Paper trail: Michael Rich tracks paper for a living, but his company has had to adapt because of competitive pressures and the changing landscape of technology. How did Equitrac switch gears without losing its market share?
Ever received a bill from a law firm that included a charge for copying? Just how much copying goes on at any firm is a mystery to most people, but Plantation-based Equitrac knows exactly what goes on and has built a thriving business out of helping companies manage their paper trails.
The company, launched by John Kane in 1977, is perhaps best known for selling the hardware that attaches to photocopiers and tracks their use for billing purposes. Technology has advanced since Equitrac’s founding, but the promise of a “paperless” office never materialized. Instead, offices use more paper than ever before, racking up increasingly large copying and printing bills. Equitrac, in turn, changed gears to solidify its lead and grab more market share. Standing in its way were firms slow to adopt new ways of handling paper trails.
The company began diversifying by developing software embedded in networked copiers, printers and multifunction devices, from manufacturers such as Xerox and Ikon. That switch also ushered in a fundamental shift in how Equitrac earned its money: While previously it helped companies track costs that would later be charged back to clients, now Equitrac helps those firms cut paper and ink costs.
“My biggest job was creating a new software culture for the company,” says Equitrac CEO Michael Rich, who joined the company two years ago.
The strategy shift began in 2000, when top executives of the publicly traded firm wanted to cash out but found the thinly traded shares were nearly non-liquid. Eventually, New York-based private equity firm Cornerstone Partners purchased Equitrac and took it private. The $74 million purchase was financed in part by the shares of the executives, but mostly with $24.6 million from Cornerstone and $44 million in loans.
Rich, who had previously run Ernst & Young’s law firm consulting practice, helped launch AT & T’s Internet business and ran publicly held NetSpeak in Boca Raton. To cut costs at Equitrac, he outsourced its hardware business to Celestica Inc. and shuttered its Doral manufacturing plant.
“We wanted to invest more in the software assets of the company,” Rich says. “We have a lot more value-added from the software.”
Equitrac opened a software development center in Waterloo, Ontario, near several universities with strong software programming curricula. This September, the company relocated its 80 South Florida employees from Coral Gables to Plantation, in part, Rich says, to draw in technology workers from Palm Beach County. He also pushed ahead with Equitrac’s plan to broaden its industry reach.
The company has more than a 70 percent market share among large law firms. Growth, Rich surmised, would come from expanding into the general office and education markets. Partners such as Xerox and Ikon would be the key to penetrating those markets because they are two of the world’s leading manufacturers of copiers, printers and multi-function machines, which could be embedded with Equitrac’s tracking software.
Joel Mazza, director of InfoTrends/Cap Ventures Inc., a Massachusetts-based research and consulting firm, estimates the software segment of the market is currently an $80 million market, and he projects it will grow to $130 million by 2007. “It’s still a niche, not a huge market yet,” he says. “But people are interested.”
Gretchen Pomeroy, manager of partner programs for Xerox Corp.’s office group unit, concurs: “A number of years ago, we were telling customers why they needed it, but in the past years, customers are telling us why they need it.”
It wasn’t always so easy. Equitrac’s Rich had to win over partners like Xerox and Ikon that in almost all cases “actually own and control the customer relationship,” he says.
He convinced the partners to allow Equitrac engineers to jointly develop and embed tracking capabilities into their machines’ software, and then market the add-on features. Until then, Equitrac only sold and serviced (and still does) its law firm products directly through its own sales force. A new team of executives was brought in to manage product development and partner relationships, and to create a telephone service organization for non-legal customers. Around 20 percent of the employees are new to the company and the headcount is down to 350, from 420 when Rich joined the company.
Equitrac’s relatively small size ($62 million in revenues in fiscal year 2004) gives the company the ability to rapidly innovate, says Michael Kohlsdorf, senior vice president of Ikon Enterprise Services. “The most disruptive technology–the technology that changes the dynamics of a market–comes out of small companies. I think Equitrac is one of those companies that is on the leading edge from a technology standpoint.”
True to Its Roots
To be sure, Equitrac has not abandoned the legal market. It remains a lucrative business for the company. “I do hundreds of thousands of dollars of photocopying a year for my clients,” says Karen Unger, CEO of Fort Lauderdale-based American Document Management, which organizes and stores documents for companies, mainly in the legal industry. The company uses software inside its copiers to tag and track copies for clients and their projects. Without that ability, she says, it “would be a significant bite into my business.” Law firms, she says, make even more copies. “I have law firm clients who tell us that everything that walks into their offices gets copied,” she says.
And more law firms are upgrading to the new technology. Robert Cohen, office manager for Miami-based law firm Tew Cardenas LLP, says the firm has used Equitrac for 12 years and this year decided to upgrade both its printers and its Equitrac software. “Eighty percent of the firms use Equitrac, and the alternative, based on my feedback, is not as good,” Cohen says.
To drive further growth, Equitrac will launch a new legal industry product by June 2005, which will add print and scan tracking capabilities to its copy-tracking products. “Those are the next two applications that are going to drive growth in the legal market, and we feel very comfortable that we are in a position to take advantage of that,” Rich says. The products will be sold through Equitrac’s traditional direct-sales force.
Unger says demand for tracking those functions is rising: “The trend that I’m seeing a great deal of is all the electronic documents and how many times they’re accessed, printed and that sort of thing. That’s becoming more of an issue.”
Rich is sanguine about the prospects for so-called “chargeback” systems for printing and scanning documents. They are “one of the few IT products and technologies that an IT manager can employ that actually improve the top line [revenues] of a company,” he says.
The two-prong strategy is not without its risks. Others have tried to go down Equitrac’s road before. Boca Raton-based Control Systems Inc., whose Copitrak product is Equitrac’s biggest competitor, went after the general office market during the 1980s with tracking software aimed at reducing costs.
“We quickly found that the area that was most in demand was the chargeback,” says Control Systems chairman Ian Carmichael. “We’re giving them a cash register. The commercial market … you’re actually spending more money to allocate charges.” He re-focused his own company on the legal market and has not looked back since.
Carmichael says Equitrac’s strategy is alienating some law firms, and that because of it, his company is slowly taking business away from Equitrac. Of the Top 100 law firms, he says Copitrak now has 44 as customers, and has been drawing up to six additional Equitrac clients a year.
Keith Kmetz, program director for Boston-based technology consultant IDC’s hard copy peripherals solutions and services group, says Equitrac’s greatest threat is that its partners, companies such as Xerox and Ikon, will choose to develop their own document tracking technology, or that a smaller, cheaper rival will develop a better solution. “They need to continue to prove that they’re the ones to work with,” he says.
Rich worries about competition, too, now that the structural changes in the company are completed. “Every time you get involved in a growth opportunity that is recognized broadly by the major players, you have to anticipate an increasingly difficult competitive landscape,” he says.
Success will be measured in dollars, of course. His goal is a $75 million company within three years, and a $100 million company within five years. Fiscal year 2004, which ended in March, saw revenues of $62 million, up from $57 million for the same period in 2003. Critically, new licensing revenue–which generally comes from the acquisition of new customers–increased by 25 percent during 2004; Rich says margins on new licensing revenue are now 70 percent or higher. Although he would not provide profit numbers, he says Equitrac is “very profitable” before interest, taxes, depreciation, and amortization are factored in. “For planning purposes, we try to target EBITDA at 20 percent of revenue,” he says. “We’re a little bit below that, but that is our target.”
Eventually, Cornerstone, Equitrac’s owners, will look to cash out on its investment. Rich says an exit is not imminent. “They hold investments as long as they continue to grow in value,” he says. “They want to see improvements in profitability and they want to see improvements in overall financials of the company.” He says an IPO is “an opportunity that is definitely under consideration.”
Ikon’s Kohlsdorf is bullish about Equitrac’s chances. “You’ve got a company that has a very high market share, that is very well known in a particular space and with this disruptive technology. They’re now going to move out of that space. Plus, they’re very well backed by Cornerstone.”
COPYRIGHT 2004 CEO Publishing Group, Inc.
COPYRIGHT 2005 Gale Group