Consistent Predictable Revenue

Cary F. McGovern Comments
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In a time when we have to really search for an investment with significant return, records management and storage consistently have extraordinary yield while building a revenue annuity base that never decreases. Impossible, you say? Let's take a peek at why and how this is consistently true.

THERE ARE TWO PRIMARY REVENUE COMPONENTS IN THE RECORDS-STORAGE INDUSTRY: storage revenue and service revenue. The storage-revenue component is an annuity that never decreases. Service revenue varies greatly and is dependent on the marketing plan you choose. It can range from 65 cents to more than $2 for each dollar of storage revenue.

Iron Mountain, the largest provider of records-management services in the world and a publicly traded company, has achieved 53 consecutive quarters of storage-revenue growth. This growth is highly predictable and recurring and, for Iron Mountain, is typically 10 percent to 12 percent annually. (For more information, visit www.ironmountain.com.) This increase is driven by existing customer relationships.

Storage revenue is essentially permanent revenue. It always grows for several well-founded reasons:

1. The "paperless office" is a myth, as documented in numerous studies over the last decade. Paper remains the primary tool of knowledge workers.

2. Average growth of business off-site records storage ranges between 7.5 percent and 25 percent annually, depending on the age of the outsourced relationship between the client-company and service provider. Growth is net of destruction. The newer the client is to outsourcing its business records to a commercial records-management center, the greater the annual "creep-growth," the difference between new additions to storage and the destruction of old storage units.

3. Clients typically sign a multiyear contract for off-site storage that includes several ominous features: permanent retrieval fees; automatic, self-renewing contracts; and preset price escalations, to name just a few. (Permanent retrieval fees are known as "hostage fees" in the industry. They dissuade clients from moving their boxes to another vendor.)

4. It has been reported by several sources that the average box stays in storage for 15 years. This is well beyond the normal life of most requirements for business-record retention.

5. Excessive volumes of business records are the result of fear of audit or litigation, which drives many otherwise frugal businesses to store records for long periods of time.

6. Terrorism and the unfortunate outcome of Sept. 11 have given rise to increased levels of awareness for the protection and security of business records.

7. Failures of Enron, Global Crossing, Arthur-Andersen and WorldCom have driven many businesses to reassess their records-management strategy.

8. The Health Insurance Portability and Accountability Act (HIPAA) rolls in this year. It requires healthcare providers and business associates (principally outsourcers) to care for medical records in a more confidential and secure manner. HIPAA has real teeth; it has financial and criminal penalties for noncompliance. Medical-record keeping requirements are long-term and have research value to humanity beyond the practical use for patient care.

9. Industry studies indicate the commercial records-management and storage industry is only 40 percent outsourced in the United States and possibly 10 percent outsourced in the rest of the world. New startups come from every corner of the world, with the European client base growing exponentially.

Industry Consolidation and the New Growth Impetus

The commercial records-management industry saw steady growth from the 1950s through the 1980s. It experienced a great deal of consolidation during the 1990s when Iron Mountain, Pierce-Lehay and Recall (a division of Brambles) acquired hundreds of major operations in the largest markets around the world. The industry is now witnessing the largest number of new startups in its history. There are several reasons for this dynamic:

1. The consolidation left holes for new entrepreneurs to fill in major U.S. and European markets.

2. Smaller communities are now excellent markets for commercial records-management services. These typically have no or limited competition with rather poor service levels.

3. There is a growing knowledge base from which to draw expertise. PRISM International (the trade association for commercial records management) and independent consulting and training companies offer industry knowledge, assistance, sales training and ongoing support to ensure successful implementations.

4. Internet-based technology allows new records-management startups to offer similar services to Iron Mountain at modest costs.

5. Strategic outsourcing of labor-intensive activities can improve EBITDA (earnings before interest, taxes, depreciation and amortization) by 15 percent or more.

6. Other related business opportunities thrive around records management, including document destruction and specific document-management services.

The Growth of Document Destruction

Over the years, document destruction has been more a hassle than a requirement. In the past, it was driven by the cost of recycled paper. That commodity has gone on a roller-coaster ride throughout the last two decades. Today's document-destruction industry is a fledgling with massive growth ahead. It is now driven by security, confidentiality, privacy and the stolen-identity crisis.

Although this business is different from the records-management and storage industries, it is highly interrelated. This year, PRISM International will have a joint conference with the National Association for Destruction of Information, the international trade association for companies providing information-destruction services. There are some industry insiders who believe if records management and storage is only 40 percent outsourced, the document-destruction industry is less than 10 percent outsourced. These are being matched as sister industries with long-term revenue potential.

Regular columnist Cary McGovern, CRM, is the principal of FileMan Records Management, which offers full-service records- management assistance for commercial records-storage startups, marketing assistance, and sales training in commercial records-management operations. For assistance in feasibility determination, operational implementation or marketing support, call 877.FILEMAN, e-mail fileman@fileman.com; www.fileman.com.

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