Is Your Printing Contract Working Against You?
The first installment of this series, “Print Contract Negotiation In-Depth” (in the March issue of Publishing Executive and online in the “manufacturing” community on PubExec.com), focused on some of the essential elements of a printing contract. This installment will address whether or not your contract is actually working for you or against you. What purpose does it serve?
A publisher makes a commitment in time, and a printer makes a commitment in price. It’s critical to determine if those commitments balance. In other words, is a publisher’s willingness to stay out of the market and stick with one printer equivalent in value to a printer’s price proposal, including some controlled method for escalating prices over time?
For the last decade, the cost of printing magazines has been decreasing. Prepress technology and streamlined workflows have carved away fixed costs. Faster presses, wider webs and new technology have cut the cost per printed page by about 60 percent in the past 10 years. Even binding and mailing prices have dropped—by roughly 30 percent—in response to yield improvements.
In such a marketplace, a print contract that allows for price increases is pretty much the opposite of useful. No publisher wants to sign a contract in order to overpay in a few years. The goal is to secure an especially competitive rate today, in return for a commitment to a printer for the future. If the good prices don’t endure, it is foolish to sign the contract.
In fairness, even the printers didn’t want things to work out this way. Prices weren’t supposed to drop rapidly while existing contracts were upheld at the original, higher prices. But a soft market forced printers to furiously sharpen their pencils, and for as much credit as new technology is due for lowering prices, sales desperation also must be thanked.
So printers’ costs fell, and then they lowered prices even before they could reap the profit benefits of the new technology they had bought. Imagine, however, the embarrassment that ensues when it’s time to renew a contract. The incumbent printer’s offer usually includes a price cut that leaves the publisher smiling for only about a half a minute before their brows furrow again: “You mean I’ve been overpaying by this much?”
Finding a Solution
There is a way to navigate this era of falling prices successfully with a printing contract. Negotiating for immediate price cuts, usually with a counterbalancing contract extension, could keep publishers from missing the price-cut party.
Printers are happier than you initially might think to offer these mid-contract reductions. It means lower bills, but it also means an ongoing commitment. A printer who doesn’t keep pace with the market has an especially tough time renewing a deal––wait too long, and the price cut must be too big.
The culprit is obvious. The escalation provision in print contracts lately has included two incorrect assumptions: that inflation was worth guarding against, and that an index like the consumer price index (CPI) was a decent reflection of a printer’s change in costs.
Inflation has been a fairly quaint concept for almost 20 years now. It’s easy to forget that print contracts once were a neat technique for staving off inflation’s ravages. Escalation provisions in the 1980s often were big-time gambles, and contract negotiations had a Texas Hold ’Em quality. Instead of pegging increases to the CPI or the printer’s actual costs, publishers negotiated for fixed percentages. And something as high as 5 percent could actually backfire against the printer, not the publisher.
This little history lesson is included to remind you that, should inflation rear up as it’s now showing some signs of doing, you may want to dust off your Reagan-era playbook. But more importantly, bear in mind that contractual commitments have value when the escalation structure has a real enemy to fight, like inflation. Without this menace, a price-control system can work against a publisher seeking guarantees. That’s exactly what has been happening since the 1990s, and it’s made contracts look like poor publishing strategy.
The other core problem is that cost increases typically are geared toward changes in the CPI. Printers have admitted that the CPI doesn’t adequately express their changes in operating expenses, and they routinely set increases as fractions of the CPI. But at a time when prevailing prices are falling, any index pointing up is pointing the wrong way.
Print-price history is, of course, just history. If contracts that escalated prices in step with the CPI have been flawed for the last 10 or 15 years, does that mean they’re just as dangerous in the future? In other words, could prices go up again?
The printers certainly would hope so. Even as equipment yields have reduced the labor costs behind each printed page, printers have faced the same onslaught of rising health care and energy costs that have permeated the rest of the economy. And all that nifty technology that reduced labor hours wasn’t free. Printers would like to earn a better return on that equipment instead of using it to fight for market share with price cuts.
If prices do rise, the printing contract can provide some protection for publishers. We’ve seen the error of letting the CPI tell us where costs are headed, but it may be no better a guide in a time of increased costs than it was when it rose while print costs went down. The arrows may end up aimed in the same direction, but the severity of the trajectory still may not match.
The solution seems to be that good old fraction of the CPI, but the timing and extent of price changes in the overall economy often are poor mirrors of the printing plant. Consider the printer’s major costs: labor and benefits, utilities and the cost of capital. The last two match up well, but the first one does not.
Labor rates often are starkly stratified in a printing plant, with experienced crew members who have been employed for many years at the high end, and transient, unskilled workers earning far less. The three key wage factors are the region’s unemployment rate (making workers scarce or plentiful), health-care benefits (often withheld from part-timers), as well as raises and cost-of-living adjustments (often small for workers with longevity and high base-pay rates). All told, wage changes in a printing plant do not pace the general workforce perfectly.
For gauging the printer’s change in costs, the CPI is not a terrible tool, but it’s not ideal. And remember that the real goal of an escalation provision is to freeze the printer’s profit margin. If his costs go up, so should prices, but by no more than his costs—and no less.
However, we won’t be happy allowing the printer’s actual change in costs to dictate the changes in our prices. That would mean the printer has no incentive to control those costs while we sit by, dumbly waiting to reach into our pockets for his mistakes.
One of the best escalation structures is using the CPI to cap increases, not to determine them. Prices are allowed to increase by the printer’s actual change in costs, not to exceed a percentage of the change in the CPI. This yokes the printer’s cost-control behavior to an outside index, but gives the publisher the benefit of yield improvements combined with true increases in cost.
The secret of a strategic print contract is that it meets three conditions:
• First, the prices must keep pace with the market, either through an escalation structure that observes the market or through voluntary price reductions, perhaps attached to term extensions.
• Second, the prices at the outset must include a true discount for the value of the publisher’s time commitment. Lately, the rewards have gone to publishers who have played the spot market, taking advantage of the freedom to hunt for those lower prevailing prices. Ironically, the equipment that has reduced printers’ costs is only safe for printers to purchase when they know they can fill it with work. Finding a steady stream of brand-new customers is far less efficient than keeping the ones they have. Core prices must reflect the value of assured volume.
• Third, the contract must stay smart. Provisions for performance, quality, specifications, schedule and payment must all work to the mutual advantage of the publisher and printer for as long as it’s in force. For example, if the quality of the work materially declines, the publisher needs to have the right to terminate. If the volume of the work increases, the prices should change to reflect it. The contract must allow for dynamic changes that would make both publisher and printer sign the agreement all over again under the new conditions.
Publishers don’t want to shop for the sake of shopping. Selecting a printer is a tough enough decision without the need to wonder if the price basis for that choice will crumble in your hands during the life of a contract.
Now, we may well be moving into an era of rising prices, trading one set of problems (contracts that drift away from market norms) for another (a wave of increases in manufacturing costs). The contract can control the pace and intensity of possible increases if the escalation structure is well-designed. PE
Alex Brown is a consultant to magazine publishers specializing in manufacturing and magazine management. She founded her consulting company, Printmark, in 1984, and is a frequent speaker at industry events.