Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.

Tough Competition Forces New Strategic Realities for In-Plants

Printers are confronted with a double-edged sword of shifting volumes and hungry competition. As alternative media has cannibalized conventional print volume, the Internet and alternative media have presented startling opportunities to all printers. In-plants have clearly not been immune to these shifting sands of reality. This article will discuss a series of observations, evolving trends and the strategic positioning which a number of insightful in-plant leaders appear to be pursuing. There won't be a lot of numbers thrown out as in many instances the leading practitioners are too small a sample to represent any meaningful statistics.

Insourcing is Essential and Sobering

Overwhelming numbers of in-plants are committing to insourcing volume from the competitive print market to fill opportunity capacity on their key equipment. Various In-plant Graphics' surveys have shown this practice to be increasing with over two-thirds of in-plants engaged to some degree. While the objective of bringing in incremental volume is meeting with varying degrees of success, this tactic has proven to be the most sobering exercise in keeping the in-plant staff in touch with the dynamics of an increasingly competitive print market.

In-plants are learning that the old sibling relationships that many in-plant employees have had with their in-house clients are not satisfactory in the pure free enterprise market. Print buyers want exceptional customer service all the time. They want the completed job when they ask for it. They do not want to negotiate schedules simply because the in-plant will not work overtime. Very little else is negotiable either. If these outside clients feel slighted, you may never know about it, as they simply won't come back.

These tests in humility and tastes of reality, while often frustrating, are quite frankly healthy for the entire in-plant staff. These experiences are productive for the in-plant sales and customer service who get the first hand brunt of complaints. But they are no less effective for the production staff who clearly sees the angst and concern on their fellow employees who are being asked to lead the operation to a new and more demanding level of performance.

Insourcing Prices Lower than In-house Prices

Escalating demands by insourced clients is only the tip of the iceberg. In-plants are finding more often then they would like to admit that some insourcing jobs are priced below what they charge their in-house clients for similar though perhaps even less demanding requirements. Those in-house clients that find out they are paying premium prices are rarely pleased since they feel that (1) they are forced to do business with their in-plant printer, (2) their budgets are becoming increasingly tighter and (3) without their in-house print volume, the in-plant would truly not exist. Each of these points is very difficult to argue against.

But the fact of the matter is some smart customers nearly always pay less for comparable product or service than others. These smart buyers know that virtually any incremental contribution earned from their work will help to cover the in-plant's overhead expenses. And in turn this contribution helps to keep the in-plants' overall costs lower therefore benefiting all clients - in house and out.

Most corporate CFOs understand the benefits of this contribution pricing and therefore allow it to continue. However, the in-house clients, when learning about the pricing disparity almost always escalate their scheduling demands and acceptability of print quality on their in-plant as well. The screws get tightened. Welcome to printing in the new millennium for both private sector and in-plants.

It is important to realize that this hardened attitude occurs almost exclusively around conventional lithographic printed products. An evolving in-plant strategy to avoid this uncomfortable confrontation will be described later.

Those in-plants, who excel at insourcing, use contribution pricing sparingly but realistically. They are still thought highly of by their in-house clients, as they seem to share three traits in common. First, starting with the in-plant general manager throughout the entire staff they are humble and impassioned about customer service and pleasing their clients. Second, they go the extra mile every occasion they can to exceed client expectations, which means typically 5-10% of budgeted labor costs are spent on overtime year in and year out. Third, they have formal, on-going marketing efforts to stay in touch with and in front of their clients.

Marketing Is Ingrained in the Soul

Here are some classic marketing examples. They have two annual open houses showing appreciation for all their clients (one for the in-house group and a second on a separate day for their insourced clients). A quarterly open house tour is held specifically for in-house clients' new employees. This tour and free lunch helps to indoctrinate new employees on the full breadth of capabilities of the in-plant printing operation.

They publish a quarterly newsletter to all in-house clients featuring their own employees, technical tips about print design or mail regulation compatibility, and featuring the successful case study of a demanding job for a client. They have regular client surveys to gauge effectiveness of their communications and overall customer service. Third parties do all of these surveys; some by graduate students in the college's marketing or MBA programs and others by consultants.

Overhead costs are climbing uncontrollably

While annual and topical surveys by In-plant Graphics have shown full chargeback policy as standard practice for over 15 years, corporate accounting allocation of overhead costs to the in-plant's budget is becoming more conservative. Or stated another way, several administrative service entities appear to be bearing a higher share of corporate overhead than ever before. This perhaps is due to a philosophical accounting shift consistent with an underlying bent to outsourcing.

Future of outsourcing to the in-plant

This is not to suggest that the move to outsourcing is increasing. Outsourcing has been a threat to all in house administrative services for at least two decades. In-plant Graphics has reported case studies about outsourcing (how to defend against) and even cases of reversed outsourcing most commonly due to exaggerated promises by an ill-prepared vendor.

The reality is that entire product lines within the in-plant structure must be considered as outsourcing candidates on an on-going basis. And the one leading everyone's list are lithographic printing.

In-plants' financial records going mainstream

New corporate comptrollers looking over administrative services budgets and particularly in-house print budgets have been known to sing a common chorus, "Where are these numbers coming from?" Only the corporate veterans who have worked the budgets for years can explain the inane logic often found behind some of the proprietary financial reporting for some institutions. This is not to suggest fraud on anyone's part.

CPAs and professionals from corporate America are being hired "to shack things up" or "to turn this operation around." Coming across financial budgets or year ending statements that are unnecessarily difficult to understand seems to be raising their ire.

Labor costs are often higher than the private sector…

No surprise here. In-plants and corporate Human Resource Departments have focused for years on the local industry labor statistics to assure that the in-plant print personnel are paid within the local print industry range. The longevity of in-plant print employees has traditionally been longer than that of the private sector printing industry. Hence, while they are paid within the range, they are at the upper end of the range due to longevity.

The crux to the in-plant labor cost problem is that corporate fringe benefits for both the private and public corporate sectors are literally twice to three times as high as the printing industry as a percent of total labor costs. No corporation can choose to give one element of their administrative services less than parity fringe benefits.

While the in-plant employees themselves are fully aware of the higher value fringe benefits they are given than the private sector printing industry, many corporations and their Human Resource Departments are not aware of this because of the definition of "fringe benefits." The printing industry includes sick pay, holidays and vacation as fringe benefit items. Many corporations do not. Corporations often do not include educational reimbursement in the cost of fringe benefits though these are very attractive to many employees. Most of the printing industry simply does not use third party sources to educate their employees; hence, no fringe benefit expense here either. The Human Resource Department could care less about the printing industry's differing definition of fringe benefits because there is absolutely no possibility of reducing them, certainly not disproportionately to other employees.

Multi-shift in-plants are rare… standard for the private sector

Private sector printers typically move to a skeletal second shift when their total employee count approaches 18. The motivation is two fold: (1) better utilization of an expensive press and (2) improved turn around times versus a single shift operation.

Though many in-plants never get that big, there are other in-plants with twice that number of employees all on a single shift. The reason is that these larger in-plants are serving the financial services or university sectors where their Human Resource Departments, who dictate hours worked, do not have a manufacturing mentality nor the requisite sense of urgency.

Actual to budget must now include Profit and Loss statement and
break even for many in-plants is getting tougher…

Virtually all in-plant printing entities have budgets and receive periodic actual versus budgeted results. Even though many are supposed to be 100% chargeback, these financial results are now summarized on a surplus/loss or profit and loss. This is a very clear trend across in house administrative services throughout the private and public sectors. Growing numbers of in-plant printers are finding it increasingly difficult to show results on the positive side of breakeven. While the reasons can run the gamut, in general costs are climbing as has been described and volume is stagnating as will be detailed below. Even college and universities, the bastions of information creation and publishing, are finding less need for ink on paper.

Right of First Refusal is being winked at…

For decades the strategic plan for in-plants was to get and enforce the corporate policy of right-of-first-refusal on anything to be printed. If the in-plant can't do it, it can be bought outside. More and more institutions are either not making this policy or if it has been "tradition" forever, it is not being enforced. It is not being enforced because clients vocally feel that they can get faster service or better "value" down the street or the accounting records are difficult to chase down offenders until months after the fact.

Conventional volume drying up

Additionally lithographic volume is seriously drying up for in-plants as printing shifts to clients' desktop printers, remote printers and small private general commercial printers offering same day or 2-3 day turn on even process color work. Multi-part forms have moved to electronic forms. Copy volumes are stagnating for most in-plants. Electronic transmission of document files to the in-plant server has not helped volume grow but has slowed the decent if the in-plant can turn the project in four hours or less.

A surprising number of in-plants are showing pride in the quality of the four-color work being printed on their ancient duplicators. The color variation from the first to the 50^th sheet, much less the last sheet of the run, is often and easily noticeable by the naked eye. No job costing records are available to show the level of spoilage resulting from the multiple passes through the press to achieve these results. No records are available to show how long the project took to complete the print production.

And the most obvious conclusion often drawn is that the pressmen must have a lot of time on their hands (due to low volume) to experiment on and produce four color printing on single color duplicators. Can it be done? Absolutely. Is this the best way to satisfy the client's overall printing needs? Ugh. No one can really blame the print shop from trying to prove their print capability beyond the traditional perception of one and two color main line. But when process color quality results are marginal and critical deadlines are missed due to multiple press passes and prerequisite drying times, the print shop often has not one but two black eyes.

Price comparison with private sector is no longer a project…

The days of preparing a costing study every couple of years showing the savings of the in-plants costs versus private sector printers is waning. The policy is changing for this to be done randomly on work regularly throughout the year to show on-going pricing trends in the outside market. The trick for all in-plants and their purchasing departments is that more and more private sector printers are refusing to waste their valuable estimating resources on these costing studies when the outcome does not earn them any volume.

What graphics services are high value?

With costs escalating, traditional volumes cascading and in house clients becoming more demanding what are the best in-plants doing to not only survive but also thrive? Simply stated, they are looking at the various graphics services that continue to demand premium prices from the private sector. These include all of the value-added services that the aggressive private sector general commercial printers are reported to be aggressively embracing plus a few others that even they don't see. Such expansionary services include electronic design services, digital asset management services including image capture, digital camera photo prints from remote kiosks, all graphics support services for meetings and conferences, information fulfillment services, mailing services, variable data digital printing and wide format digital printing.

While many of these high value and premium priced services are "analog," most are clearly digital workflow and digital expertise-based. Several of these incremental services have been described through successful case studies in In-plant Graphics. Similarly the magazine in its annual survey of services provided by in-plants show an incremental increase in these services.

This article has tried to concentrate on strategic shifts of the leading in-plant practitioners and a brief background sketch leading up to these decisions. While the cost savings and improved service opportunities have existed in these ancillary services for many years, the aggressive shift to adopt has been spearheaded by severe problems in their traditional service offerings.

One final thought on strategic planning. It always seems amazing how the carrot rarely seems to encourage change but the stick gets the masses moving. The carrot motivation is client driven. The stick motivation is based upon self-preservation. The carrot always has some degree of financial risk though many clients praise their vendors for trying new things. The stick is proof positive that client's needs have been ignored, marginalized, and politicized. To gain clients back after strategic shifts due to riding the lame horse to its death often includes the departure of the in-plants' general management team who ignored their client base.

Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.