Management Considerations and Financial Metrics for Business Planning in the MPS Space

by Mark Shelton

At the beginning of each mentoring class we hold, I ask for a show of hands in answer to these three questions, and typically, I get these responses:

  • “Who has a written business plan on file?” Ten percent of hands go up.
  • “Who updates their plan annually?” Five percent of hands go up.
  • “Who has written a long-term plan?” One percent of hands go up.

Winston Churchill once said, “Plans are useless, but planning is invaluable.” The planning process is invaluable because it causes you to think about what you want to do, and to consider all of the contingencies affecting your ability to execute on your objectives. Quantifying these goals, and then committing your thoughts to writing, provides the ongoing ability to measure your results against the plan and make the appropriate adjustments to stay on track.

Most resellers have strong ideas as to what they want to accomplish with managed print services. However, most stop short in quantifying their goals because they are uncertain about what is truly achievable in the MPS space. Following are some planning tips and metrics for you to consider in developing a written business plan. We have found these to be representative as they have been compiled over seven years of experience, and verified through mentoring hundreds of resellers.

Segregation of Performance Reporting

It is important to set up a separate division, department or business unit, with its own set of books, for your MPS business unit. You will want to do this so you can see at a glance the profitability of each of your MPS contracts, as well as your entire portfolio of contracts. While resellers operating with a copier and MFP model are familiar with cost-per-page contracts and service provision, co-mingling printers into the mix adds a level of administrative complexity that you will want to be able to gauge quickly and accurately. Set it up so that you are able to see, at a glance, whether each of the individual contracts is profitable. That way, if you are leaking profits, you will be able to easily identify the account and then drill down to determine what is causing the problem. Remedial action steps are then easily enacted.

Overhead and Expenses

Plan your MPS business unit with a proper amount of overhead allocated. This becomes important as the business grows and creates wealth, because it will then stand alone as a complete, viable business unit, and not just a highly profitable segment of your transactional business. Guidelines for allocating overhead and expenses to MPS are shown in Figure 1.

Figure 1: Allocating MPS Overhead and Expenses

It is important to allocate the appropriate amount of overhead and expenses to your MPS division. This will allow you to analyze the profitability of MPS as a stand-alone business unit.

 

Overhead or Expense Component

Estimated Cost

Staff Compensation*  
  • Sales

$40,000 as a first-year guarantee, reverting to a page-based annuity plan in year two

  • Admin

$35,000

  • Technical Service

$30,000

Employee Benefit / Tax Package

20% of salary—dependent on geographic location

Reimbursable Expenses

Mileage, cell phone, etc.

Rent

Percentage of existing floor space or actual rent if located separate from your existing floor space.

Business Expenses

Utilities, phone, insurance, etc. Use the same type of logic as was used to calculate rent using percentages.

* Estimated costs for staff compensation are based on national medians.

Sales Ramp-up Period

From cold start to fully productive sales performance can take as much as a year. However, most sales reps will begin to gain some traction within 90 days of hire. We look at one year as the median time frame for a sales rep in MPS to achieve full productivity in their sales effort. The typical ramp-up timeline might look like this:

  • First 90 days: mentoring.
  • Second 90 days: gaining traction.
  • Third 90 days: regular new contract activity achieved.
  • End of first year: full productivity achieved.

With proper planning and manage-ment, the MPS sales specialist will reach full productivity on planned sales metrics between six and 12 months into their tenure.

Deal Craft: Gross Profit Expectations

We generally have two platforms for deal craft in MPS. The prospective customer’s present-state cost and productivity model will determine whether a comprehensive approach or a simpler care-and-feeding program will present as the most compelling business case. And, certainly, we can be as creative as we want to in crafting the deal, by mixing and matching delivery platforms with customer needs. General expectations for profit margins are outlined in Figure 2.

Figure 2: Profit Expectations: Comprehensive MPS vs. Care-and-Feeding Programs

The below table outlines expected gross profit margins for both comprehensive MPS and care-and-feeding programs. It also takes into consideration whether the program uses refurbished or OEM products.

 

Comprehensive MPS

Refurbished / Replacement

OEM / Branded

Devices

30%

20%

Black Supplies

40%

20%

Color Supplies

40%

25%

Parts and Labor

40%

35%

Care-and-Feeding Programs

Refurbished / Replacement

OEM / Branded

Black Supplies

35%

20%

Color Supplies

35%

20%

Parts and Labor

40%

35%

Deal Size

The sweet spot for prospect development are those prospects whose total page volume is in the range of 25,000 to 125,000 pages per month. Since the prospect won’t know how many pages they produce in a month’s time, we need to develop an understanding of what this size account looks like from the parking lot! If the median number of pages produced per printer is around 3,000 and the median number of employees per printer is four or so, then a 50,000-page-per-month prospect would have around 16 printers and perhaps 65 employees. This is optimal, as these size accounts will move through the sales process in the shortest possible time, the prospect’s internal efforts will be fragmented, and the size of the account provides opportunity to have a highly positive impact with a good MPS program. Deals with smaller accounts are always possible. Deals with larger accounts take more time in the sales process, scaled to the size of the prospect’s environment.

Service and Supply Fulfillment

Resellers with an existing service department will be well familiar with the facets of service and supply delivery on a per-page basis. Those without this base of experience can find planning this space daunting. Creation of parts and supplies inventories, managing inventory levels, tracking service calls, tracking parts flows, and managing contract costs are not practices that are easily implemented without experience and knowledge of the operational and financial concepts and tools involved.

To enter this space without experience is best undertaken by using one of the comprehensive MPS delivery programs now in the market. These provide for the vendor to assume much, if not all, of the business risk associated with delivery of the service and supply components. Several of these programs have proven to be highly viable delivery platforms for organizations with high-caliber sales capabilities, but little or no infrastructure for service and supply delivery.

However, one of the questions most often asked is, “When can I afford to bring on a service technician for printers?” Similar questions relating to other staff positions are also frequently asked. These questions get posed from a number of perspectives, such as number of machines under contract, number of contracts in place, etc. Generally, the most efficient metric to consider is the number of printer pages under contract. Following are median metrics for calculating when the business unit can afford to hire for new staff positions and turn a profit on the investment:

 

Staff Position

Pages per Month

Service Tech

1.25 to 1.5 million

Client Mgt Rep

2 million

MPS Manager

5 million

Note that the number of estimated pages for a service technician assumes that the devices producing those pages are located relatively close together. Travel time between devices dilutes the number of pages a tech can competently service.

Break-even Calculation

By calculating the amount of revenue and GP dollars generated in an MPS contract portfolio, it becomes easy to do the math and determine how many pages under contract are needed to break even on a given overhead structure. Simply divide the allocated monthly overhead by the GP dollars (cents) per page, and you will have the number of monthly contracted pages required to break even.

Profit Picture

After achieving a portfolio of contracts that creates a breakeven for the business unit on a monthly basis, then aside from incremental increases in overhead, all other sales go to profit. Understanding the affects of incremental increases in the number of pages under contract, on a continuing basis, gives an understanding of when the business unit can expect to be able to increase overhead to further fuel the sales growth engine.

While each reseller’s net profit will vary depending on expenses, types of delivery programs chosen, and the gross profit associated with individual deal crafts, generally speaking, resellers can expect net profits before taxes to range from 10 to 15 percent higher than they experience in their transactional business units.

Caveats

Keep in mind the following caveats:

Off-site Inventory

Resellers new to page-based programming many times do not recognize that supply inventory shipped to the end-user site is still the reseller’s inventory, until it is consumed in the production of a printed page that can be invoiced for. Shipping of excess inventory to end-user sites is arguably the highest potential place for MPS contracts to experience diluted profits.

Labor and Parts Risk

Resellers who have experience delivering page-based service programs have an understanding of the financial risks that are assumed by providing fulfillment of service needs with their own forces. And these can be BIG. If you place a device under contract this week and next week it blows out a laser scanner, or a circuit board, it will take thousands and thousands of pages to recapture the cost associated with that repair, let alone achieve a profit, on that device or perhaps even that entire contract. Understand the risk and develop some options to mitigate your costs. Resellers wishing to mitigate or eliminate this risk should consider using one of the MPS delivery programs available on the market.

With proper planning, every reseller can implement an MPS business unit to help increase the quantity and quality of new prospect development, as well as to create a defensive mechanism that helps protect existing accounts…

Upfront Funding

I have consulted with numerous resellers over the years who have arranged to have a financing resource fund not only the equipment piece of an MPS deal, but the lion’s share of the service and supply stream upfront as well. While this may provide temporary cash influx for the business, it is always a strategic mistake. Doing this does not create wealth in the business unit, but rather, it creates a liability, and an unfunded liability at that. This can create far more problems than it solves down the road, when the contract requires investment to keep the fleet viable. Avoid this pitfall.

Start Planning

With proper planning, every reseller can implement an MPS business unit to help increase the quantity and quality of new prospect development, as well as to create a defensive mechanism that helps protect existing accounts from being boarded by would-be competitors. Plan the work and then work the plan. You will find that a well-crafted business plan will be a valuable aid in managing your MPS business.

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