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| Consumer & Business.. |
Friendly Geeks look to fill a niche
The fire that roared through three business offices started sometime over the Thanksgiving weekend. Sandra Albert heard about it Monday morning when her customer called to report his bad news—all of his business data had been destroyed. Could she help? Fortunately for him, the answer was yes.
Albert owns a CMIT Solutions franchise in Danbury, Connecticut, and provides IT services to small and medium-sized businesses. A basic CMIT package of IT services—including offsite data backup—costs only about $500 per month.
Albert had her client up and running in a remote location only hours after he called.
Unfortunately, the two other businesses in the same building weren't as well prepared. One had backed up its data on a hard drive that was stored in an office closet next to the server. All the data was destroyed. The second company had no backup at all.
The Danbury case is an excellent example of managed service providers (MSP) in action, serving the small and medium-sized business market. And it shows how the market—including many leading franchisors— is moving from a "break-and-fix" model where technicians simply respond to a customer's need to have his computer repaired, to one where MSPs provide proactive, strategic management level services.
The Small to medium-size business market in the U.S. generates more than $5 trillion in annual sales, according to one estimate. Harry Brelsford, CEO of SMB Nation, an organization dedicated to bringing together these service providers, defines the segment as companies with fewer than 500 employees.
"What you are seeing," says Brelsford, "is that set up and repair is a downstream function that has gotten very easy. And now that hosted services are going online (with recent moves by Microsoft and Google), that break-and-fix isn't a very good model. Now, the successful ones are becoming business management consultants."
According to Jeff Connally, president and CEO of CMIT Solutions: "Where a technician previously might have made 10 trips across town to one client. Today, that might be cut to three trips in the same period with much of the work done remotely. It saves money for everyone. It's a win-win-win situation."
Interestingly, a big chunk of CMIT's remote monitoring is done by a partner in India. The relationship allows CMIT customers to receive 24/7 monitoring services at the service center. If there is a problem that cannot be handled remotely by the center, the franchisee is contacted and works on the problem locally. The customer never deals with the Indian partner.
It's another example of the improved IT service provided at low cost to smaller companies that just a few years ago was available only to Fortune 500 corporations.
CMIT also offers a help desk through a partner located in the Boston area. It's another service commonly offered through major franchises.
The IT market segments are served, in very broad terms, by franchises, by big box retailers such as Best Buy and Circuit City, and by independent IT operators, largely entrepreneurial businesses serving a local market.
And it shows why many MSPs are running gross profit margins upwards of 35 percent. Says Charles Weaver, president of MSP Alliance, an association of managed service providers in Chico, California: "If an MSP isn't doing 30 percent," he says, "there's something wrong."
While gross margins generated by individual franchisees can vary widely and depend upon local market conditions, franchisor programs and business skills of individual operators, gross margins for franchisees often exceed 40 percent.
While declining to provide specific margin information for his franchisees, CMIT's Jeff Connally points out that costs for his franchisees often are lower than that of an independent MSP because of the franchisor's leverage in purchasing hardware, software and services. CMIT franchisees also experience lower costs due to marketing expenses being spread across nearly 100 offices, he says.
At the same time, the need for a franchisee to build and staff costly help desks and network operations centers remote monitoring is avoided completely."One of our franchisees told me he more than offsets his (6 percent of revenues) royalty fee in rebates from our partners alone," says Connally.
It's difficult to determine the size of the IT services market, except to say that it has huge potential: possibly in the neighborhood of $90 billion, if you count all the consulting and outsourced support services, according to Geeks On Call, one of the largest MSP franchisors in the U.S.
And there's plenty of room for growth: Internet costs continue to drop. This enables MSPs to provide additional web-based services at lower costs.
At the same time, Internet use continues to grow.
Finally, more small to medium-sized markets are looking for disaster protection for their data.
Two of the most important trends to watch in the next few years are consolidation of MSPs, such as the acquisition of Computer Renaissance by Friendly Computers, and the growing specialization of franchise operations in providing managed services—as opposed to break-and-fix models—for smaller businesses.
Also, say industry experts, the consumer market will be handled more by independents and the service arms of big box retailers, such as the Geek Squad, which was acquired by Best Buy in 2002.
Industry Sampler
There are a number of companies—franchise and non-franchise organizations—providing services in the small to medium-sized business market and consumer IT managed services segments. Here is a sampler of some of the leading companies:
CMIT Solutions
CMIT focuses on small to medium businesses, with the typical customer having about 11 PCs, one server and fewer than 100 employees. It operates in 32 states and has 85 franchisees, who run 100 offices. System wide revenues in 2006 were approximately $15 million. "Our mission is to serve the SMB market with innovative solutions," Connally says.
Bottom line, says Connally, is that CMIT is a relationship-driven business, not one driven by transactions.
While Connally says CMIT is basically a technology company, it's driven by marketing. CMIT has about 55,000 subscribers for its online newsletter, a database that it uses to discuss issues and to survey about marketing questions. Most recently, CMIT surveyed the subscribers and received more than 700 responses without offering anything to participants. "We thought we would get maybe 50 or 75 responses," says Connally. "These weren't trivial questions; they
required thoughtful responses. We can do very good grassroots research with this database."
Connally likes CMIT's franchise business model because the franchisees are local entrepreneurs. "This is a pivotal element of our strategy," he says. "They are in business for the long haul in their community. I just love this business model because I'm an entrepreneur myself."
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CMIT Solutions |
Friendly Computers Franchise Fee: $25,000 Royalty: 8 percent Renewal Fee: $2,500 Term: 10 years |
Geeks On Call Franchise Fee: $25,000 Royalty: 11 percent Renewal Fee: NA Term: 10 years |
Geeks On Call
Geeks On Call is one of the fastest growing and largest computer service organizations in the U.S. Last year, its 270 franchisees generated more than $25 million in total revenues. The publicly traded company is one of the newest franchisors in this segment: it was founded in 1999 and began selling franchises in 2001.
Geek's position in the market is that it sells only to small and medium-sized businesses. While it provides on-site services to home-based businesses, it is moving away from consumer services.
"We want to be a national brand that you can rely on," says Rich Artese, vice president and chief information officer. "Sort of like the Maytag man."
Geeks certainly has the visibility. Franchisees drive branded PT Cruisers to customer calls, a mobile marketing technique that Geeks pioneered, says Artese.
Geeks' goal over the next several years is to develop a truly national footprint, to have a presence in the major markets. The expansion will come with company-owned stores as well as franchises. Geeks recently opened 14 company stores in the Phoenix area and expects to open company stores in four more unidentified cities during the next six months.
Until it gets that national footprint in place, Geeks is offering a program called Telephone technical Support that permits Geeks to tie-in remotely to a customer's computer and fix a problem or help the customer fix a problem. "This fills the gap for us between places where we have cars and where we don't," says Artese. "It also lets us serve our warranty customers without an onsite call."
The company's biggest competitor is Minneapolis-based Geek Squad, which travels in well-marked Volkswagen Bugs.
Geeks has launched a major initiative to generate new customers by working with other franchisors as partners. Reasoning that most franchisees are small businesses that could use IT help, the company has begun approaching franchisors with a special discount program for their franchisees that provides a 10 percent discount off Geeks' normal pricing structure. No agreements have been signed to date.
Friendly Computers
This MSP took a major step in January when it acquired Computer Renaissance, the company that buys, refurbishes and sells new and used computer equipment out of retail stores. The move broadens Friendly Computer's business model to include hardware and added eight states to its 31-state network. The combined operation has 131 franchisees. At the same time, the acquisition adds retail stores and provides a feeder system for Friendly's services to small- to medium-sized business.
The company will continue to sell both brands, but new Computer Renaissance franchisees will be able to take advantage of services from Friendly Computers, according to Bryan Ward, president of the company.
Friendly is in a growth mode. System-wide sales grew 68.1 percent in 2006 and 24 percent last year. Computer Renaissance system sales grew 18.6 percent last year.
Best Buy's Geek Squad is Ward's primary competitor, but he competes successfully with lower prices and high service, he says. Service callbacks, and indication of the amount of return visits to fix the same problem, were only 2.89 percent through February this year, down from 3.58 percent last year. "This is a very big issue for us," notes Ward. Quick response also is important—99 percent of calls are handled the same day.
While about half of Ward's revenue comes from business accounts, 25 percent comes from small office-home office accounts.
