Reverse Auctions -- Sold to the Lowest Bidder
Just when it seemed safe to go back online, the specter of short-sighted Internet business models has risen to threaten print margins. It's the players, more so than the concept, that is new.
Reverse auctions are now being touted by accounting firms and business consultants as a means for Corporate America to dramatically cut the cost of print work. The nature of the players means printing isn't necessarily even the main target, but rather gets lumped into a broader procurement strategy for commodities.
Given the growing level of concern he was hearing from printers, Robert Lindgren—president of Printing Industries Association of Southern California (PIASC) in Los Angeles—felt compelled to raise the issue in a recent issue of the association's newsletter.
According to Lindgren, the process starts with the buyer designating a pre-qualified set of print suppliers. After job specifics are disseminated, these companies are given a window of time to enter their bids in an online environment. The identity of bidders is kept hidden, but each can see all the amounts being entered in real time.
"It's a 'reverse auction' because the bids start high and go lower," Lindgren notes. "The concern is that this process will lead to printing being given away."
Sandy Alexander, in Clifton, NJ, has been one of the printing companies playing a leadership role in the industry's response to reverse auctions. Members of its management have been actively involved with an informal task force started by the Association of Graphic Communications (AGC) in New York City. Roy Grossman, president and CEO, and Jonathan Fogel, senior vice president and director of marketing, also made a presentation on reverse auctions at the 2003 PIA (Printing Industries of America) President's Conference.
Just a Passing Fad?
Corporate initiatives of this type usually have a life span of around two years and then more often than not go by the wayside, Grossman says. "We're probably about nine months into this being a fairly widespread phenomenon," he notes.
"Typically what happens is a consultant sells the concept to a CFO, who usually does not have a lot of knowledge about the printing business. The CFO is naturally very excited by the reported savings. Without having a thorough understanding of all the implications of how a reverse auction impacts that transaction, the company exec will issue an edict that the program be instituted," Grossman explains.
Printing is an easy target because it tends to be a big budgetary item. The custom manufacturing nature of printing makes it difficult to challenge the analysis of potential savings, Fogel says.
"It's very easy for consultants to claim they are going to save a company anywhere from 10 to 50 percent of its total print expenditure because it's virtually impossible to establish a meaningful benchmark. The consultant will issue a big RFI to a prospect's core group of printers, but also throw a bunch of others into the mix to establish a baseline for pricing," he explains. "The savings often are overblown because it is a flawed model."
The biggest single flaw in the process, Grossman contends, is that the specs have to be set before the auction begins. "Real savings come from collaboration at the conception stage of the project, where the printer can optimize the project based on the best manufacturing processes," he says. "The job ends up not being what was specified anyway, so additional costs start to pile up. The whole process is compromised in the end."
The process itself can be disingenuous since the rules for auctions typically specify that print buyers are not obligated to award jobs to the lowest bidder, Grossman points out.
"What often happens is that the low bidder isn't a client's regular supplier. The buyer then goes back to one of its regular printers and says, 'We'd really love to give you the job, but we got a bid that's 30 percent below yours. If you can meet the price, or at least come close, we'll give you the job.' The supplier that drove down the price doesn't end up being the beneficiary."
There are always at least two sides to every story, and sometimes more. Paul Beyer, vice president of product marketing at Servador Inc. in New York City, says there is a middle ground in the reverse auction debate. Servador enables print buyers to use this procurement tool, but Beyer stresses that it is just one component of a full-blown, Internet-enabled sourcing solution.
"Not all auctions are created equally, and not all print jobs are suited to an auction environment," he says. "Once a client is online with a qualified pool of suppliers, sealed bidding becomes the standard practice 95 percent of the time.
"Successfully managing an electronic marketplace—so it equitably services both the buyer and the seller—requires extensive domain knowledge and market expertise," Beyer continues. "When put in the context of a company-wide print management solution that supports, and often enhances, printer-buyer communication, printers have a lot to gain."
Cost containment, spending visibility and process efficiency are key drivers motivating companies to adopt integrated, online sourcing technology and services for their print purchasing, Beyer says. The use of Web-based RFQs, sealed bids, online estimating, job tracking, project logistics and reverse auctions are emerging as powerful tools for print buyers to centralize and better manage suppliers and the procurement process, he explains.
"The main benefit for printers that participate in managed, online environments are low-cost access to corporate customers, the potential for larger aggregated contracts and predictable work volumes," the Servador exec continues.
Beyer concedes that print still is largely a custom manufacturing process, but he believes technology advances and widespread understanding of the process have increased production stability, minimized the need for customer hand holding and made many types of printing highly repeatable or simply on-demand.
"Four-color separation and offset printing are not the black arts they were 20 years ago," he says. "A sizable portion of print work can be managed easily through an online sourcing solution, as long as a detailed job specification is established and a knowledgeable facilitator is involved in planning and managing the process."
Servador has answered that concern by offering a job engineering service, Beyer asserts. "We put a great deal of time and development into our online RFQ, scheduling, project management, access to resources, etc.," he notes. "As an independent supplier, we're able to offer unbiased job engineering. Print customers may get advice from their suppliers, but that expertise is based on the type of equipment a printer has in its shop or that is available at any given time. That perspective may or may not be in the best interest of the customer."
Process expertise is critical to the success of reverse auctions as a sourcing solution, Beyer asserts. Solutions such as Freemarkets, Ariba, Oracle and PurchasePro treat print like a commodity that they know little or nothing about, he notes. "That's when the bad things happen."
The bottom line is that print suppliers shouldn't make bids with which they are not comfortable, Beyer says. "With a reverse auction, many times the low bid does not win the business. So, if a supplier posts a comfortable price and finishes second or third, it still has a fair chance of getting the business."
Sandy Alexander's Grossman agrees with that point. "When you bid on a project—whether it is via fax, e-mail, in person, online, etc.—you should submit your best number," he says. "With a reverse auction, we're recommending printers go in one time with a best number and that's it."
Commercial printers can't function with price being the only differentiator, Grossman adds. "It weakens the entire industry and, ultimately, it's not good for anyone."
Knowledge Is Power
The printing exec notes that the business trend seemed to catch on faster in the New York area. He attributes this to the volume of work purchased in the area.
Fogel adds that the push isn't coming from the ad agency and graphic design world. "It's from the Fortune 100 companies where a point of access is gained through people who are not familiar with the print purchasing or production process," he explains.
In response, AGC has produced a communication targeted to the CEO/CFO-level corporate executive, Fogel notes. "It's a PowerPoint presentation of the facts and implications for all sides of reverse auctions."
PIASC's Lindgren says most people who are in the trenches buying printing—and responsible for it being done correctly and on time—don't like this buying approach, but may be forced to go along with it. He advises printers to learn how to play the game correctly.
"The first thing printers should do is continue to build relationships to ensure that they are always among the designated handful of preferred suppliers," the association exec counsels. "When bidding, keep in mind the customer's behavior in terms of change orders. With some projects, the change orders are worth more than the original job. In those situations, printers can be more aggressive on pricing."
Susan Greenwood, president of AGC, reports that her staff and association members are working hard on a number of fronts to educate Corporate America about the implications of reverse auctions. "It's one of the most important issues we are looking at," she says. "The traditional print buyers know reverse auctions are not the right approach. It's the CEOs and CFOs that don't understand the process, and we need to change that.
"We're telling them about all of the wonderful benefits, for both parties, of the relationship that are lost in this process," Greenwood continues. "Also, the reported savings are a fallacy."
"When it comes to print production, the business model doesn't work," adds Vicki Keenan, AGC vice president of government affairs. "The lowest price isn't necessarily the best value."
The presentation at PIA's President's Conference showed there was definite interest on the part of members to learn more, reports Mary Garnett, vice president of executive development. "It was just one part of our overall action plan to get the word out," she notes.
PIA's E-business Council (EBC) will spearhead the organization's activities with regard to reverse auctions, Garnett says. Under the direction of Joanne Vinyard, program manager, the council contracted out a white paper, titled "Strategies for Reverse Auction Survival." (Visit the EBC home page on www.gain.net.)
The more printers get involved in efforts such as these to gear up a response, the quicker this trend can be reversed.