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The MSP Opportunity for OE Dealers - How to Achieve 60%+ Margins: MSPtv Episode 32

Posted December 16, 2014by Tim Lewis

 

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Have any suggestions for an MSPtv episode? Want to give us your feedback? Email us at mspnow@continuum.net and let us know what you think!

 

 

Episode Transcription:

Mark: Good afternoon, folks. This is Mark Connolly, Vice President of Sales with Continuum and I'm delighted to have some special guests with me here today. We got Ed MacLaughlin, who is the CEO and President of Valderus, and then Mitch Morgan and Chris Ryan, our friends from Growth Achievement Partners. Welcome, you guys.

Guests: Thank you very much.

Mark: Thanks for making the trip in. So what we'd like to talk about today is, of course, the office equipment industry. You're all experts and spent a lot of time in that space so we're delighted you're here to chat about it. I'd like to talk about it in general briefly and then get really into managed IT services because that's the topic that I think many of our listeners would be very interested in understanding more about. So Ed, maybe I could start with you and just talk in general terms the office equipment marketplace. How's the health of the market? What's going on in the marketplace today, just in general terms?

Ed: The financial health of the office equipment industry is still really very sound. In all honesty, if a well-executed company can certainly deliver 10, 15, even 20% plus profits of their bottom line, just focus on document alone. The thing that changes over time now is that while it's profitable, the enormous way that it used to grow has just sort of slowed down and the growth of the industry in terms of pages is now in a negative tone. So most of the dealers are concerned where this is going to lead. The reality is that the pages are declining roughly about 3% per year. While it doesn't seem like a lot, it depends upon the demographics inside those pages as to what really impacts what. So they're beginning to realize it's become a zero-sum world.

As a result, they're concerned that they're taking part of the actual disruption itself that's going to occur. And with the compression of the business itself, while it's not growing organically, then they have to consider that the profitability is going to have to be compressed. As a result, they're seeing compressed margins. They're seeing things being a little more difficult to achieve. They're recognizing that they have to create more density. All of the acquisitions that are going on today where dealers are acquiring dealers to get greater density and profitability, that can last for a while, but they need to expand their depth into accounts. And that brings us to why we're here today because one of the avenues that they can take and should take is looking at the IT opportunity incentive accounts.

Mark: Yeah, makes perfect sense. So running good businesses, still making money, good place to be, growth not what it used to be, some impending things that are happening in the marketplace and looking for ways to maybe find alternate channels of revenue would be a way of...

Ed: Yeah, they need to stay close to their core and their core needs to be profitable as they are today. They need to be running a good business before they venture away. But as they are running good businesses, they need to think about what their next steps are going to be.

Mark: Yeah, for sure. And so great lead into talk about managed IT services. Mitch, you deal with people day in and day out around this subject. Maybe a good starting point would be, could we just define for the team here, for the group, for the people listening, how would you define managed IT services?

Mitch: Yeah, that's a great question, Mark. In fact, Ed brought up a great term "depth." And essentially, what dealers are trying to do that we work with, and we've been helping dealers with managed services transition for a number of years, is they're trying to get deeper in their accounts. And managed IT services, I'll talk about that in two ways. One where it's going to be and then where it is today perhaps. Where it's going to be, and for a lot of our clients and a lot of dealers that are out there, they look at it this way. It's all things technology managed for one price per seat. And if you think about it from the context of an office equipment dealer, that's what they provided traditionally as it relates to documents and output.

We need to extend that, get deeper, as you mentioned, Ed, and think about all the things that are related to that technology landscape, and frankly, help customers to be able to navigate that as technology continues to change within their environment. Managed IT services, where it's been is frankly managing servers and work stations through monitoring, through providing help desk services, and being able to focus on core business as an end customer and turn over the running of the day-to-day network over to someone else that is more proficient, has the economies of scale, and understands the technology even better.

Mark: Right. Great. Good lead-in. Maybe Chris, you can handle this one is you deal with the independent office equipment dealers every day. And many who've adopted this and launched successful businesses doing this. Why? I think I know the answer having heard what I just heard, but could you help me, what is the motivation to go do this? Why are they doing it? What's the benefit to them to explore this?

Chris: Yeah, I think Ed and Mitch both touched on it a little bit. First and foremost, for most of them, it's not a huge chasm to jump when you think about getting into managed services. They've been in, on, around the networks since these office equipment devices went from analog to digital. They've got network credibility, they've been supporting those customers in those devices. Over the last number of years, they've also gotten really good at running programs as it related to managed print. So the combination of those two things are within the core, if you will, their core competencies. As kind of Ed described, these are adjacent businesses that fit really well with their model and what they're good at today, recurring revenue, account management, and maintenance. Onsite support as needed and frankly driving and selling a monthly payment towards that all things technology one price per seat. So it's adjacent. It makes sense.

The second this is the community smart. They've always been smart. They recognize the market opportunity. And what we talk to our clients in the dealer community about at-large is how those core competencies that they have are really lining up with how these products and services around managed services and Cloud services are packaged and positioned is the second thing. So it makes sense from a business perspective. And then thirdly, for the strategic dealers that are looking at it strategically, recognize the market opportunity, there's really a couple of components. One is about future proofing your business. We talk about that a lot and Ed had also mentioned that as well. It's how do we build around this really good client base, this really good market presence that we have and this incredible credibility to lead clients through technology decisions and utilization that we historically have done into this new and burgeoning and expanding market.

And then frankly, last thing is relevance, and that one probably makes the most sense when you get into the bull pen and you're talking about an office equipment rep. These guys have done great jobs historically, driving their lease portfolio and making it relevant either when it breaks down or the lease needs to be upgraded. These types of products and services are top of mind for everybody and the sales reps can have really relevant, meaningful, impactful conversations with the clients. So no one thing, but a number of things that frankly all just hone around the core if you go execute it right.

Mark: Right. Terrific. Thank you, Chris. So to that point, if I'm an independent dealer and I am watching this today and I've been thinking about this and I'm hearing what I'm hearing, I'm excited that this looks like something I should do, and there's probably many answers to this, but what would be a few of the business considerations? What do I need to think through? Are there multiple ways I can go attack this thing? Is there a best way to go about getting started or getting launched? What should I think? What are the key things I should think through as an independent dealer as I embark on doing this? How can I learn from what you, folks, know already perhaps?

Mitch: Yeah, absolutely. The first decision is build by a partner and you're going to have to have the capabilities to be able to offer operational service and support to your customers. We're finding increasingly that companies are choosing to focus their efforts on taking care of customers and outsource the back office, if you will. Frankly, the office equipment industry is fortunate that Continuum has made such a strong entry into this space. You've enabled a lot of our clients and a lot of the industry to be able to get there faster. A lot of other companies are looking at acquisitions. We don't think you should wait for acquisitions. Go ahead and get started now while you're continuing to look for potentially a company to buy. You got to have the right resources, personnel resources.

There's a term in the industry that's some of you may have heard. It's called virtual chief information officer or VCIO that oftentimes is key to selling the initial contract and is absolutely key to the expansion of the contract. And then obviously the commitment from the top end, owners have to be involved. Sales leadership has to be involved, service leadership has to be involved. This is a company directive, this is a company decision, it's a not a side business and that has to be thought through and managed through throughout the process.

Mark: Right. Great. Any comments, Chris? Ed? I know you were the one talking a little bit about...

Ed: I would like to underline some of the things that's already been said. First of all, from the top down, absolutely the owner has to be committed. This is not a side business. That's the most crucial thing that was said already. This has to be a commitment to be in a new business, adding a new dimension to the services you already offer. If you're not committed to that, then don't even bother getting started. And the whole concept of build by or partner, to me, it's an open inside case. The first step should be to partner and then you can bridge from there and go to the other things. Building on your own, it's so totally impractical, it's too expensive, and you're going to make too many mistakes along the way. It's easy to buy companies that you know the core. It's not so easy to buy companies you don't know the core. And for me, I would suggest that somebody learn the business first, then take your other options. They still exist. They're always going to exist. But to me, it's just that simple.

Mark: Terrific. So what would be, if you could, this might be a bit of a loaded question, but if I am somebody who wants to get into the business, I heard what I just heard, I'm committed to doing it, what's my opportunity here? Like what kind of margins can I make? What kind of revenue potential is here? I'm sure there's a lot of ways to answer that, but we got some kind of high level thoughts you could share around revenue, around margin?

Mitch: Absolutely, Mark. As you know, Continuum and Growth Achievement Partners have co-authored a business plan. And for all of those that are in the office equipment industry, they know that a business model and a business plan is critical to success. And these companies are really good at driving metrics. And so we got together a couple of years ago and rolled out a business model, the first of its kind for the industry. And that's one of the things that I think is important for them to look at and make sure they're getting the right chart of account and set up and putting the revenue on the right buckets. Some of the metrics that we looked at, the prelabor margin of 60% on services. Frankly, it should be higher than that, but that's the metric in the model. A lot of our clients are getting a lot higher. If you're not getting 60% or more prelabor margin on your services that you're delivering and reselling to your customers, you're probably not going to make the profits that you're looking for and probably not going to make the profits you're used to from your traditional business.

So the cost of that service is extremely important. Another metric that we look at is frankly increasing the revenue per customer. We think it's going to be coming increasingly important metric as we go forward. And we find our clients, when they close a managed services contract, are increasing the spend from the customer by anywhere between 5 and 12x over the current spend for document output and output devices.

So yeah, it's a great way to make additional revenue through depth with that particular customer. So those are some of the metrics that we think are important. Another one with our strategy supported by you of land and expand is that we're looking for increasing revenue of 30% year over year. Meaning, if I sign a contract for $1,000 today with a customer, we expect that to be $1,300 a month, 12 months from today on the basis of some of the additional services.

Mark: Any additional products and services?

Mitch: That's exactly right.

Mark: Okay. Great. Great. Sounds like a pretty healthy business.

Mitch: Yeah, it's a very good business.

Mark: So, a couple more questions and then some final thoughts would be great for each of you to share. But can you think of people you have dealt with that have done this successfully? I know you can, but if you think of people that have done this successfully, are there common threads or the things that they did so if there's somebody listening could kind of learn from that experience and maybe have in there minds as they do this?

Chris: Yeah, I'll piggyback off this one if I can. First and foremost, there are a number of dealers out there that are doing well. Most of them are trying to figure out how to make more profit, how to make more money certainly, but that's what you would come to expect with an annuity-based business, it takes some time. But we would tell you today if you're in the managed services market and not making a profit, you're behind. And that's a harsh statement in some cases because there's some guys that are still determining if they're going to get in or how they're going to get in. You might not be behind in your local market as it relates to your traditional competitor, but you're behind everybody else. And so we used to talk about there's time to catch up. The time to catch up has passed and now you're really going to have to think about strategic partnerships and acquisitions to be able to speed that because you're behind. So that's the first thing.

The second thing, and we talk about this with all of our clients, is we help them get an understanding of what they would expect at this portion of the business to represent in the future. One year, three years, five years. Most of our clients report back that they like it to be 20 to 50% at some point. They need to act like it. To Ed's point, not only do they need to be emotionally committed, they need to be financially committed. They need to be fiscally committed. This is not going to be a whole lot different than the analog to digital conversion that we saw and some guys didn't sign up for that. And if you're not going to sign up for that, it's some of the guys that are selling today.

Ed: The guys that didn't sign up for it are either oil slicks, dinosaurs or dead.

Mark: That's right.

Ed: That's progression upwards.

Mitch: That's exactly right. That's exactly right.

Ed: So I mean, it's absolutely true. I would say that the other piece of this that's so critical and you;ve really touched on it is scale. And you don't get to scale unless you're fully committed to be into it, to grow sizable numbers. Gross margin statistics, in my opinion, are one of the most overrated statistics in business. Because if I get 90% gross margin, but the collective scale of it doesn't equal 10% of my fixed costs, it doesn't matter anymore. So you've got to apply those good margins to developing the right kind of scale to reinvest in your business to be really profitable and to be meaningful.

Chris: Yeah. And that's the best practice that I had kind of back to Mark's question for the guys that are in it and been in it, even the guys that are driving profitable, meaningful revenue and a profitable bottom line. They're going to have to scale the business and they're going to have to scale the business certainly by bringing in additional head count, but acquisition is the way to do that and fill that gap. Strategic partnerships are a way to do that and fill that gap. You could look at some of the best known dealers in the country and they're certainly growing their top line, but in many cases, they're growing it by acquisition, by bringing on adjacent opportunities, telephony companies, carrier services, back up, so on and so forth to be able to do that. So being able to scale scale profitably and effectively is critical. And then kind of the last thing I would mention would be to again piggy back off Mitch's comment, if I was going to look at a dealer principal and say, "You've got one thing to manage," would really look to manage that technology road map, that land and expand opportunity because most dealers have made it through that first round of growth, the client acquisition.

We've brought contracts on, we have contracts on that we're servicing, we've got credibility in the bull pen and externally with our external customers. And getting that contract to grow is critical and sometimes that expansion doesn't get done because we're servicing, because we're trying to grow and not leveraging a partner and/or we're still focused solely on new client acquisition. We're actually seeing that growth that Mitch had described, come way shorter than the 12-month. We plugged it into the model in 12-month, but we're seeing 39% in nine months. So land and expand is what it's all about. And as the owner, if you're going to sign up for this, and you should, one of your activities has to manage the client pretension and expansion.

Mitch: The only other thing I did, Mark, is sales integration. So many of our clients in the companies that are out there today look at this as a separate sales organization perhaps. Those that we find that can work its way into the bull pen, you may have a sales specialist for as far as the eye can see going forward, but you have to get sales leadership and the core equipment reps involved in this because you want to touch every customer. And as Chris mentioned before, relevance is what equipment sales reps are looking for. This is a very relevant discussion to have and you have to get them over some of the barriers that they have to get through, to a place where they'll openly discuss this with customers and be positioning it and feel comfortable with it, then you're attacking the base, then you're truly attacking the base.

Ed: And you have to attack the base to make it more valuable to the company. I mean, we're not done with equipment disruption. The types of equipment technology that are going to disrupt print have not ceased to come forward and they're not going to stop anytime in the future. There's going to be even more disruption. The only way to take advantage and be a valuable part of that disruption is to be deeper and tighter into your accounts and that's the way you have to do it. And that means bringing the core organization in place. Compensation and the reward mechanisms, you get what you reward. Period. Exclamation point, if you want. And you've got to be able to bring it together.

Mark: Fantastic. Guys, that was plenty of content, excellent content. I appreciate it all. Any like a final thought you just, if you had one final thing to say, anybody get anything else that want to add before we wrap?

Ed: Don't sit on your butt. Move.

Chris: Get going with it. It's here today, yeah.

Ed: Don't talk about it. Do it.

Mark: Great. And if somebody wanted a little bit for information, where would you point them, Mitch, Chris, Ed? Where would you point them for some more information?

Mitch: The Continuum's website. You guys have so much good material in there and you can find the business model that we have co-authored there, as well as the Growth Achievement Partner's website. Place to start I think is with that business model, frankly, and then take a look at the model and the metrics and take a look at ways in which you can build the business, if you haven't gotten start it already.

Mark: Fantastic.

Ed: Call Mitch.

Mark: Excellent. Well, guys, I appreciate you coming in today. That was fantastic, hopefully very meaningful for all of our folks listening today and thanks for attending. Take care.

Ed: Thanks.

 

Get Your Copy of the Managed IT Services Business Model for Office Equipment Dealers RIGHT HERE!

Tim Lewis is the Producer of Digital Content for Continuum's marketing team. Coming from Emerson College in Boston, he lives and breathes motion pictures. In his spare time he enjoys petting his dog, Duke! Woof!

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