Blessings of Net-Procurement

Digital technologies are nothing new to the printing industry. But until recently, their main impact was centered on the creative and production processes. The management of vendor selection and project information – approvals, change orders, process communications and invoicing – were not affected to the same degree. However, the rapid emergence of well-funded, Internet-based print-procurement services has changed all that.

These new service models claim to facilitate the entire print buying process. The most sophisticated models aim to streamline and simplify the handling of the many variables typically associated with buying and producing custom print products. Based around new eHub technology that allows collaboration through a secure Web site, the print-procurement services attempt to provide the technology-driven tools required to make the entire process more efficient.

Most services that stress project management encourage buyers to enlist their print suppliers into the system, essentially keeping their supply network intact. Some also encourage the option of taking bids from other vendors outside the buying firm’s supplied list. While services generally claim a reduction in price for the buyer, they maintain it results from more accurate pricing and better matching of projects to vendors’ capabilities than to heightened competition. Similarly, they claim printers gain more business in their most efficient areas.

So where’s the rub? The problem is not in the application of e-business technology to the print-procurement process. The problem is in the transaction fees charged by the services. Generally, there is a sliding scale from 1 percent to 3 percent of the total invoice amount – less taxes, freight and customer-furnished paper – charged to the printer on every project run through the service. One company also charges the buying firm a nominal contract fee, but the bulk of the charges fall to the printer.

Are transactions fees fair? Probably not, especially for the management of existing business. Think about it.

On one hand, printers can justify paying a transaction fee to an auction service that produces new business because it relates to a commission for bringing buyer and seller together. The long-term risk in this scenario is that the auction sites may eventually commoditize printing in much the same way the Government Printing Office did. Margins became so low that many printers opted out – except to occasionally sell some down time – and many of the agencies spent their time trying to circumvent the GPO to get higher-quality printing and better service.

On the other hand, expecting a printer to pay a transaction fee at existing accounts (possibly on every job, forever) is a difficult financial pill, particularly in an industry that often struggles with margins of 3 percent to 4 percent.

The services argue that they will save printers far more money through greater efficiencies than they collect in transaction fees. In the only detailed ROI projection provided (to me) by the services, savings to the printer would primarily to result from:

• Personnel reductions in estimating and customer service;

• Overall data entry reductions;

• Reduced estimating/invoicing errors and omissions through an integrated system;

• Reduced time in the job checking process through integration of management data and content;

• Reduced billing/payment cycle through automated invoicing;

• And, better equipment utilization through use of improved scheduling tools.

These savings are not proven, however, and it could easily require thousands of man hours to truly integrate a printer’s internal systems with any given service. Consider that a printer may have several different services with which to integrate, and it’s difficult to see any near-term savings.

In addition, there is an inherent “windfall” factor built into transaction fees based on total invoice. As every print buyer knows, identical catalogs with different run lengths – say 5 thousand vs. 5 million – would require about the same amount of job processing from the print-procurement service. The difference is simply the amount of time each catalog spends in the pressroom and bindery. Yet the procurement service would receive a vastly different transaction fee for the two jobs. Their answer is to charge a lower transaction fee for the larger job, but there is still a disproportionate fee involved as well as a disconnect in the rationale behind value provided and fees charged.

Why charge transaction fees? The main reason is that Internet print-procurement services are largely backed by venture capital funds and the investment community places a far greater value on transaction fees than licensing fees. No doubt venture capitalists’ mouths watered when they thought about the potential for collecting transaction fees on the total volume (or even a significant chunk) of the huge printing industry. It’s that simple.

What is the printing industry’s response? It varies. Since many of the services are working hard at recruiting buying firms, some smaller printers are often unaware until a contract appears. I know of one printing company that recently received a contract sent on behalf of one of its largest clients. Most of the work they performed was going to fall into the 3 percent transaction fee range, and they were also to pay the service $300 per employee trained.

Understandably, most printers are being cautious. Fast Facts, a weekly e-mail service provided by TrendWatch Creative and Printing Reports, claims that 18 percent of commercial printers responding to their survey said they currently participate in Internet job bidding and another 14 percent said they plan to in the next two years.

On the other hand, 20 percent said they will not participate in Internet job bidding in the next two years, and 23 percent are concerned about the possible negative effect on their business in the next few years. TrendWatch expects the current split to change as printers either have success with Internet services or lose business to them.

Large printers likewise are just beginning to address the procurement service issue. One major printer, however, decided to join forces when it announced a $14 million equity investment in a print-procurement service, along with plans to introduce the service to the printer’s network of customers.

On an industry-wide basis, Printing Industries of America recently announced its intention to form a committee to study Internet-based print procurement and develop a set of recommended standards. Transaction fees will be reviewed as one of the issues.

What to do? My advice: Proceed with caution. Remember that behind the hype and genuine potential is a real cost that must be measured carefully. If you’re considering an auction service, be careful how much and what type of work you submit. Relatively simple, straight-forward projects are probably the best bet. If you’re considering a project-management service, weigh all your options and include your printer in the discussions.

Most likely a number of the services will fail, and already there have been announced mergers and rumors galore. Lots of developments are expected to take place in the next 30 to 60 days, so make sure you don’t end up investing your resources in a service that may be quickly outmaneuvered in the marketplace.

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