations who treat Managed Print Services as a more strategic direction may even choose to not partner with a vendor at all and avoid the pre-packed programs so they can offer unique services independently of a single vendor to avoid potential channel conflicts.