Q2 Trends: Copier Dealer Progress in Establishing & Growing Profitable Managed IT Services Practices

As the largest-scale and most accurate benchmarker of copier dealers intentionally building IT offerings, Service Leadership has launched a series of quarterly 15-minute C-level webcasts as a service to all copier dealers. This Q2-2016 Trends analysis, recapped and shared with you here to launch the quarterly webcast series, reveals the most recent Service Leadership Index® benchmark results on copier dealer IT revenue growth and gross margin production, and answers the question: Can Copier Dealers Be Profitable in the Managed IT Business?

IT Revenue Growth

As the chart below shows, Office Equipment Dealers (OEDs) grew their IT revenue substantially faster than their IT company competitors did in the Q2-2015 through Q2-2016 timeframe.

IT Revenue Growth

We believe this is for two reasons, as you have heard us say before:

  • At the same company revenue size, OEDs typically have a much larger base of existing customers than do IT companies; about 10 times larger. This means that OEDs can capitalize on many more existing customer relationships in their geography than can their IT company competitors, who must get more of their revenue growth from new account conquests.
  • OEDs in general – though they often don’t believe this – are significantly better at running outbound sales teams than are typical IT companies.

Put another way, the outbound sales model present in the majority of copier companies, regardless of how well it works or doesn’t, is present in a small minority of IT companies. While training copier reps to try to sell Managed IT is not a best practice (it is low Operational Maturity Level as we call it), capitalizing on the traditional copier rep’s relationships with existing customers using a Subject Matter Expert (SME) sales model is, and it works well. The intermediate step for copier dealers of having dedicated Managed IT sales people, (a medium Operational Maturity Level tactic) works for a while, but is costly and becomes unnecessary with the high Operational Maturity Level model of pairing copier reps with Managed IT SMEs.

This high IT revenue growth creates immediate value for the OEDs who pursue it. This is because, with regard to the value of their shareholders’ stock, the revenue multiple for the IT Managed Service line of business is high: in 2015, about $1.27 in stock value for every $1.00 in IT Managed Services revenue. This is shown in the chart below:

Stock Value Multiples of Revenue

Also, we know from recent examples, that the overall value and attractiveness to investors, of copier companies who have substantive IT revenue, are higher than for copier dealers who do not.

IT Line of Business Gross Margin

While copier dealers who intentionally pursue building IT lines of business are accelerating IT revenue faster than their IT company peers, how are they performing at driving IT gross margin dollars? After all, you can’t pay overhead with revenue, you can only pay it with gross margin.

The chart below shows that copier dealers are also growing their IT gross margin dollar production faster than their IT company peers:

Gross Margin Dollar Growth by IT Line of Business

This means copier companies are advancing their ability to grow gross margin faster than are IT companies. This is to be expected given their faster revenue growth. Put another way, being early in their IT business progress, copier dealers have more recently than most IT companies, been at negative or low gross margins on it. Also as you would expect, this is improving rapidly.

A similarly important question is: “Ok, I see OEDs are growing their pile of IT gross margin dollars, but how are we doing at generating higher gross margin percent on our IT business? After all, it’s gross margin percent which indicates whether we are delivering value.”

The answer is shown in the chart below:

Gross Margin % by IT Line of Business

In Q2 2015, most OEDs doing Managed IT services were at negative gross margin percent on that business. As a result, across the whole population of them, the average Managed IT services gross margin was negative 13.2%.

This was to be expected: Managed IT is not inexpensive to get into. The typical copier dealer getting into small-and-medium-business Managed IT, without the benefit of accelerated access to best practices, will spend at least $1.5mm and often much more, just establishing the capability to deliver the service and the rudiments of sales and marketing.

As the chart shows, however, with accelerated access to best practices, the average copier dealer intentionally focusing on building an IT business, is rapidly accelerating their ability to sell IT service at favorable gross margin percentages. In only one year’s time, these dealers have improved their IT services gross margin by 29.1%. They are currently at 15.9% and likely are continuing to accelerate.

Meanwhile, as you can see, they are already beating the product resale gross margin percentages of both IT companies who specialize in reselling IT products, and of IT companies who specialize in Managed IT. Again, we believe this is because of their generally better sales people and sales management than in the typical IT company.

As a result, the overall IT gross margin percent of copier dealers – that is, their IT services and IT product gross margins combined – are higher than that of the IT companies who have specialized for years in selling IT product: in Q2-2016 24.0% for OEDs vs. 22.5% for IT Product-Centric companies.

The copier dealer’s overall IT gross margin % is not yet at par with the IT companies who specialize in Managed IT. We expect them to continue making progress and to catch up and possibly exceed their Managed IT peers’ performance, for the reason cited above.

Indeed, if the copier dealer chooses to leverage the high Operational Maturity Level sales model of pairing traditional copier reps with Managed IT SMEs, then their total sales cost will likely be materially lower than their Managed IT peers, without impacting their copier revenue performance. Additionally, they will be further securing their copier accounts from predation by IT companies, and expanding the career opportunities of those traditional copier reps who might choose to pursue that path.

Can Copier Dealers Be Profitable in the Managed IT Business?

Many copier dealers who are pursuing the IT business are not yet profitable. Any who expected to be profitable so early in their pursuit of Managed IT, were either overly optimistic (how many years did it take to get to consistent profitability in the copier business?) or were misled. The majority of those who are not making money, are trending progressively towards doing so.

It’s important to remember that the C-level executives in the IT company down the street are spending 100% of their time focused on their IT business. Copier dealer executives expecting good-to-great results in IT need to exert similar leadership in less time. They also need to put people in charge of their Managed IT business who are not just good at technical operations, but who are also good business people and leaders.

It’s also important to remember that there is nothing about copier dealer “DNA” that presupposes they must fail at building profitable IT businesses. The number of cases where copier dealers have built good-to-great Managed IT businesses is numerous, visible and increasing in number and size. To maintain otherwise is to misread facts.

To those dealers who are building successful IT businesses, it must be mystifying to be told they cannot do so. No doubt the Managed IT business is not a walk in the park. Nor is any worthwhile business including being a copier dealer.

We continue to observe that copier dealers have natural advantages in pursuing Managed IT, that “native” IT companies generally do not have:

  • Stronger business management culture overall – most IT company owner/operators are techies, not sales and marketing or business people.
  • Stronger sales teams and sales management – as discussed above.
  • Larger installed base of customers to whom to sell Managed IT – as discussed above. Any IT company would think they had died and gone to heaven to have the list of existing customers as long as you have – and they’re pursuing your customers!
  • Much better understanding of equipment financing – critical to removing obstacles to signing up new Managed IT customers.

Yes, the Managed IT business isn’t easy. But, the IT company down the street doesn’t hold all the advantages.

Managed IT companies in the Top quartile (Best-in-Class) of profitability, earn about 18% EBITDA annually or higher. That’s one-quarter of them, not one-fifth or one-tenth. So great profitability is within reach of decent operators.

At that performance level, each dollar of EBITDA generated from the Managed IT business is currently worth about $8.00 in stock value. Meanwhile, each dollar of Managed IT revenue is currently worth about $1.27 in stock value.

What’s Next?

Each quarter Service Leadership will provide the copier dealer community with an update on the financial performance of IT in copier dealers via a 15-minute webcast open to C-level executives of all copier dealers.

If you’re a copier dealer and are already in a Service Leadership Index® peer group, you are gaining accelerated access to best practices and have the advantage of our Service Leadership Index® confidential benchmarking and the SLIQ Operational Maturity Level progression system.

If you’re a copier dealer engaged in building an IT business and are not in a Service Leadership Index® peer group, we invite you join one of our exclusive copier dealer IT peer groups to find out how your IT business is doing and how to make it better.

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