Last month, Sydney-based reseller Coefficiency pulled Lexmark printers out of two large government accounts and replaced them with Hewlett-Packard machines. The exercise was a protest against Lexmark's anti-channel tactics and may serve as an example to those who doubt a reseller's ability to steer the buying decision.
Coefficiency managing director Steven Jones says Lexmark has exhibited an increasingly direct sales mentality in recent years. The vendor has, against the terms of its own contract, neglected to log calls with Coefficiency's services centre despite the reseller having to "jump through hoops" to earn its certified service agent status. "They wouldn't even put through calls on the printers we had sold," says Jones. "When I pointed out to them that they were in breach of contract, they just changed the contract."
What's more, Lexmark has made it increasingly difficult for partners to participate in recurring revenues from value-added services. The conditions of the vendor's extended warranties, for example, specify that maintenance must be carried out by Lexmark even though a reseller may have sold the box and the additional warranty and have the resources to maintain it. Coefficiency has stopped selling the extended warranties since and is promoting the brand with less vigour. "We would have done $1 million of Lexmark product a couple of years ago. This year we did about $100,000," says Jones.
Meanwhile, Lexmark appears to be oblivious to its partners' pain. In an interview with ARN, Lexmark's marketing manager, printing solution and services division, Tim Champion, proudly announced that in January this year, 100 per cent of its hardware sales went via the channel (this number has since been scaled back to 95 per cent following some direct deals with government agencies). Yet, in the same breath Champion encourages resellers to get into selling solutions, saying Lexmark has clocked its greatest success in this arena. "We're on fire this year and it's not because we're selling boxes," he says.
Beneath this statement lies a contradictory mentality and the crux of an ongoing conflict between printer vendors and their channels. Vendors continually whine about partners being too price-centric and unwilling to invest resources in securing repeat business. Meanwhile, they are stealing as much of the channel's service revenue opportunities as possible and forcing them to deliver boxes.
"None of the vendors are focused on developing their channel. They see the channel as a mechanism to get product to market when they should be looking at them as their sales team," says Jones.
It appears that when resellers manoeuvre to protect themselves against such bad practices, vendors are more likely to exhibit arrogance than heed the message. In the recent encounter with Coefficiency, Lexmark declined to bid with the reseller because the reseller had chosen to submit a competing HP proposal alongside Lexmark's.
Printing hits a crucial juncture
Selling printers as part of a solution is not a new concept. It has been lingering in the bowels of the channel for years under various guises, including printer auditing, document management, information management and custom-built software. For the most part, the business of providing "solutions" has been the domain of vendors and remains so to a large degree. Canon's customised management software, ImageReal, sells exclusively through its professional services division, although Canon claims this is "not the only way it could go".
In recent months, however, circumstances have collided at a crucial juncture. Print, fax and copy have converged and the IT network has become the backbone from which to hang all of these peripheral devices. The "paperless office" has been proven a fallacy, with information continuing to be generated in copious quantities while businesses try to control their knowledge assets, or at the very least stop them from draining resources. OKI reports a 20 per cent increase in the number of MFDs (multifunction devices) being sold with management software over the last 12 months.
The goal in this chain of events is to reinvent a tired and widely disseminated device, the printer, and convert it into a package deal of hardware, integration services, maintenance, warranty, consumables, software and, most importantly of all, an intimate knowledge of the customer's environment, people and refresh cycles.
Flavour of the month
HP's new print and imaging boss, Rebekah O'Flaherty, says the product-oriented sales pitch that resellers serve up today is old school. She wants them to start asking customers how many faxes, printers, scanners and copiers they have in their organisation, if they are procured and maintained in a cost-effective manner, and whether they are configured for optimum efficiency.
"The key growth area for our partners will be moving upstream into print solutions," says O'Flaherty. "We will still have our traditional resellers and wholesalers, but independent software vendors [ISVs], consultants and outsourcers are the partners of the future." O'Flaherty is looking at outsourcing-type arrangements whereby the customer turns over the entire management of their print and imaging environment. Still, she claims the biggest hindrance is resellers' inability to recognise opportunity knocking. In a recent survey conducted through one of its wholesalers, HP discovered that over 50 per cent of resellers feel printers have little or no impact on their overall strategic direction. "Resellers have to start elevating the printer on their internal agenda because the customer is elevating it," says O'Flaherty.
Meanwhile, resellers say they hear the message loud and clear, but vendors have overlooked a few realities in the rush to line their pockets. They feel the outsourcing model has seen its heyday and is on the way out, an argument supported by analysts at IDC and Meta Group. "Managed print service is like a flavour of the month," says Coefficiency's Jones. At the end of the day, all business is cost-focused and outsourcing is expensive. An organisation may implement an outsourcing model, but as soon as new management comes on board with an eye to cutting costs the service will be dragged back in-house.
In addition, Jones says vendors underestimate the difficulty of making the transition from a "box dropper" to the solutions sell. "[Converting to a services model] is a difficult thing to do. It's an expensive investment; you've got to be able to service the product, which means having a service centre, the people to run it, training, spare parts, workshops, bench space, tools and infrastructure."
The expense associated with establishing the infrastructure alone is staggering. Jones says Coefficiency is currently upgrading its system to HP's Openview application for a tidy sum so customers can track service calls with more ease. Aside from the initial licensing fee, there is implementation and the expense of someone to drive it. The firm has also invested about $30,000 in demonstration equipment. Jones warns that even after outlaying this capital, resellers should not expect the pay-off to be as huge and effortless as vendors make out. "To run a service department is really difficult. On balance we manage to make it pay, but it's a fine line. If you haven't been in the services space to date then you wouldn't be able to [make the conversion]."
Adding to the challenge is the fickle nature of vendors. Jones says many resellers steer clear of channel programs because they are not maintained for any length of time. "[Vendors] operate on short-term ideas. When they announce a partner program we know it's going to take us five or six years to build a business around that model. Yet, they tell you upfront: "We're only going to run this program for six months."
An alternative to managing the print and imaging environment on behalf of the customer is to integrate customised software. David Gradwell, Canon's national marketing manager of business, imaging solutions group, says that although this type of solution is clearly not the majority of sales today, specific verticals are making greater use of customised applications than others and the market is growing. Independent software vendor Indigo Pacific confirms this trend, saying it is witnessing a surge of content into document management and workflow applications. Still, Lexmark's Champion sees the lack of correlation between hardware and software sales as a major barrier for reseller uptake. "In one account you may sell 30 printers, only two of which will have software built around them," he says.
While these applications, such as Canon's ImageReal and Lexmark's OptraForm, cost between $50,000 and $400,000, the profitability for integrators is sketchy. Jones says he has never made money on an OptraForm install because the software is complex and requires a lot of integration time. "[Vendors] are talking about ideas that are very hard to realise," says Jones. "[Printing software] is hardly going to be attractive to the channel."
On the other hand, some parties are doing well from software customisation. Indigo Pacific contributed $US3.8 million to HP imaging and printing group's bottom line last year within Australia and New Zealand. This measurement is calculated on the volume of HP appliance sales attached to Indigo's solution activity, according to Mike Yokom, business manager of HP solutions at Indigo Pacific. The HP relationship accounts for 15 per cent of Indigo's overall business and Yokom says the recent shift in HP's structure indicates a significant shift in this percentage for the better.
Competing on consumables
Many resellers are refusing to participate in the provision of consumables - ink, toner and paper refills - for much the same reason they avoid software. "Resellers feel they have to tie up a lot of capital in stock. To satisfy the customer they have to stock all the different brands and models of consumables. And although they might secure the first or second round of repeat business, the customer often goes looking elsewhere for a cheaper solution," says Corinne Cowper of Wholesale Printer Technologies.
This is particularly the case when resellers are competing against stationery companies like Corporate Express and Daisytek, which are given incredibly competitive list prices by vendors and run sophisticated logistics operations. "There are a lot of barriers to the supply of consumables. You have to carry a lot of stock; it's expensive to manage the process, especially when [stock is] returned, and you need good freight charges," says Jones.
Some vendors make the option of securing repeat business via consumables impossible from the outset. For example, Kyocera, one of the loudest critics of myopic resellers, bundles toners and services with all MFDs sold to government agencies, thus locking resellers out of all repeat business for the length of the contract.
Kyocera managing director David Finn dismisses claims that resellers find it difficult to muscle in on ongoing services in accounts where they are one of many IT suppliers operating under a prime contractor. "[Kyocera] is not even going to get into that. We can't hold their hand and take them to the toilet too," he says.
Who's really topping up?
At the end of the day, the ruthless undercurrents of printing manufacturers have resellers on the defensive when it comes to selling solutions around the printer. While Coefficiency has signed up to HP's new solution-touting partner program, Jones is acutely aware that all vendors are self-serving. "The way the vendors are suggesting [printing solutions] be done suits the vendor. They're all trying to build their own services divisions." He suggests vendors are attempting to streamline resellers into a new form of box drop which bundles hardware, services, financing and consumables all into the initial sale, with the intention of supplying as much of that repeat business as directly as possible.
Document management won't help resellersThe "document management" or "knowledge management" market opportunity won't bring relief for printer resellers, according to David Finn, managing director of Kyocera Mita. In fact, Finn says it will increase pressure on them because it will help copier resellers move into the already over-crowded printer channel. Printer resellers are fighting in the trenches. The majority of them (around 80 per cent) are focused on the sub-20ppm market where: l The customer is focused on the initial sale price and no longer views total cost of ownership as a priority.l The customer is not interested in value-adds such as networking services.l The customer does not necessarily want an ongoing relationship with a reseller.
"It will be increasingly difficult for most resellers to survive by fighting in the trenches like this, indeed it'll be difficult for the printer channel to survive at all without some fundamental changes in the way it thinks, targets and operates," says Finn.
How to sell solutions
Think solutions. This hackneyed phrase is actually critical to the channel. A copier reseller thinks in terms of a full package where the initial base hardware contributes just 30 per cent of the sale price, the rest of the sale includes services, options, consumables etc. Compare this to the average printer sale where hardware accounts for some 99 per cent of the overall sale price.
Think long-term services deals. Unlike printer resellers, copier resellers typically "own" their customer relationships because they sell products linked to a three-to-five year services deal.
Think education of salespeople. Start asking customers: How many print/fax/copy/scan devices do you have? How are they optimised or configured for maximum efficiency? Do you care?
Decide if you're a volume reseller or a value-added reseller (VAR). Design a business model to support that. If you're interested in focusing on value-add sales, raise your eyes to the 30-35ppm printer market. At this level, the customer begins to value services and a reseller relationship and will pay for a package beyond hardware. The average SME in Australia is a potential customer at this level, but resellers need to focus on this market and learn to deliver an appropriate value-add sales proposal in order to make it grow. If the printer resellers don't rise to this challenge, the copier resellers probably will.
Work with solutions-focused vendors. Partner with vendors who are aware of the changing market dynamics and are interested in investing to improve your bottom line.