Are You Maximizing Your Business Potential?

Greece’s fiscal crisis is a clear indication that the global economy is not totally out of the woods. The “Great Recession” came in with a roar after Lehman Brothers filed for bankruptcy in September, 2008, and by most economists and Government accounts ended in the second half of 2009. Today, the US appears to be experiencing some level of recovery in almost all sectors, albeit against week comparables from last year.

Strategy Development’s copier company clients are experiencing year on year equipment growth and year on year click growth, although against weak comparables from last year in the copier segment. The big question is sustainability—does the short-term growth result in a sustained growth run.

Unfortunately, many companies react based on what is occurring today rather than on sound planning. If business is down—throw some bodies at the problem and when that doesn’t work, and you’ve needlessly drained cash—take an ax to expenses. If business is going well don’t take the time to understand “why” simply enjoy the ride. Yet history demonstrates that without planning and innovation the good times end and the bad times usually get even uglier.

I would suggest that now is not the time to be euphoric about your growth against weak comparables. Enjoy the additional revenue, operating income, and cash flow, but take the time with your senior team to understand where the industry is headed and how your business can properly invest today to be a leader tomorrow. Moreover, don’t assume that “better” is “best,” look for areas to increase revenue, improve gross profit, and reduce general and administrative expense (G&A).

Those of you that have heard me speak on business planning know that I use a concept of “air cover,” where I look for short-term gains in high leverage areas to provide me the investment dollars to grow the business. Service and back office operations were always two of the areas I looked to leverage. Both back office operations and service are quasi production environments. Without deep understanding of these areas of the business it is difficult to maximize gross profit and minimize G&A; yet they usually provide the greatest opportunity to provide the “air cover” you need to invest in growth.

MPS adds complexity to back office operations and service because many aspects of the MPS agreement are foreign to employees of a copier company. E.g., there were 100 devices on the initial assessment, 104 at the first quarterly read—plus three totally different from the initial assessment—then on the second quarterly read there are 103 devices, two reappeared from the initial assessment, and two others are different from the prior reads. And oh yea, the rep added four devices, changed the minimum and CPP rate, and extended the lease out six more months! Service has to deal with five different vendors and 18 different models.

Let’s say service represents 40% of your revenue and with the correct processes you can improve margins by 5%: That added 2% to your bottom line. Let’s assume you are in the 19% - 22% G&A range of most dealers and with the correct back office processes you can reduce that by 2%. You now have 4% operating income improvement to invest in sales. Isn’t that a lot more logical than hoping the new sales employees can outrun their expense? After all that expense coverage from sales never happens but by taking the “air cover model” you now you have money to invest in growth without feeling the severe pinch of cash flow.

Unless you have a team of analyst to run off and research back office operations and service—or you want to go down the trial and error route—you’ll need help. Fortunately for you Mike Woodard, service consultant and Jim Boulden operations consultant from Strategy Development have the experience to help you get your air cover. Every dealer engagement Mike and Jim have entered has had a three to four month payback period with ongoing savings that could be invested in growth. These two guys provide you the air cover!

If you are nervous about entering a consulting engagement enroll your team members in one of the classes they put on through BTA: MPS Operations and Service or Service Management University (SMU). Jim also instructs, along with Ed Carroll and me, BTA’s business planning workshop.

What about MPS? Where do you think you’re going to make those investments! Our MPS clients also experienced year on year click decreases on a comparable basis (same customers) during the recession (keep in perspective we’ve been consulting in MPS since early 2006); but they experience substantial overall growth because they were continuously adding new customers. How is your MPS program going—honestly? I add that qualifier realizing that it is hard to be honest when everybody you speak to says they have an MPS program, and at least in public, tell you it is going “GREAT.”

Strategy Development consults for the most successful MPS providers in the country so we know what great looks like. You want the first indication that “GREAT” may not be that good? When you are quoted a quantity of prints they manage (our start-up MPS clients did that until the figure was bigger than McDonald’s hamburgers sold). Let’s be realistic here: That “3,000,000 print” contract actually means 50,000 prints per month or $750 per month (most companies use 5 years as the multiplier even if the contract is for 3). And “we’re managing 60,000,000 prints” means they manage (maybe) 1,000,000 prints per month or $20,000 per month: Decent revenue for one rep 12 months into the MPS business.

What is good? Hyper growth to simplify the answer but here’s a quick financial look. After 12 months—from dead start—a good MPS specialist will be managing $24,500 in monthly recurring aftermarket revenue. After two years that same single rep will be managing $64,500 in monthly recurring revenue and will have sold $360,000 in equipment the second year; in other words your single rep will be a $1 million plus business by the end of year two. Use these figures to really get successful in the space! If you want to realize these results attend BTA’s Managed Print Services Workshop or download licenses from InfoTrends MPS Sales eLearning workshop through the BTA website (at a discount to members) or directly from InfoTrends.

What about copiers? According to the research firms you will continue to see year on year unit decreases. That doesn’t mean you cannot grow; you will need to increase your market share with better programs or processes than your competitors. Attend our BTA Sales Management program, or if you are a KMBS dealer the KMBS Sales Management Workshop, subsidized by KMBS and instructed by Strategy Development.

Finally, to tie it all together BTA has the Business Planning Workshop.

You probably see a theme here in that Strategy Development and the BTA have a training program for every ailment. Believe me SD didn’t invent the ailments we simply developed training programs to help dealers/resellers overcome the issue they face. We are in the business of helping you achieve success. Primarily, Strategy Development accomplishes that through our consulting engagements but the seven of us cannot possibly think we can touch all 2,500+ dealers with our consulting. BTA is also focused on helping the dealer community achieve success and we choose each other as partners to help dealers thrive.

Things are good now because most companies have very easy comparables from last year but don’t take long-term success for granted. Whether or not you work with Strategy Development, take the time to put together a business plan and take into consideration the environmental issues affecting the industry.

Sea Change For the Copier Dealer

For years making a healthy profit has been a fairly easy formula for the principal of a copier dealership: Increase your unit placements, provide high quality customer service, and reap the benefits of the profitable aftermarket stream (defined as supplies, service and parts). Actually, it is a model similar to many, car dealerships being one that comes immediately to mind. Hold that example as we progress through this article.

This model of success was formulated during the late seventies and throughout the eighties as the industry flourished with technological advancements, product extensions, and year over year increases in units sold.

Many times the dealer channel has been told that there was a Sea Change occurring. First, companies like Alco (eventually IKON) and Danka were acquiring the independent dealer channel with the promise of leveraging efficiencies of scale. Some dealers wondered how they were going to compete against these behemoths. That fear never materialized as the Goliaths impaired themselves with poorly executed strategies.

Next, the transition to digital was going to be the tar pit of the copier dealership as network companies controlled the network. Remember the saying; whoever controlled the network controlled the output? Then came production units and the pundits who said that dealerships could never understand the space or afford the investment to be successful. This led to those that said the direct operations would be the death of the copier dealer. In reality, those direct operations that were not run to produce profit seem to be hurting the manufacturers themselves, but that is another subject.

I am confident that the Sea Change I am referring to is not a mirage: Year over year unit sales are declining—and rapidly. As detailed in a ChannelWeb article (see previous post) , Gartner reported that year over year fourth quarter shipments of copiers and printers in the professional segment, as opposed to consumer segment, declined by 25.3%. I saw a report by another research firm—included in a presentation so I am not quoting it since I did not see the original—that showed 2008 copier unit placements decreased 200,000 from 2007 and a projection that they would decrease by another 190,000 units in 2009. Placements were projected to decrease from 1,355,000 in 2007 to 963,000 in 2009. In case you are curious color was down year over year and projected to fall again and overall units were forecasted at 813,000 in 2012.

The dealer community has adapted to the roll-up years, the transition from analog to digital, into the color world, the proliferation of direct operations and the product extensions into the production space. And many of the dealerships around the country will adapt to the dramatic decrease in unit sales. The same can be said of the manufacturers: Many will adapt.

The other side of that equation is that there are quite a few that will not adapt. On the manufacturer side—and this has been said for years by many industry players but I think the time has finally arrived—there is simply too much distribution.

So back to that car dealership comparison; when we were buying 15 million + cars it was hard for a dealership or manufacturer to make a fatal mistake. Manufacturers produced inferior products and wasted billions of dollars in a multitude of areas. Car dealers were happy as the manufacturers drove traffic into their showrooms through big incentives. Then, unit sales fell 30% or more in a short period of time (sound familiar), the manufacturers cut back on incentives they could no longer afford to fund, and car dealerships (and soon it seems manufacturers) begin to fail.

The copier industry has a long and rewarding future for those dealerships that plan well. The second half of that statement is very important. If the predictions are accurate copier placements will decrease by 40% over the period 2007 – 2012. Combined with lower average unit selling price, the proliferation of printer based MFDs, and A4 units replacing A3 and you have a significantly lower revenue stream. Offsetting those decreases are color pages and capturing the prints made on the printers—print management or MPS. I believe the latter is a significantly larger revenue stream than the former.

But dealerships will also need to address high general and administrative expenses. At Strategy Development we believe that dealerships need to strive for a 10% G&A within the next five years. Our operations consulting practice is helping dealers put the plans in place to achieve that goal. We also believe that you need to maximize the return on aftermarket; our service consulting practice is helping dealerships achieve that goal. Our MPS practice has helped scores of dealerships launch successful print management initiatives; a must have to thrive in the future. And finally, and most important, you need a solid plan that ties together all of the aforementioned moving parts so that you are one of the dealerships that thrive through the Sea Change.

Get your plan in place, execute, and thrive!

This piece was also published in Document Solutions Daily (www.kworkpublishing.com)

Don't Cut Your Prices!

I realize that we are in a poor economy and that revenue is one measurement you always want to focus on, but cutting your prices is a death spiral. And don’t give me the cash flow reason either: the cash flow statement starts with the entry for net income. Lower prices results in lower margin, which results in lower net income—all else equal.

There are a lot of reasons for the death spiral comment. One is the cultural change you will instill in your sales force. If you have spent the last decade developing the team to sell value and fight for profit using enablers such as advanced capture, document routing, or variable data , and then send the message “get the deal at all cost,” your decade of work has evaporated in six words.

Once you get your sales force accustomed to selling on price how hard will it be to switch them back to value when we exit this economic trough? I would tell you it is next to impossible.

At the company I worked at prior to Strategy Development the CEO rolled out a new pricing and compensation structure for the sales force. Since I ran the largest business unit, and the only one gaining market share, I had my finance team run some Monte Carlo Modeling on the plan to see how it was going to affect our revenue and profit. The modeling demonstrated that GP would decline by 300 to 400 basis points and, depending on the mix of business, could actually increase compensation: Lower GP with higher compensation, about the ugliest of scenarios.

The CEO and I had what I’ll term as, robust discussion on the program (I always took delivering my results seriously). After this robust discussion we came to the conclusion that we had two distinct philosophies on strategy, and I left. Since it was a public company I could follow the results. The next quarter equipment GP decreased year over year by 430 basis points and the Wall Street Analyst annihilated the CEO on the earnings call. Even though it was a topic of discussion every quarter thereafter, the GP never recovered. That company spun out until it was ultimately acquired at what looked like a bargain, a significant discount, relative to other public companies acquired in the space.

The point is not that the modeling my team produced was accurate—who cares because I failed in delivering the message so that it would be heard—but that even with extreme focus and three years of opportunity that company could never get their margins back up. Don’t cut your prices!

So what actions should you take? Make well planned and strategic investments in sales and fund those investments by optimizing your service operations and your back office operations. Exiting the current economic trough in a position of strength is one big reason to focus on these two areas but another looming issue is that your new competitors—the VARs and print management companies stealthily entering your space—have G&A in the mid to high single digits. Most BTA channel companies have G&A in the high teens to low twenty percent area. Set your five year plan now to get G&A to less than 10% and to maximize service returns.

The next couple of entries will focus on how to accomplish these goals.