Increase Your Services Revenue
A service bureau initiative can help VARs profit despite the cyclical nature of end user demand, if business and technical challenges are addressed from the outset.
When some imaging VARs say they offer a total solution, they often mean hardware and software to manage the process from document scanning to mass storage and maybe a service contract. However, for many VARs, a total solution involves offering outsourced scanning services that supplement an in-house solution. For VARs that understand the business and technology challenges of service bureau operations, outsourcing can provide an additional revenue stream to smooth the peaks and valleys of solution sales. According to analyst firm The Yankee Group, BPO (business process outsourcing) is one of the fastest growing segments of the IT industry. With anticipated annual sales growth rates of 15% to 18% over the next several years, BPO is expanding at twice the rate of IT sectors.
"VARs have to recognize that end user demand is often cyclic," says Laura O'Neill Habza, marketing manager for Eastman Kodak's Commercial Imaging Group. "Complementing solution sales with outsourced services can help VARs weather market challenges." For example, when Jaime Forero, president of TaDIS (Schenectady, NY), opened his business three years ago, he intended to run the operation as a service bureau. In performing due diligence and benchmarking, Forero and his business partner determined that tight margins and the time necessary to build a pipeline would make in-house solutions sales impractical. However, customer demand at that time was for in-house solutions. "The VAR business kept us open last year," admits Forero. "In January, the service business took off. As of May 2003, we already had enough work to keep us busy through the end of the year. Now that we know the value of both businesses, we can move on to the next level, which is hosting the records to create yet another revenue stream."
"The price of the technology is coming down, and technology keeps improving," notes Mike Cohn, marketing consultant for German scanner manufacturer InoTec. "This reduces the overhead for the VAR and makes a service bureau offering a natural extension of the value they offer customers."
Having a service bureau operation can also help a VAR succeed in an increasingly competitive market with thinning margins. "A VAR that isn't just a service bureau or a reseller can go in and do the back-file conversion as well as sell a system for day forward," notes Scott Francis, scanner product manager for Fujitsu Computer Products of America (San Jose, CA). "It's a way they can make more money by selling service that can't be shopped on the Internet, typically for a reasonable margin. An end user will often play the quotes of two or three VARs against each other. Services can be the differentiator."
Same Imaging Technology, Different Business Model
One of the mistakes a VAR might make when beginning a service bureau initiative is underestimating the business challenges. Savvy VARs like TaDIS leverage existing expertise by using the same products in the service bureau that they offer for customers' in-house solutions. The danger is believing that technical understanding ensures success. "A service bureau is a good alternative source of income to balance business risks, but it is also a whole new business endeavor," warns Habza. "It has its own model and needs, and you have to treat it as if you were starting an entirely new business. There is a lot of due diligence in identifying target markets and requirements as well as best practices for successful service bureaus. Then there are the human and equipment resources."
Because most service bureau accounts are billed on a cost-per-page basis, employee productivity and efficiency is critical. To maintain service margins, VARs must invest in employee training for processes and hardware maintenance and reevaluate management strategies. "The most efficient way is to try to keep the team together," comments Mark Schneider, director of engineering for scanner manufacturer BancTec, Inc. (Dallas). "When a service bureau rotates people in and out, that affects productivity. The operation will work best if there is some kind of incentive for employees. For example, if a job bid calls for a project to be completed in 15 days, tell operators that for every day they are ahead of that deadline, they'll get paid extra. We visited a service bureau scanning a million documents a day using that model. The operators didn't even look up when we walked through.
"One of the worst ways to run a service bureau is with temporary employees," cautions Schneider. "Then there is constant training and lots of unwarranted overtime. The caliber of the employees and how they are managed and paid overwhelmingly determine success."
Adding outsourced services also affects management of the sales team. "The challenge when trying to sell both solutions and outsourced services is getting salespeople to work together," says Sophia Marchi, national sales manager for scanner manufacturer Böwe Bell & Howell (Lincolnwood, IL). "Sometimes services sales sees solutions sales as a threat. The worst case is when those two sides are separate and don't talk at all. A salesperson who sells both can go into a customer site with the confidence that he or she has a solution to the customer's need."
Learning to price services is another significant sales obstacle. "The number one danger is underbidding," says Francis. "There may be a caveat or component you didn't count on that requires more labor or storage than anticipated. Because of the demands of workflow and pre-sorting, VARs should base their calculation on 50% of the rated throughput." Francis suggests that VARs always perform a pilot before committing to a service bureau contract. This protects the VAR against undertaking projects that demand far more labor than anticipated because of the demands of pre-sorting or image quality. It also ensures that the customer is getting the desired results from the outset instead of having to modify the project after it's in full production.
VARs also need to determine how adding a service bureau will affect technical staff. "Since downtime is so expensive for a service bureau, many feel they want to have someone on-site who can do first level support and maintenance," says Cohn. "Obviously, there is a critical mass for justifying having someone trained to service the scanner. However, VARs that choose that model cut their costs by performing repairs and preventive maintenance." The cost of technical training could also be justified by providing repair and maintenance to customers.
The Hidden Costs Of Hardware Operations
While a VAR might choose to specialize in healthcare forms or accounts payable documents, most service bureaus can't predict whether they'll be running warranty postcards or 11-inch by 17-inch loan documents. Schneider suggests that VARs invest in a single high-performance scanner rather than two or three midrange models, based on information presented at a service company executive forum. According to one speaker at the event, the payback period for a high-end scanner in a service bureau is 90 days, compared to 6 months for multiple smaller units.
Total cost of ownership is the priority in choosing service bureau scanning hardware. Unfortunately, it is not as simple as dividing rated throughput and duty cycle by price. In an environment where seconds count, the number of double feeds and time it takes to recover from a paper jam translate into lost dollars. "When looking at ROI for a hardware investment, service bureaus also need to consider the warranty, consumables, and cost per page," states Sean Parnell, product manager at Böwe Bell & Howell. "Consumables particularly can be a hidden cost. The savviest companies will look at the roller life and lamp life. Not only do you have to look at the size of paper but the types of paper. NCR paper [the three-layer yellow, pink, and white receipts that replaced carbon paper], for instance, has kerosene in it to transfer the ink, which is very hard on the rollers."
VARs should also evaluate the physical environment in which the scanner will operate. "Do some homework on the heat they generate and where they'll be located," says Schneider. "A scanner is fairly hot internally and while it can be fine in an office, poor ventilation or the dust produced from handling so much paper can affect its operations. Buyers need to ask about the cooling setup, what temperatures it can function well in, and how easy it is to clean the critical points."
Even VARs who have mastered the design and implementation of customers' imaging systems may find the demands of a service bureau operation more than they expected. Though resellers need to constantly evaluate new revenue opportunities, they should never view new initiatives as easy money, no matter how familiar they seem at first.