White Paper MANAGED PRINT SERVICE CONTRACTS Is the cost per page charging model still fit for purpose in 2015? By Adrian Moule Regional Head of Managed Print Sales, DTP Group March 2015
Table of contents Introduction: origins of the cost per page charging model...3 Cost per page: how it works... 4 Elements that can contribute to cost per page...5 Engineering service and components...5 Toner: the key consumable...5 ISO standards for page coverage...6 Toner yields: how much can you expect to achieve and how much are you actually being charged for?... 7 The pitfalls of including Capital within the cost per page charging model...8 Conclusion...9 Appendix... 10 2
Introduction: origins of the cost per page charging model The sophistication of print devices and the service needs of customers have changed significantly. Most enterprises choose to outsource the management of their print and multifunctional devices to an external specialist service provider. In most cases, the contracts that underpin these services are based upon a cost per page charging model. The cost per page charging model enables service users to take advantage of a consumption-based service contract that moves their printer fleet from Capex to Opex. The cost per page approach also allows the service provider to recover the cost of servicing the devices, supplying the toner being consumed and, in some cases, providing the devices. The cost per page charging model originated at a time when peripheral devices such as photocopiers and single-function printers were not connected to an enterprise network and were unable to report usage volumes via device management software. As such, the responsibility for providing monthly or quarterly page count readings from each copier or device within their fleet fell upon the customer. The cost per page model was, by design, heavily weighted in favour of the vendor, for whom Managed Print Service contracts proved to be extremely profitable. In the years since the cost per page charging model was first introduced, the sophistication of print devices and the service needs of customers have changed significantly. However, the cost per page charging model and the terms of Managed Print Service contracts have hardly changed at all. As a result, the appropriateness and value of the cost per page charging model when applied to Managed Print Service contracts, as opposed to the photocopier-style contracts that it was originally designed to facilitate, are now open to question. This white paper examines the relevance, fairness and value of the cost per page service model. It explores the advantages and disadvantages of Managed Print Service contracts and provides guidance that will help buyers negotiate and achieve best-value from their service provider. 3
Cost per page: how it works The cost per page model is generally presented as a standard industry approach. The flat rate price per page printed provides an easy benchmark for comparing the cost of one Managed Print Service offering against another. However, the cost per page charging model comes at a price that can prove to be costly for customers over the life of the contract. In order to arrive at a flat rate price per unit, the cost per page model has to bundle many different service and supply elements within a unified service offering. These can include toner, engineering service, replacement of components, and user support. In some cases it may include the provision of capital equipment. The problem is that not every supply element that is included within the cost per page contract is affected by, or dependent upon, the volume of printed pages actually produced. Some engineering parts, such as Fuser Units, Maintenance Kits, Transfer Belts and Rollers, can be considered to be volume-dependent because they have a predetermined average lifespan. The lifespan and the value of the part can then be amortised over the number of pages it will handle before it requires changing, as shown in the Fuser Unit example below. Item Cost Yield Cost per page Fuser Unit 180 150,000 0.0012 The different cost elements within a cost per page charging model will typically break down into three or four areas. Figure 1: Typical cost per page cost elements (excluding the capital cost of the equipment, which will generally become the largest element when included). Figure 2: Typical cost per page cost elements, including the cost of capital equipment Figure 1 Figure 2 Toner 60% Service 30% Toner 12% Service 6% Parts 2% Parts 10% Capital 80% 4
Elements that can contribute to cost per page The cost of providing an on-site engineer will be a key component within the cost per page calculation. Engineering service and components The cost of providing an on-site engineer will be a key component within the cost per page calculation. Equipment manufacturers publish a Mean Time Between Failure (MTBF) rate for their devices. This is based upon the average volume of printed pages they expect each model type to produce before it requires servicing. Managed Print Service providers use MTBF rates to calculate their engineering cost exposure and determine the most appropriate and profitable cost per page rate to apply. Such calculations are not an exact science and a number of variables may apply. As a result, many service providers attach a Minimum Volume Commitment (MVC) to service contracts for certain device types or across the entire printer fleet. The MVC, in effect, provides an insurance policy for the supplier that underwrites their engineering exposure. However, this also means less flexibility for the customer and can lead to unanticipated costs being levied during True-Up periods at the end of a designated contractual period. If the engineering service element can be calculated at the outset, it may be better for the customer to pay for this element in advance in the form of an extended warranty. This enables the service provider to manage their risk exposure and protects the customer from any unexpected surcharges. This also means it is in the best interest of the service provider to keep the device running for as long as possible between failures, resulting in a more reliable service for the customer. Toner: the key consumable Toner is probably the one item that most people would expect to be dependent on volume and, therefore, a key consumable within the cost per page charging model. However, this is not the case. Almost every page printed will be different. Some pages will have a high volume of toner coverage, such as a photograph for instance, whilst others will be virtually blank, with many variants in between. However, within the cost per page charging model, all pages printed are charged for at an identical, flat rate with the only distinction being whether the page is mono or colour. It may be tempting to believe that this is a case of swings and roundabouts, where what you lose on one you gain on the other. But it s not that simple. In order to arrive at a standard, flat-rate cost per page, Managed Print Service providers have to estimate the amount of toner that will be consumed. This is based on the manufacturer s expected yield for the toner, which is based upon the ISO benchmark. However, not every page printed will use the same amount of toner. In fact, studies confirm that the typical office document uses, on average, less than 5% toner coverage. Yet the cost per page charging model demands that customers pay the same flat rate for each page being printed, regardless of how much toner is actually being consumed. 5
The yield declared by manufacturers is not intended to reflect the minimum number of pages that the cartridge will print. Instead it is intended to provide an estimate of the average yield that can be expected from a particular cartridge when measured using the ISO test methodology. In practice, individual printer cartridges can perform above and below the estimated average, due to variations in the cartridge manufacturing process. Yield can vary according to factors such as the amount of toner on each printed page, typical printer job size, environmental conditions, and the amount of colour printing relative to monochrome printing. For this reason, manufacturers page yield data should be used simply as a benchmark for comparison purposes. Yield data should not be used to determine the exact yield that a printer or cartridge can deliver, or to arrive at an average cost per page. ISO standards for page coverage The standard addresses a broad range of important factors that affect yield and yield measurement. The International Organisation for Standardisation (ISO) published the ISO/IEC 19752 toner cartridge yield standard for monochrome laser printers in June 2004. The standard addresses a broad range of important factors that affect yield and yield measurement. These include: the test document, print job size, print quality modes, end-of-life determination, sample size and environmental conditions. The introduction of a rigorous and widely adopted standard provided customers, for the first time, with yield information that can be used to make accurate and objective comparisons between printer products and services. In December 2006, the ISO/ IEC 19752 for mono print was joined by the ISO/IEC 24711 for ink and the ISO/IEC 19798 for colour toner. In recent years, LaserJet printer and multifunction product yield data has been calculated using standard ISO test methodologies. The ISO/IEC standard that applies depends upon whether the device is a monochrome or colour printer. You can find more information on the ISO/IEC standards in the Appendix at the back of this document or online: http://www.iso.org/iso/home.html 6
Toner yields: how much can you expect to achieve, and how much are you actually being charged for? The actual yield that a customer may achieve will vary according to the printed content on the page. Printing dense documents, such as the text document shown below left, may result in cartridges yielding fewer pages than the ISO standard. Less dense documents, such as the organisation chart shown below, will enable the cartridge to yield more pages than the ISO standard. High-density text Organisation chart High use of cyan Most Managed Print Service contracts standardise the cost per page element for toner at a uniform 5%. The ISO/IEC yield methodologies allow the customer to compare the declared yield of cartridges from many different manufacturers. Most Managed Print Service contracts standardise the cost per page element for toner at a uniform 5%. However, research and audits performed across a wide range of enterprise customers operating within different industries and environments found that very few office documents use as much as 5% toner coverage. Almost all fell below, with most mono pages containing around 3% toner coverage. This discrepancy is exacerbated when colour pages are being printed. That s because cost per page contracts levy the full cost of printing a colour page even when the page contains only one word in colour. The typical office colour output contains between 9 and 13% coverage, not the 20% coverage (5% for each toner colour) applied within most Managed Print Service contracts that are based upon the cost per page charging model. Consider a situation where a particular consumable is rated as delivering an average yield of 5,000 pages at 5% toner coverage and the customer is being charged 1p per page for this element of the print. If, as research suggests, their actual toner coverage is only 3%, the consumable will produce, on average, 40% more pages. This means that the customer could be paying 40% more for their print than their actual usage demands. There are other usage situations where the customer ends up paying for more toner than they are actually consuming. For example, when the user sets the device to draft or eco mode, it will use considerably less toner. However, under the cost per page charging model, it is the service provider that reaps extra profit while the customer is rewarded with absolutely nothing for their prudent actions. This suggests that most customers would be better off buying and paying for toner as they use it. The one potential downside to this approach is that buying toner in this way is transactional and is likely to cost more than buying it through a contract. 7
The pitfalls of including Capital within the cost per page charging model It is rarely a good idea to include the cost of the capital equipment within a cost per page contract. This is because the service provider needs to ensure that they will recover the full cost of providing the capital equipment over the term of the cost per page contract. The most effective way for them to guarantee that they will do so is to include a Minimum Volume Commitment (MVC). The example below shows how the capital element is amortised over a typical 36-month, 5,000 pages per month contract. The 5,000 pages per month figure will typically constitute the MVC for providing the device. Device Purchase Cost Contract Duration Estimated Monthly Volume (MVC) Actual Monthly Volume Printed Capital Cost Per Click Total Capital Repaid 2,000 36 5,000 5,000 0.0111 2,000 2,000 36 5,000 6,000 0.0111 2,398 2,000 36 5,000 7,000 0.0111 2,797 2,000 36 5,000 8,000 0.0111 3,197 2,000 36 5,000 9,000 0.0111 3,596 2,000 36 5,000 10,000 0.0111 3,996 The example above clearly shows that any print volume produced on the device in excess of 5,000 pages per month will generate additional margin for the service provider. The table above, if shown without the Total Capital Repaid column, would give the illusion that the cost to the customer is the same regardless of the volume of pages being printed. This presents a tempting opportunity for an unscrupulous service provider to double the capital amount recovered. Clearly, if a device has a purchase price of 2,000, then this is the maximum capital price the customer should be charged, regardless of whether the device prints one or 1,000,000 pages during its lifetime. 8
Conclusion It s time for more buyers to exercise their duty of care and take a closer look at a service and an issue that is too often left to run unchecked. It is clear that, when it comes to Managed Print Service contracts, and the cost per page charging model in particular, common practice does not necessarily constitute best practice. As stated in the introduction, the cost per page charging model originated with photocopier contracts at a time when peripheral devices were less sophisticated, customer needs were less complex and the pitfalls of such contracts were less well understood. Times have changed. Cost per page contracts should only include items that have a predictable and projectable lifespan. However, research suggests that, in practice, very few of these exist. Instead, cost per page contracts calculate averages for a multitude of different engineering, service and consumable elements. In the vast majority of cases, the averages applied are heavily weighted in favour of the service provider. In order to be in control of usage, efficiencies and costs, customers should: Consider moving to a transactional model for the consumables within their Managed Print Service contracts. Ensure they do not include the capital cost of the print devices within a cost per page contract. Insist upon regular, scheduled volume reviews. Avoid making a Minimum Volume Commitment. Not expect to achieve the same yields that are stated in the ISO/IEC guidelines. Ask prospective service providers to provide cost per page rates for different densities of toner coverage. Be prepared to challenge the standard 5% coverage commonly applied. Managed Print Service providers must recognise that, whilst the printing needs of today s enterprises and their users have changed, the nature of the pricing models they are being asked to agree to have not. As a result, many organisations are paying considerably more for their print than they are actually consuming. Those who own the responsibility for providing and managing their organisation s print services should give more attention to achieving best value. And, to do this, they should review their print services more regularly and more thoroughly. They should compare their current usage against their managed print contract terms and commitments. If they find that average print coverage per page is less than their contract terms, they should consider moving to a provider whose services, terms and costs more closely match their needs. There is no doubt that more cost-efficient, intelligent and fairer Managed Print Services are available in the marketplace. The best of these offer 100% transparency for billing and service reporting, and they do not ask their customers to agree to a Minimum Volume Commitment. It s time for more buyers to exercise their duty of care and take a closer look at a service and an issue that is too often left to run unchecked. 9
About the author Adrian Moule is Regional Head of Managed Print Sales at DTP Group. He has more than 25 years experience gained in the reprographics and digital document imaging markets. Prior to joining DTP, Adrian was Head of Professional Services at EKM4 where he helped champion their vendor independent Managed Print software platform Insight II. Adrian has also held senior roles in Lexmark and Océ. Appendix The Monochrome Standard (ISO/IEC 19752) Under the ISO/IEC 19752 testing guidelines, a standard page is printed continuously until the cartridge reaches end-of-life. The Colour Standard (ISO/IEC 19798) Under the ISO/IEC 19798 testing guidelines, a standard set of five pages is printed continuously until the cartridge reaches end-of-life. Telephone: 0113 276 0210 Email: managed-print@dtpgroup.co.uk Web: www.dtpgroup.co.uk