by Jake Fishman, Gap Intelligence

It’s been hard to ignore the growing buzz surrounding the printing industry’s direct sales organizations as news of downsizing and branch closures placed a spotlight on the sustainability of the business model.

Highlighted among the recent events were the transfer of Ricoh’s branches and commercial accounts in four Mississippi and Alabama metros to RJ Young and the sale of Canon Business Solutions Canada’s Halifax, Nova Scotia, branch to local dealer Xtra Document Solutions. While questions regarding many manufacturers’ direct sales businesses have existed for decades, these events provided dealers and industry watchers with rare “proof” of this vulnerability.

Canon and Ricoh colored their recent moves as part of an effort to better support their local client bases, while those in the analyst community were quick to notice the economic similarities of these regions and the growing pressure that manufacturers are facing to stay profitable. Dealers, however, had a different perspective on these moves. After years of lamenting their role in subsidizing OEMs’ direct sales operations, dealers quickly latched on to these events as a type of revolution. It was a confirmation that their complaints were not unfounded and a sign that the power was on its way back to the people, or in this case, the partners.

After years of aggressively expanding their direct presence, sometimes with market share goals taking precedence over profitability, it appears that some manufacturers have begun to re-evaluate their direct sales strategy (and not just Canon and Ricoh). Over the years, many vendors’ direct sales investments were largely driven by the promise that any short-term sacrifices made to grow their presence and installed base would eventually be justified by ongoing click annuities and future incumbent sales advantages. In line with this strategy, the last 10 years have brought a procession of branch openings into smaller and smaller metros, very aggressive acquisitions, painful organizational integrations and drawn-out installed-base conversions. Meanwhile, many direct organizations matched their geographic migration with a similar expansion of their target markets, which for some direct sales groups now range from any company that can afford a single copier all the way up to the largest enterprises.

Not surprisingly, news of direct downsizing was greeted by dealers with a mix of celebration and self-congratulation. Dealers, of course, know the cost of selling and servicing MFPs and the challenges associated with acquiring another dealer but could never figure out how their direct sales competitors could a turn a profit. Actually, most dealers were pretty darn sure that many direct branches were not profitable at all. With each bid they lost to their various direct rivals, who were offering prices and CPCs below the dealer’s own wholesale costs, many of these down-the-street capitalists began to see the OEM-direct relationship as closer to socialism (gasp!). That may just be the loud voice of the channel’s Tea Party minority, but even more moderate resellers saw it as factory economics at best. The dealers provided their vendors with profits, the direct branches gave the U.S. subsidiaries revenue and volume, and together they provided the factory in Japan with revenue, profit and manufacturing scale. Of course, it’s not that simple, and I have no doubt that the majority of direct organizations see profit as a huge priority, but these branches are closing for a reason.

In terms of sales growth, the direct organizations’ expansion tactics have actually worked quite well over the years, making direct sales the main revenue driver for most vendors. Unfortunately, there is a catch to this expansion strategy: It only works when the market is expanding and when manufacturers are generating enough profit to incubate their direct sales initiatives. With 2011’s incredible combination of a continued recession, flattened page volumes, natural disasters and currency pressures, signs suggest that vendors can no longer wait to collect on their direct sales investments.

While anecdotal at this point, it is very likely that manufacturer direct organizations will continue to shift away from smaller metros and clients, relying on partners to target these opportunities – and for very good reasons. Servicing any size account costs 10 to 12 percent more through a direct branch than through a reseller, and SMBs simply do not provide the scale to offset these costs. So once the priority shifts from generating revenue and growing installed bases to making a profit, SMB-heavy branches are the first to go. The question is, are vendors merely pruning rural branches and addressing acquired redundancies (this has been going on for a while), or will market and financial realities force vendors to rethink how they sell to SMBs in general?

The good news for any overextended manufacturer direct organization is there are some solid business cases to model their transitions after.

HP and Lexmark may call their direct groups’ enterprise focus a channel-friendly gesture, but the truth is they have no interest in chasing SMB sales. In fact, HP has made it quite clear that it doesn’t even want to support the SMB clients it already has, doling out accounts to partners upon the 2010 launch of QuickPage in Europe and more recently transferring its acquired Printelligent client base to resellers in the United States.

Xerox essentially invented the industry’s direct channel but has clearly set its direct sales sights on the largest enterprises, while relying on its dealer-style Global Imaging Systems branches and scale-appropriate agents and resellers to support smaller regional clients. Just to make it official, Xerox began transferring its remaining SMB and regional accounts to Global last summer, effectively right-sizing its direct client base and firmly establishing each organization’s target market.

It is probably no coincidence that the three manufacturers with the least pressure to keep the factory churning out MFPs and cartridges also have the best-defined direct sales strategies. However, Lexmark, HP and Xerox’s profit goals are not unique from any other vendor, and there is nothing stopping other industry players from doing the same.

I’m not suggesting that every direct organization should shift all of its attention to the Fortune 1000. I’m also not suggesting that we’ve seen the last of channel acquisitions, as there have been more acquisitions in the last 12 months than in 2009 and 2010 combined.

However, I do believe that the trend away from less developed regions and smaller end-user companies is a good one and that most direct organizations would benefit from better defining their target markets. I also believe that the direct sales business model and the direct rep compensation model have to shift from revenue to profit.

It’s a changing world, and the printing industry’s sales and distribution structure has to change with it. I guess we’ll see in the next few years who agrees.

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