By Stephen Aranoff and Robert FitzPatrick, The Eagle December 5, 2002 -- In this article, we discuss what some of the traditional manufacturers are doing to develop advocacy and create value for their products and offerings through Service. We found that: - KPG had purchased service company TSI, and has integrated it with KPG’s own service organization under the TSI banner and management. - Agfa had always had a significant service, product support and systems integration organization and understands that profitability can be achieved by it. - Fuji Graphic Systems had its own service entity FTS. Speculation centered around their parent company, Fuji Photo Film’s purchase of PrimeSource, Heartland Imaging, GSI and more recently Taylor Impressions to form its own National Distribution Company, Enovation. How would service now be handled? Why so much emphasis on Service? Because Service is a big business! While there are no studies we can point to, we believe that for the traditional graphic arts prepress sector alone, service is worth over $600 MM per year. With digital print for pay approaching that market in size, we’re probably looking at doubling that number to $1.2 B. Adding the wide format printers, digital presses, traditional presses and post press opportunities, SERVICE is truly a market worth understanding and participating in. And, if you add the technology synergy with medical, manufacturing, retail, exploration and other digital imaging fields, WOW! Product sales only come about when products become obsolete, perhaps every 3-7 years, but Service is an annuity that keeps coming back. So, we decided to look further at what these three major Graphic Arts manufacturers were doing for Service and to present a more full picture about Service, overall, in the Digital Imaging world. Fuji, KPG and Agfa have all used service at the manufacturer level to drive relationships and provide a standard for their products across the U.S. marketplace. A quick look at the major difference between the companies seems to be that: - Agfa has had a long history of taking service, applications and support seriously, and has used it successfully as either a profit center, or a way to drive additional sales through its integration and support services - KPG has had no uniform policy and who serviced a product varied by product. With the acquisition of TSI, this changes to a strong constant presence for all products and a need to grow profitability. - Fuji has used strong relationships with the Dealer community to foster localized service with mixed results and has had to start its own service organization, although it uses 3rd parties in remote areas for help. The Details 1. Enovation: As a consolidation of a growing number of previously independent dealerships, Enovation inherits and typifies the arrangements that prevailed over most of the dealer channel regarding technical service. It has a large number of technical service personnel, but they are uncoordinated and fragmented in focus and training. In practice, Enovation, at its birth was a consolidation of many more than four initial companies. PrimeSource, the largest of the four companies, was an amalgamation of many other dealerships from coast to coast. Heartland too had consolidated ABV, Jungkind, Lawrence Photo and HPS. Graphic Systems had acquired Young Phillips. Some branches of each of these companies had significant technical service operations. Others had little or none. The dealer channel preformed little of Fuji’s technical service work. This was done mostly by Fuji’s own tech service department and by various third party specialists including TSI (now owned by Kodak Polychrome Graphics). While the potential exists for harnessing the technical service talent of Enovation into a cohesive service division, the costs and commitment to accomplish it will be large. 2. Fuji Technical Service (FTS): Fuji’s path to building a cohesive technical service department within its Graphic Systems Division has been circuitous. A relative late entry to EI equipment sales, Fuji relied on third parties and, for a time, attempted to collaborate closely with dealer service departments. This proved unreliable. Over the last few years, it has been steadily building its own technical service capabilities under the management of Neil Johnson. Fuji says it now has more than 30 field technical reps, managers and software support people. Inside it has 8 engineers and factory liaison personnel. Overall FTS has between 40 and 50 people in the division. Additionally, FTS uses some resources of third parties but to a far lesser degree than in the past. Dealer participation has also declined. FTS is totally focused on Fuji-branded products and may be seen as comparable in business model to AGFA’s and Heidelberg’s service divisions. Its prime mission is to ensure that sales of Fuji-branded products are fully supported. FTS is expected to continue to support and service Fuji products partially with its own personnel and partially through its dealers, as has been the strategy. It will likely continue to use 3rd party service as a backup, as well. Enovation Graphic Systems, a FUJI wholly owned dealer subsidiary, is in the business of providing national distribution, and has its own service personnel from the dealerships it has acquired. But Enovation is a separate company, and so Fuji’s (FTS) service strategy must also continue to take into consideration full support of its products and its dealers that are not part of Enovation. 3. KPG/TSI: According to COO, Tom Faughnan, the Melding of KPG’s varied service offerings into TSI have created an even larger nationwide capability for system design, training, applications, maintenance and service. By combining almost all of KPG’s service and applications assets into a single entity, TSI has doubled in size, picked up more technology and is poised to grow bigger through more focus and getting over its prior size and financial stability issues. They now have over 180 engineer and application specialist employees in the field with an additional 70 or so in support positions, not including some application specialist personnel still within the KPG organization – coming from the Imation acquisition. In the Q1 EAGLE, we noted that KPG hoped to do a better job of selling value-added services through this invigorated organization. Our guess is that current sales are somewhere under $50 MM annually. This includes both KPG products as well as all of the OEM and direct customer business they had going into the acquisition. 4. Agfa: According to Agfa’s Susan Wittner, service and support is also now delivered and accessible through a user-friendly Website. Registered users can quickly communicate questions and diagnose problems by utilizing this enhanced service offering. Like KPG, Agfa is also focusing on value-added services and has been rapidly expanding such service and support solutions for its customers. It indicates that its support of the total Graphic Enterprise, which is comprised of its customer’s business management and production systems, puts Agfa in the unique position of offering true, total solutions. Training has always been a key differentiator for Agfa versus other manufacturers. Wittner indicates that their equipment group can provide a complete service solution on Agfa equipment as well as equipment from other manufacturers. The list of additional manufacturers and equipment is growing rapidly. Agfa’s consulting services group has been extremely successful in helping customers to design the electronic infrastructure that's right for them. This has lead to new technology and product developments such as Agfa's Salient server systems. --- Most observers believe that service has been a real problem for most manufacturers because their sales staffs have been prone to give away service in order to make or maintain a sale. We have written about this before. By creating a separate service division, through TSI, KPG has taken the first steps necessary to separate sales and service and create the atmosphere for service to be a profit maker, rather than a drain. We don’t know whether Agfa’s service organization is profitable and it is too early to see what Enovation will be able to accomplish out of melding its different dealer service organizations with different skill levels and its GSD Fuji core. --- 5. Imation (OSG – Now part of Decision One): Imation’s Outsourcing Services Group (OSG). It used to provide service for both Imation products under contract to Imation and products from other manufacturers. Today, with the sale of Imation’s last Graphic Arts products to KPG, Imation Outsourcing Services no longer does any work for in-house products. It is now the largest completely independent national service organization in the Graphic Arts/Digital Imaging marketplace, with over 35 years of color expertise to offer their customer base. With over 250 Service Engineers plus backup product specialists and management, they are able to cover the whole country and claim to have received over 97% customer satisfaction for their efforts. Imation OSG is different in philosophy from TSI and GEI-CalGraph in that it concentrates solely on OEM relationships and only services end users when asked to by the manufacturer. This print-related group is part of a larger over 1000-man group that also services other industries, such as Medical, Data Storage, Retail and Quick Service Restaurants, videoconferencing and security products. Imation offers a comprehensive outsourcing relationship to their OEMs that includes: field service, 24/7 call center help desks, parts logistics and management and depot services. Stuart Dross, their OEM Sales Manager, indicates that the division is profitable and having just recently been purchased by Decision One, we expect that it is important to Decision One’s current business strategy. 6. GEI-CalGraph: GEI-CalGraph is newly formed and arguably, according to Mark Lewis, the CEO, now the largest true independent print oriented Service Company in North America. It was formed through the merger of CalGraph and Graphic Enterprises of Ohio’s service personnel. The new entity is focused on servicing the wide format printing market in North America with focus in newspapers, engineering and commercial printing markets. Their concentration is both on end users and on OEM relationships. Among others, they have current contracts with DuPont, Barco/Purup-Eskafot and Mutoh America for various product lines, as well as with major end users such as Anheuser-Busch, and Kinko’s. They also service prepress equipment and wide format printers at most of the nation’s largest newspapers, including The Wall Street Journal, and the Chicago Tribune. Currently less than 40% of the business is with OEM’s for call center, parts, warranty repair, installation and training. Just over 60% is post warranty work including maintenance contracts, T&M repair and parts sales. This imbalance results from the initial founding of CalGraph with all post warranty Calcomp business and from GEI’s emphasis on end user contracts. However, in order to succeed in the long run, Lewis expects both parts of the business to grow, but would like to develop a higher percentage of OEM business that will also help grow the post warranty business through customer satisfaction. At the time of the acquisition, GEI-CalGraph had about 115 employees in the U.S. and Canada with over 70 in the field and a core group of 13 color applications specialists and are doing about $11 MM in sales. 7. Hewlett Packard: HP, the leading supplier of small and larger format ink jet printers in the world. HP sells wide format through a group of ~500 Gold VARs, some of which service the wide format printers as authorized ASPs, and directly through it’s Website. According to Mark Goozen, HP’s Services product Manager for HP Designjet printers, approximately 50,000 printers are covered by warranty at any point in time. HP’s intent, according to Goozen, and Sandy Gramley, HP Designjet Category Manager, is to give customers a breadth of choices with no quality tradeoffs at the most competitive pricing wherever they choose to buy or to get service support when necessary. As such, a. Large multi-machine customers can become qualified to handle self maintenance and have full access to HP’s service/support capabilities, b. Smaller customers can use their local VAR ASP for service/support knowing that the VAR is trained by HP and has access to needed services, or c. Any customer can be serviced directly by HP using all of its resources. In any case, HP maintains a trained Designjet staff that mans a central call center. As with most such products, 85% of the calls can be handled through the phone, including new firmware for download and consumable issues, as well as just plain walking through a solution. In the average 15-minute call, HP can diagnose to the parts level and have the part delivered to the servicing ASP. If the customer has a relationship with an ASP and requests that they be utilized, HP sends the part to them and has them provide next day on-site service with the cost paid for by HP. If the customer has no preference, HP always refers the repair to an independent company, ARC that also performs warranty service for HP on other technical products such as servers. This relationship makes best use of HPs resources due to the other products also included in the relationship. Both KPG/TSI and GEI-CalGraph also service HP printers as authorized ASPs, but they don’t get referrals; a customer must ask for them. After the warranty ends, HP supports a two level maintenance contract opportunity. Its VARs and ASPs are able to sell contracts that are under their own banner or under the HP banner. In either case, the customer is able to choose response times as short at 4 hours 24/7, or as long as next business day. 8. Heidelberg: Heidelberg is a digital press, traditional press and prepress supplier, selling direct and not truly part of the "channel." As the "big dog" of the industry, though, no compilation would be accurate without discussing them. "Heidelberg has had no interest in servicing other manufacturer’s products," Donn Goldstick, VP for Heidelberg America told us. Regardless of what product is bought, Customer Satisfaction is their primary directive. According to a February 2002 WTT/CAP Ventures survey, Heidelberg led the companies with 61% of the respondents ranking them as Outstanding or Above Average. Brad Chapin, VP Customer Service for Digital Products that includes NexPress, indicates part of the reason is that there are more service people in the company than everything else. Technicians are limited to a 50-mile radius for travel, parts are available 24 hours a day, on-board diagnostics are in all of the digital presses and other products and telephone/internet support is comprehensive. Chapin indicates that service is a profit center, but not the driving one that other companies make it because Customer Satisfaction is the main company goal. 9. Smaller Manufacturers: Smaller volume wide format players also seem to use 3rd party companies for on-site service in North America. For example, Decision One (ex Imation), KPG/TSI and GEI-CalGraph each have OEM relationships with such companies. In some cases, the 3rd party may also provide the call center capability, while in other cases, the manufacturer may handle this and the 3rd party may be called in as discussed for HP, above. With the proper training and coordination, it shouldn’t matter at all the end user. 10. Dealers: Nowhere in the above discussion have we included Dealers other than for Fuji. Certainly there are dealers who do their own service. One of the problems facing Enovation is the vastly different emphasis on and quality of the service offerings of the four companies they have purchased. And, Pitman, who has indicated a need to add value-added business, has no widely articulated plan for how it is going to do so. Into this void, the major manufactures appear to be poised to take control and limit the way that others can service their products. The reason for doing so has been described as necessary to provide a high common level of service across the country, however, we also believe it is being driven by the realization that Service can be a Profit maker. Conclusion: It’s a mixed bag of solutions and opportunities in the marketplace. In each case, the manufacturer and/or distributor is doing what it believes is best to provide nationally standardized service to their customer base at reasonable cost for their size and breadth. Some are also trying to leverage the support knowledge base to develop additional value-added services that can improve their bottom line. What’s important, is that no matter which way they’ve gone, the end user customer shouldn’t be left holding the bag and should get the quality service that they need.