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World Outsourcing Trends Will Fuel Bindery Growth

We’re reading about it everywhere.  Outsourcing is the way the world does business.  More and more companies are sticking to their core competency areas and outsourcing the rest.  The graphic arts industry as a whole has been slow to embrace the outsourcing model.  Not any longer.

Even in the face of declining profitability – down 0.3% in 1998 – the future for the trade binding and finishing industries are bright.  Businesses around the world are pursuing outsourcing strategies with a vengeance.  Although commercial printers have been slow to adopt outsourcing on a wide scale, the economic model makes too much sense to ignore.  Here’s what the Boston Consulting Group, a leading consulting company, has to say about Nike and their outsourcing vision:

“New outsourcing opportunities are possible with very sophisticated relationships between firms.  For example, Nike’s relationship with its suppliers involves rich communication and collaboration in a deconstructed (outsourced) industry.  It includes coordination in design, manufacturing and delivery.  It has allowed Nike to build a superior brand in athletic footwear with constant innovations and high quality: All without owning the capital-intensive assets of production.”

Isn’t this how printers should interact with their post press partners?  Like Nike, binderies help in the design, manufacture and delivery of products.  Printing companies that cling onto “value-added” selling philosophies unnecessarily restrict their salespeople to the limited range of bindery services that they happen to produce in-house.  These outdated business models encourage print sales representatives to focus on selling what they happen to be able to produce without regard to their customer’s needs.

Here a few examples of what some of my company’s customers have done in the outsourcing arena:

  1. A large multiple location printing company bought a centrally located mailing facility, lost money every month, recognized its mistake, closed it, and reverted to outsourcing, all within two years.
  2. A mid-sized midwestern company bought an east coast bindery and found the technology and business of bindery very different than they imagined.  After a brief unprofitable attempt to make things go, they closed it down.
  3. Another company tried to create a vertically integrated “campus” in one location.  (Vertical integration is the creation of complete products within one economic unit from beginning to end.)  This effort lasted less than two years.
  4. Several companies that we know of have improved their profitability and market position by focusing on their core competencies and outsourcing all other steps.

Although the US economy was strong in 1999, I expect the final industry numbers will show only moderate post press growth.  Andrew Paparozzi, of the NAPL Printing and Economic Research Center, recently said that the growth of the printing industry tracked very closely with the Gross Domestic Product (GDP) from 1986 through 1997.  Since 1997, however, the growth of the economy has been twice that of printing.  One hypothesis is that alternative media is finally taking a measurable bite out of the traditional graphic arts industry.  But there are other possible explanations.

The Internet and Y2K Effect
According to consultant Dick Gorelick, one of the fastest growing print markets is “printing about products that try to do away with printing.”  Everywhere you look, “dot.com” (.com) businesses are littering the print landscape.  “.com” ads appear on billboards, in magazines and newspapers, direct mail, bus signage, business cards and consumer products.  In short, there is a lot of printing about the Internet going on.  If so, why has printing growth, and by extrapolation, post press services growth, risen at slower rate than that of the GDP?

In the late 1990s, U.S. companies in virtually every industry furiously ramped up their Internet efforts.  By the end of 1999, it is estimated that 70% of all American businesses will have some sort of Internet presence.  This means that a significant amount of the Internet groundwork has been laid.  As companies stop socking resources into non-revenue generating electronic infrastructure creation, they will soon start looking for a payback on their sizeable Internet investments.

What is the Internet used for?  Instead of marketing (Internet marketing is still in its infancy), its greatest value is as a low-cost response vehicle.  The cost of doing business on the web is far less than that of brick and mortar locations, making phone, fax and telephone response centers unbelievably expensive by comparison.  The granddaddy Internet retailer, Amazon.com, has launched a massive traditional marketing campaign touting the values of its website.  Why traditional?  Because a good mix of print, radio and electronic media continues to produce the best marketing results.  Will it always be this way?  No one can say for sure, but for the foreseeable future, it’s an awfully good bet.

Likewise, the Y2K computer threat of the late ’90s drained a lot of resources from sales and marketing budgets.  Y2K helped fuel our economic growth, but did little for printing.  The economists haven’t spoken yet, but Y2K by itself may explain some of the differential between the growth in the US economy and the printing industry.

Extrapolate these thoughts one-step further.  Now that Y2K is behind us, and that many companies have established themselves on the web, business leaders are now free to turn their attention toward unencumbered sales growth.

What Does This All Mean?
For binderies, the decrease in the printing growth rate should at least be partially offset by the trend toward outsourcing.  Beginning in the 1980s and lasting throughout the 1990s, companies in many industries have distanced themselves from their vertical integration strategies of yesteryear.

Consider the automobile industry.  General Motors was the king of the hill for decades and indelibly intertwined itself with a vertical integration strategy.  GM believed it should make its own seats, lights, gaskets, etc.  During the 1980s GM got to the point where it had the reflexes of a sloth and lost significant market share to nimbler competitors.  This is a far cry from the company that once proudly declared, “What is good for GM is good for the country.”

Today, GM is still reeling from its hefty vertical integration strategies.  Although it now outsources an average of 45% of the value of its vehicles, this number pales in comparison to Ford’s 60% and Chrysler’s 65%.  However, compare these numbers to some Japanese companies, which outsource up to 90% of their vehicles.  The last time I checked, the Honda Accord was the best selling car in America.  The more a car company outsources, the more resources it can devote to its core competencies – design, engineering and distribution.  Think of Chrysler’s current marketing slogan: Engineered to be great cars.  Maybe they’re onto something.

What’s the pattern?  Automotive companies are outsourcing, Nike is outsourcing and your next-door neighbor is probably outsourcing.  Are you and your company?  If not, why not?  The old internal value-added model is hurting our industry.  Commercial printing companies need to grow and develop their core competencies, which usually don’t include design, photography, bindery and mailing.

Good Accounting
There is one accounting issue that keeps companies from comfortably outsourcing all non-core activities.  This is whether the cost of those activities are deducted from your revenue before or after the net sales line in your financial statements.  When they’re deducted after net sales (as if they were a manufacturing cost) the size of those dollars wreaks havoc with your ability to accurately analyze your internal performance.  By deducting outsourced costs before your net sales line, your financials will give you a clear picture of what you’re doing right and wrong in the plant.

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Although there’s a lot of innovation going on in the bindery right now, in my opinion, there’s no bigger issue facing the printing world than this trend toward increased outsourcing activity.  Here’s a last thought for you.  How many new in-plant printers can you think of?  In response to intense global competition, American non-printing businesses are focusing on improving competitiveness in their core competencies.  Diversifying into printing is no longer on the radar screen for most large companies and forward-thinking printers are increasing their outsourcing activities to binderies.  It doesn’t matter whether sole-sourcing, limited-sourcing or multiple-bid sourcing systems are chosen, just as long as the emphasis is on outsourcing.

Jack Rickard is the President of Rickard Bindery, and the former President of the Printing Industries of Illinois and Indiana, Binding Industries of America, and Graphic Finishing Industries of Illinois.  Rickard Bindery is a company specializing in creating solutions for challenging bindery jobs.  Jack is a contributing author to T.J. Tedesco’s Binding Finishing & Mailing: The Final Word, published by GATFPress.  Jack can be reached at (800) 747-1389.