How Ikon Changed Its Business Model

Have you ever thought about changing your stripes? Too many products and not enough services? Out-of-date business practices eating into profits? Well, it may be a multibillion-dollar company, but in more than a few ways, Malvern, Pa.-based Ikon Office Solutions is just like many other VARs one-tenth its size, trying to revamp a business strategy that no longer makes sense in its current market.

The 35-year-old company (No. 37 on the 2004 VARBusiness 500) had made its name as a holding company that functioned primarily as a document-management product distributor. But that just wasn't cutting it. The product of 450 smaller, local and regional acquisitions made from the early '80s to the late '90s, Ikon was big but burdened by debt. When CEO and chairman Matthew J. Espe joined about two years ago from GE Lighting, he decided the company needed a regrooving. Specifically, like many VARs it needed to reduce its costs and re-create a go-to-market strategy that would excite its customers.

For starters, Espe built on the notion of changing the holding company into an operating company, a decision made by previous management that enabled him to head up a single company--with a unified focus--that could, for example, offer centralized training and chase national accounts. Shareholders were in favor of these changes because it allowed Ikon to reduce costs and have the centralized clout to pursue new opportunities.

In addition, Espe saw the handwriting on the wall and decided to turn the mammoth New York Stock Exchange-traded $4.7 billion company into one that focused on services. "We have gone from being a distributor to being a service provider," he tells VARBusiness. "Hardware will continue to be soft...the real opportunities are in the service segment."

To that end, in mid-September Ikon debuted an integrated solutions portfolio, teaming up with preferred vendors to broaden its appeal to potential customers. The strategy, Espe says, differs from the company's primary competitor, Xerox, because Ikon selects what it considers to be top-shelf solutions, while "any Xerox solution is going to be a bundled Xerox package," he says. "We are uniquely positioned because of our independence."

To get the right mix of partners, Ikon road-tested a total of 35 vendors. After months of deliberation, Ikon picked eight based on their functionalities and price points: EMC for its EMC Documentum ApplicationXtender 5, which manages content from capture to storage and archival; Kofax for its information-capture application; Captaris for enterprise fax and e-document delivery solutions; Notable Solutions for distributed capture and document work flow; Electronics For Imaging for Web submission and work-flow tools; Equitrac for document-accounting solutions; and Objectif Lune and Solimar Systems for output and distribution software.

"We have increased our level of relationships with software providers," Espe says. In addition, 50 percent of the hardware placed by the company is from Canon and Ricoh.

The exec overseeing Ikon's push to services, Michael Kohlsdorf, senior vice president of Ikon's Enterprise Services division, now oversees $2.3 billion in annual sales, roughly half of the company's annual total. In all, he is responsible for 16,000 Ikon employees.

A key component of the company's direction is its new document-strategy assessment offering. As the first phase of any potential project, more than a dozen professionals across Ikon meet with new and/or existing customers that are considering a new project to evaluate the work that needs to be done. They then offer suggestions for the best way to accomplish it and achieve the quickest return on investment. However, Ikon now charges for this work, a perhaps-controversial strategy in an industry that often provides up-front consulting work as a way to get a foot in the door. In any event, the company's 5,000 salespeople lead with the completed documents in their presentations.

"We charge for it. If we don't, we devalue the proposition," Espe explains. "We credit [the customer] out if we do a large amount of work for it. The strategic advantage [of a strategy assessment] is that it helps create long-term relationships. You become integrated with their work flow."

Ikon also is making a determined effort to generate new customers to use its services capabilities. Currently, it works with more than 500,000 customers internationally, 85 percent of which are in North America. Espe says he's also looking for growth in Europe, especially in the services arena, but, more interestingly, will be making a determined push to recapture the smaller customer.

"Not understanding the differences was where we missed the boat," the CEO acknowledges. "We abdicated the coverage of those different segments to a local marketplace [when] we increased our focus on national accounts...We are not in a position to turn down any customers."

Ikon's Financial Picture

Where will a services orientation take Ikon's bottom line? Espe and Kohlsdorf estimate that with gross profit margins for services a good 20 points higher than equipment, the company's profit picture will increase. By 2007, the team estimates operating income will increase from 4.5 percent to 6 percent, while SG&A will be trimmed from 33 percent to 30 percent.

Wall Street seems to be responding slowly to Ikon's new direction. Stock prices have edged down slightly in the past month, from $11.40 on Oct. 4 to $10.94 as of press time. However, that's quite an improvement from less than four years ago, when the stock was trading at just above $2 per share.

Year-end results announced Oct. 28 for Ikon's fiscal year ended Sept. 30 show the company still has a way to go. While service revenue was up for the year, to $2.38 billion from $2.33 billion a year ago, net income was down to $91.5 billion for the fiscal year from $116.0 billion the year before. Sales also declined slightly for the year to $4.6 billion from $4.7 billion.

For Shannon Cross, a principal at Short Hills, N.J.-based Cross Research, it's too soon to tell whether the Ikon push toward added services will fly.

"I think Ikon is doing OK," she says. "It's almost too early to tell--they just started announcing their partnerships. We'll start to get an idea of their growth rate by mid-'05...I would speculate that based on the company's relationships and its knowledge of the business that they are pretty well-positioned."

A plan to take down corporate debt started off smoothly earlier this year with $250 million retired. The company is also involved in a share repurchase program. The strategy will allow Ikon to make a targeted acquisition, perhaps an enterprise services firm to serve Europe. In any event, Espe characterizes the company's attitude at this point to making acquisitions as a "slow" one.

So, what can other VARs take away from Ikon's experience? "We intend to stick to our knitting for the next two or three years," Espe tells VARBusiness. "We learned some lessons in the late '90s. We tried training and failed miserably. Don't stray too far from the core."