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Dealers Look Towards a New Future - Will Office Solutions Carry Them There?

9 Nov, 2004 By: InfoTrends/CAP Ventures imageSource

Dealers Look Towards a New Future - Will Office Solutions Carry Them There?

The office equipment industry is going through many changes, some more
positive than others. The industry is moving aggressively to convert a
predominantly black and white base of equipment to more mainstream color devices
based largely on desktop color laser printers and universal color
copier/printers (UCPs). Driven by high network connectivity for UCP placements
and increased numbers of connected black and white copier-based multifunction
peripherals (MFPs), key industry players continue to introduce the latest
software applications and related solutions to add new value around adhoc
document-centric office applications.

Many industry observers and participants have expressed continued concern
that the opportunity for selling software-based solutions is not gaining
significant footing within traditional office equipment channels despite
significant ongoing investments. With the exception of a few obvious
applications like scan-to-email and advanced document routing solutions, it is
difficult to identify a large and sustainable market for software that can help
replace some of the top-line revenue declines from hardware sales.

To better understand this issue and identify possible areas of improvement
for the sale of solutions, InfoTrends/CAP Ventures recently conducted a
Web-based research study that was distributed to independent office equipment
dealers throughout North America. This study focused on the interest and
reported success of software and related solution sales through dealers as of
the second quarter of 2004. The following is a summary of some of the results
from that study.

Respondent Profile

InfoTrends/CAP Ventures received completed surveys from more than 100
independent office equipment resellers throughout the U.S., including 80 percent
of respondents who identified their primary business as comprised by copier
sales and support. The estimated average annual revenue of the dealerships that
responded to this survey was approximately $15 million.

The general understanding in the industry is that the majority of office
equipment providers, including both manufacturer direct sales organizations and
independent resellers, frequently do not charge for value added software and
related services when they are offered with a device such as a digital copier.

Despite the efforts of numerous industry players including software vendors
and manufacturers’ planning and marketing departments, it has been unclear
whether or not the value message around software and solutions-based services
resonated in independent office equipment sales channels. Yet, our research
shows that nearly 80 percent of the respondents we surveyed agreed that there is
a tangible value proposition being offered with software solutions currently
sold with office equipment.

Ninety-four percent of respondents who established their dealerships on or
after 1995, and 87 percent of dealerships started prior to 1980 agreed with this
statement regarding the value of software-based solutions. While only 63 percent
of respondents from dealerships opened between 1980 and 1994 agreed with that
statement. As could be expected, dealerships that started doing business during
the recent transition from analog to digital copiers were almost unanimous in
agreeing that software-based solutions for office equipment provide tangible

Yet, surprisingly respondents from the oldest group of dealerships agreed
with this value statement almost as frequently as the youngest group of
dealerships. Further, based on the survey results, dealerships with at least 10
employees were more inclined to agree with the value statement around software
solutions (80-plus percent), while only 62 percent of small dealerships with
less than 10 employees agreed that tangible value is being offered with
software-based solutions.

In regard to customer demand for solutions, nearly 80 percent of respondents
indicated that customers are specifically asking for help with document related
processes, like electronic filing, document scanning, storage and retrieval. The
applications that customers most commonly request help with today include
document scanning and capture, automated document routing & distribution (for
example, eCopy, GlobalScan, scan-to-email solutions) document storage and
retrieval, and document tracking.

Expectations for the future

When asked to evaluate the current positioning for software-based solution sales
and support within their dealerships, roughly 83 percent of dealers agreed that
software is a key value added component in differentiating the office equipment
they currently resell. Further, a little more than 70 percent of respondents
indicated that their organizations plan to invest more resources into selling
standalone software applications and services over the next year.

When asked about how quickly software sales would ramp as a percentage of
their organization's revenue, just less than 80 percent of dealer respondents
anticipate that software-based solutions will comprise at least five percent of
their business revenue by 2009. Within that group, nearly 20 percent agreed that
this category would account for at least half of their business by the end of

One key aspect of building a successful software-based solutions business is
the need to effectively manage the different cost structures associated with
software and related services compared to the cost structures for hardware sales
and service. About 34 percent of respondents who answered the above statement
indicated that their organization has created a financially separate business
unit to focus on customer-oriented document solutions. This is a fairly healthy
margin among those who are selling software, but when weighted against the total
sample that included dealers who do not actively sell software and were
eliminated from answering this question, the percentage declined to below 17

Only 21 percent of respondents agreed that hardware and software service
businesses need to be separated to promote the independent success of each. A
scenario where hardware sales can influence the promotion and position of
software and value added services is a precarious one that may in the future
undermine the integrity of a given dealer's solutions message and value to

Research Take Away

Overall, the general message regarding the value of solutions and the
competitive need to differentiate software is penetrating the office equipment
channels. The level of traction varies, but the expectations voiced by those who
participated in this study indicated that they have a clearer understanding of
the solutions available in the market and that customers are requesting them to
solve related problems.

As the market continues to consolidate, those dealers who are generating real
results in the solutions side of the business will likely feel far less pressure
on the gross margin dollars they generate from their ongoing equipment business
than those competitors who do not build their business around this opportunity.

Despite some very positive signs around expectations and understanding for
the fundamentals of building a more open services oriented business model, some
of the results revealed in the study indicate that the solutions opportunity for
dealers may be overshadowed by the brand-centric legacy of the office equipment
industry. With what is becoming an increasingly competitive market, a move away
from brand-centric solutions tied specifically to hardware will likely be a
mainstay, at least until customers gain the leverage to demand more open and
brand-agnostic solutions.

A portion of dealers appear to be evolving their businesses aggressively
towards software solution opportunities, some with very high expectations for
the future. What may seem like radical changes for some dealers today may be the
changes that save their business five to 10 years from now.

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