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HP Printer Services Strategy: Keeping the (Black) Ink Flowing

Last quarter's financials were a reminder of how brutal the economy, competition, and the general move toward electronic communications have been to printing at HP. Long a big profit mainstay, the Imaging and Printing Group (IPG) saw Q2 net revenue drop from $7.64 billion in 2008 to $5.92 billion this year, or 22.5 percent. There was even a 1.1 percent decline from the first quarter of 2009. Not good news for an expected cash cow. In fact, the only bright spot in HP's financial life has been services, which almost doubled in size year-over-year. But you can't say that the printing folk don't see where the money is, which is why the division is in hot pursuit of an enterprise managed printing services model.

"What's happened in the [printing] market is because of the economy," says Tom Codd, IPG director of enterprise marketing. "People are focused on reducing cost. They're having to do more with less; there's more of a focus on the impact of printing and imaging on environment, and security." That translates into two trends that doesn't make HP happy: companies buy fewer printers, and they look at alternative sources for ink.

For many years, the printer industry has used a razor and blade business model, in which they'd sell the printer for relatively little and expect the consumable ink cartridges to be the blood of profitability. However, market dynamic have changed. When it comes to using far cheaper off-brand ink or toner cartridges, the major leverage that printer vendors have had over customers is printer warranty. Use anyone else's ink and you could expect no help from the vendor if things went wrong. When printer prices are as low as they are now, though, the ink cartridge to printer ration becomes so high that the machine is almost disposable. Use a few rounds of off-brand ink consumables, and you may already have made up the price of the printer itself. Even if the printer eventually chokes (assuming that it actually does, given the amount of FUD the vendors spread about), the customer is ahead of the game.

So what HP is doing for its enterprise strategy is bank on exactly the desire to save money. "Now they're seeing imaging and printing as the next place they want to take cost out," says Codd. Think of it as the old photocopy model of having service people maintain the machines of a company, with facilities and procurement handling the contracts. Now multi-function devices that print, scan, and fax are on the network and IT handles them. HP is telling those departments that by handling printer fleets and configuration, it can give them savings of up to 30 percent. HP goes into the client, does an assessment, and devises a recommended fleet. According to Codd, the managed printer services market is growing at 4 percent, while HP's effort is seeing 8 percent annual growth. "Roughly a third of the market is enterprise customers already doing managed [printer] services," he says. The rest of the enterprise market is split evenly between those unsure about making the switch and companies that don't see how the model would apply to their needs.

HP is targeting operating expenses, which might make you take a step back, because clearly for a client to save money, it has to spend less on printers and supplies. But HP gets a few advantages that are worth the trade-off:

  1. It can control the potential business rather than possibly seeing it go to other vendors.
  2. By setting the strategy, it can work to push other vendors on annual contracts out of the way over time, possibly getting more of its own products into place.
  3. It can use HP ink rather than cheaper brands, which means the vendor protects its big margin business as much as it can.
HP is using a number of enticements, including a guarantee on first year savings, which is relatively easy for the vendor to do as it has enough experience to accurately gauge likely results. And if it's off a bit, contracts allow for adjustments after that first year. There's also the green play, letting the company boast about energy saved and paper use cut. If there's doubt, HP will go into a pilot project, perhaps in a new building not yet covered under an existing contract.

I'm guessing that there are other areas, including the following, in which managed services might offer vendors additional ways of locking in business, including mobile devices and even PCs and servers beyond maintenance contracts, and including virtualization and load balancing.

Image courtesy Hewlett-Packard Development Company.

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