Confronting Reality About Margins --Dickeson
Why do we duck the reality of the Ratio Studies published by the Printing Industries of America (PIA)? In a prior article, a summary of the last six years of those studies was published. If we accept those studies as representative, the lower three-fourths of our commercial printing industry have had margins that are below the survival level. Either the results presented by PIA are misleading—or downright phony—or we're in denial of the reality of what they clearly say.
To put it in existential terms, why haven't at least 10,000 of our 20,000 commercial printing firms filed for bankruptcy?
Suppose we accept the PIA Ratios as the realistic view of our industry. No one seems to be in the least excited or disturbed by the condition. At least I haven't seen any written outcry. We just see the data and go on about our business. So, what else is new?
Truth Is in the Numbers
There are more than 30 firms selling computer systems to printers. How many companies are supplying paper (and credit) to printers? Ink companies? Machinery and equipment suppliers? It's not only printers who should be concerned about these gloomy numbers—if true.
Larry Bossidy and Ram Charan published a book last year titled "Confronting Reality—Doing What Matters to Get Things Right." They stress that businesses have to change their operating models continuously as economic conditions change.
One of the first things to be done, they suggest, is to look at the market as an outsider. Has it changed? Is it changing? Has the product become, or is it becoming, "commoditized?" If so, pricing margins must fall and, to succeed, operators (printers) must do everything they can to reduce their costs to maintain margins. Can we say that printing has changed, that it's become more of a commodity over the past six or seven years? Personally, I don't think that it has changed that much.
But is the balance between being an industry of service or commodity slowly tipping? Each printing company has to look at what its product is and give some thought to this question. Clearly, the balance tipped for personal computers. Personal computers are now a commodity like telephone receivers or calculators.
But where are all the software companies that sprang up in the late '90s that purported to be auction houses—little Ebays—for printing? They depended on printing being a commodity that could be bought and sold by price bid. They're history! That's the reality of the matter.
Where's the paperless revolution that was supposed to follow the computer boom? Hasn't happened, has it? Are there more or less catalogs, books and magazines than there were? Is your Sunday newspaper still a file jacket of preprinted inserts? Is your mailbox less, or more, filled with direct mail printed promotions?
Yes, there's change in commercial printing, but it's at the margins, isn't it? And, that's always been true. Maybe business forms or tax returns are less than they were, but just look back over the past six years, or 12 for that matter. The lower three quarters of the commercial printing industry—according to the PIA Ratios—haven't been doing well enough to attract major new investment.
When we look at 10 years or more of the Ratio Studies we find that the upper 25 percent of the firms reporting have operating margins of 12 percent to 15 percent. Not great, but not too bad. Let's look at the product pricing. Surprise! Surprise! All firms, both upper 25 percent and lower 75 percent, are within fractions of a single point of each other when judged from a value-added point of view. It isn't price that makes the difference. That's reality. What is it, then, that gives the upper 25 percent such a great difference in operating margin?
It's a People Problem
Either the lower three-quarters of commercial firms have too many people for the value they're adding or they're paying each person employed far too much. There's a 9.5 percent to 10 percent difference of value-added in personal compensation between the two groups!
That, good buddies, is where the difference really comes home to roost. That's the reality we must really confront in commercial printing. Pricing you can forget. Compensation for people, including all the benefits that go with the people, is where the truth lies hidden.
But, pricing is the great secret, isn't it? No. Pricing is way, way overplayed. It's compensation, materials waste and personal relationships in selling that are the keys to success in commercial printing. We're wasting far too much time and effort arriving at a price—budgeted hourly rates and all that malarkey. We must look for ways to reduce the number of people we're using to convert materials to finished product, from top to bottom of our businesses. That's a fundamental change we must make in our operating models.
Maybe that requires a hard look at specialization rather than a policy of being a printer of "all things for all people as long as it's printing." Gulp! That would be a radical change in business plan for lots of firms, wouldn't it?
Let's take a hard look at those printers in the upper 25 percent. Do they tend to be specialists? Who knows? We must find out. It's doubtful if any of our big, top-five firms in printing qualify as being in that top 25 percent group of operating profits. Am I wrong? Look at published financial statements where available.
Look at the merger firm specialists. Top quarter of all commercial printers? Very, very doubtful, isn't it? Well, then, just who are those in the upper quarter? What are they doing? How did they become successful operating at 10 percent value-added, less compensation?
There's a secret. First one of the lower three-quarters to find it out—I mean really, really, truly find it out—wins the gold ring!
About the Author
Roger Dickeson is a printing consultant located in Pasadena, CA. He can be reached at firstname.lastname@example.org. A PDF copy of his recent book Monday Morning Manager is available without charge by e-mail request.