Benchmarking MPS

Benchmarking has been around the copier space since the late eighties, when a group of finance managers at ALCO, the predecessor to IKON, designated the 28 categories to measure. By stack ranking the operating companies inside of three revenue categories—under $25M, $25M - $50M, and over $50M— a company management team could identify areas of opportunity. The monthly report we all received got the competitive juices flowing and provided a basis of support and camaraderie; the high performing companies were always willing to discuss their approach with those that needed help.

Used for benchmarking and for identifying areas of opportunity, a model can be a powerful tool. Unfortunately, too many companies don’t use benchmarking effectively. The “model” company does not exist; what the model does is provide a picture of a healthy company along with focus areas. If you are a copier company and your equipment gross profit is 31%, your sales expense is 20%, and your service gross profit is 54% with 14% G&A expenses and you produce a 15% operating income, you are not at the model in any category, other than operating income.

The “Model” sales expense is 25%, so are you paying your sales reps too little? Possibly, or possibly the mix of equipment revenue that is driving a 31% gross profit ratio, five points below the model, is also driving a lower sales commission percentage. Or, maybe you have a high mix of major account business with really high sales rep productivity that is driving that low sales expense. Don’t run out and give everybody a raise just yet.

One other important characteristic of the model as designed at ALCO was that the revenue, cost, and expense categories were all set up to be the same across multiple operating entities. As a former CFO/VP of Operations for the Mid-Atlantic District at IKON, I can tell you that many a day was wasted arguing over whether or not revenue, cost and expenses were properly categorized. Some missed the point—are you growing at a healthy rate and are you producing a healthy operating income? If you are great, work to marginally improve in every area. If you aren’t, then you need to work to improve in every area but you need to select the areas with the most opportunity to improve significantly. You can try to argue away categorization, but the ultimate test is healthy growth and healthy operating income.

Given the title of this article, you might be wondering where are we going? To MPS benchmarking, of course. But I don’t want you to look at these benchmarks as absolute targets but rather as guides to what good looks like. Your main focus should be on healthy growth and a healthy bottom line. I am going to provide one last qualification on the benchmarks: In the late 80’s the copier industry had over a decade of history on which to base the benchmarks and the industry was clearly out of its early stage of hyper growth. MPS is still in its infancy and still in hyper growth so some figures will not fit well.

Growth is the most obvious benchmark that will not fit many. MPS is growing at a 25% CAGR, so if you have an established MPS practice—let’s say a $10 million annual MPS business—and you grew that business by 25% this year you would be growing at market rate. But let’s say you entered the MPS space six months back and have a $200,000 dollar business inside of a $25 million copier dealership. With a little effort, there is no reason why you cannot grow at a rate exceeding 500%.

To put growth in a more realistic perspective, let’s look at benchmarking MPS sales specialists. In a top 50 marketplace from start-up, an MPS rep should have $24,500 per month in CPP contracts at the end of their first year and should have billed $95,000 in CPP revenue for the year and $120,000 in equipment revenue. At the end of the second year, the specialist should be managing $64,500 in monthly CPP contracts, have written $514,000 in CPP revenue and $360,000 in equipment revenue.

Let’s say you started January 1, 2010 with two MPS sales specialists: At the end of the first year you would realize total revenue of $430,000 comprised of $190,000 in aftermarket and $240,000 in equipment. For 2011, assuming you retained those two sales specialists and didn’t add any additional specialists you would have total revenue of $1,748,000 comprised of $1,028,000 in aftermarket and $720,000 in equipment. If you added specialists along the way you can do the math.

One thing you will note is that the ratio of equipment to aftermarket is changing rapidly, from 56% equipment year one to 41% equipment year two. This is due to the fact that you are entering a rapid growth business. The more mature MPS providers have a mix of equipment to aftermarket in the 33:67 range.

Next, you will want to know what gross profit (GP) to expect. Until recently, aftermarket GP has been averaging 58%, but those days are quickly fading. One factor for the deterioration is that more competitors are entering the MPS space. Two years ago it was uncommon to have a competitor in an MPS transaction. Today, at least in the top 50 markets, there is better than a 50% probability that there will be somebody competing for the MPS engagement. Unfortunately, many of the new entrants are selling price.

Before I get back to aftermarket GP, I am going to digress for a few sentences here because it pains me to see how quickly margins are dropping. If you are going to enter the MPS space, get some good training and stop selling on price (www.bta.org for great MPS training). Also, stop trying to convince companies to move from their high priced (insert name) to your low priced alternative. If you could sell something for $2 and enjoy a 50% margin or sell a substitute product for $1 and receive a 50% margin which would you rather do? I’ll answer for you—sell the $2 product and receive $1 to go toward my G&A expense and produce a profit for my efforts. Stop talking people out of $0.015 clicks and into $0.008 clicks—sell them the $0.015 click!

Okay, back to the aftermarket GP—it is trickling down to the 55% range but I think there is hope to mitigate the decline. First, new entrants will heed the last paragraph and stop selling price—hooray! Second, MPS providers have not had to optimize the logistics on their toner delivery and put metrics in place or optimize their service function. That first point is particularly important—in the copier space, service represents approximately 65% of aftermarket and supplies 35%, with the blend of color devices altering the overall blend. In the MPS space, service represents 25% of aftermarket and toner 75%; your risk and largest opportunity for reward reside in how you manage toner. There is also opportunity with service by improving service effectiveness, but you need to focus on price and toner to really be successful.

Equipment GP is running at 40%.

General and administrative expenses are another area where MPS differs significantly from copier companies, and an area of further opportunity down the road. Today, G&A is running under 12% but keep in perspective this is in a high growth industry where most companies are hiring in advance of the need. Once growth begins to moderate there is no reason why G&A cannot be sub 10%.

Run your high growth MPS business well and you can enjoy a 20% operating income. Take the time to really learn the business and enjoy the rewards.

Tom Callinan is the founding principal of Strategy Development, a management consulting firm for the technology and outsourcing space and the leading MPS consultancy specializing in business planning, sales effectiveness, advanced sales training, and operational and service improvement (www.strategydevelopment.org ). From 1998 – 2005, Callinan was an executive with IKON Office Solutions, most recently vice president and general manager of IKON’s largest business unit with revenue of $1.4 billion. Prior to IKON, Callinan was the founder and CEO of Copifax, Inc, a copier dealership that was recognized with numerous awards including inclusion on the INC 500 list of fastest growing private US companies. Copifax was acquired by IKON in 1997. Callinan graduated with high honors from The Wharton School, University of Pennsylvania. Tom can be reached at callinan@strategydevelopment.org  or 610.527.3317