Averil Horton takes a look at some of the financial implications for printers who are moving to digital pre-press and digital print.Banks like printers! You may not
believe it but they do. Why? Because traditional printing presses represent very attractive collateral for lending - they have a good long life and can be sold for a good price during or at the end of their life (in
some cases for more than their original purchase cost).
This gives us a first view of some of the changes that digitisation can bring. Computers, networks, and ink jet digital proofing printers do not have the long
life expectancy of traditional print equipment. One of the major implications of investing in digital technologies that depreciation times are much shorter giving a comparatively higher utilisation cost. Such equipment
also represents a much less attractive lending prospect to the usual sources of finance such as banks.
In response, major print suppliers are starting to provide not just the equipment but the financing for it too.
This of course provides a double edged sword - financing maybe easier to obtain and suitable for shorter life equipment, but it means you are locked into one supplier for some time to come, especially if some of the
finance comes via a long term lease arrangement.
In practice, equipment for digital pre-press, and eventually for digital print, will become partly capital and partly consumable. Software, with its need for regular
upgrades, is not really a capital asset of any sort and should be considered solely as a consumable. As a result, the decision to buy, and the costing of product produced on such equipment needs, to be done very
differently. Digital printing equipment is also very difficult to cost on the basis of running time; such equipment does not take well to maximising throughput as do traditional presses and maintenance times are higher.
The value added to a digitally printed product will come as much, if not more, from the manipulation of the digital data (from simple pre-press up to complex direct mail data handling); putting ink on paper is the stage
at which the value added becomes apparent but not where the work is done.
The implications are therefore that costing needs to be done on a value-added basis and not on a time-taken basis. To do this effectively
printers must know what value they are adding, in the eyes of their customer, which means that they must improve their understanding of their customers business in order to be able to asses this value accurately.
In addition, the value of a whole set of services is greater than all those services provided separately, so that costing should be done on a package-of-services basis, not on a cost-for-each-part-of-the-job basis. The
perceived value of a package will be much higher than for print-only work as it will include services that are already perceived as higher value such as design and distribution. For buyers of products well suited to
digital print, such as marketing material and training material the perceived value can be high compared to traditional print-only work.
It is well known that in general print runs are becoming shorter, a trend that
is accelerated with digitalisation. As a result the administration of estimates, quotes, invoicing and payments becomes proportionally more of the cost of a job. With the extremely short runs possible with digital
presses this work can even take longer than the whole job, pre-press included. The same is true of course for the customer too. Printing is moving from being a true batch process towards being a continuous process and
the associated business administration must therefore do the same. This means moving away from the traditional process of quotes, invoices and payments for each job, towards a more integrated approach, aiming for longer
term annual 'call-off' contracts with customers. Prices for standard jobs can be agreed in advance so that quotes are not needed for every job. Whilst this may mean that some jobs are not as profitable as others the
time saved on estimating and quoting will provide a better overall margin.
All this - the need for longer term contract type business and the need to price on a value-added rather than cost-plus basis requires a
closer relationship with the customer and the development of greater levels of trust. This in itself has financial implications. Developing such relationships takes time and resources, neither of which are usually part
of a print company's budget. In preparing the budget therefore managers should have a line for the development of customer knowledge, which can be as simple as reading the trade press associated with a customer's
business or more explicit work such as sending the pre-press and print staff to visit a customer for a day. What this all amounts to is a reappraisal of what a company considers as investment. Investment is no longer
just in terms of cash for a new bit of kit but is now also a question of investing time and other resources in developing a better understanding of customers and their markets. Investment plans should acknowledge this
explicitly, perhaps treating it in a similar way to investment in training. Print accountants please note that expenditures are real investments and not operational costs!
One of the business strategies that small
companies can adopt in the digital future is to be part of an alliance of smaller companies, which enables each member company to offer their client a range of services, some of which come from other members of the
alliance. The customer sees a one-stop-shop providing all the services required, with the 'printer' bringing together all the services required in one job, but only carrying out some of these itself. This is one way
that smaller companies can compete with larger concerns who can offer everything in house. However in the longer term there are some interesting financial implications arising from the development of networking, both of
an electronic and business nature.
Essentially simple physical assets will diminish in importance for print companies. Other assets, such as electronic networks with suppliers and customers and customer business
knowledge will become of real value. Similarly, customer trust will be very valuable, as will knowledge about the content of customer data and its manipulation. However, most of these assets are not easy to put a price
or value on and even less easy to write into the company budgets and accounts. Questions such as how to share the cost and value of intercompany networks will also arise for print accountants. These questions cannot be
ignored as more and more of the value, and therefore profit generating ability, of a print company will come from these sources.
A longer term consequence of this move from long term capital assets to short term,
'consumable' type assets is that medium sized print firms will find they have the least favourable future. Large printers, or those part of a large groups, can source finance internally; smaller companies can take
advantage of the ever downward price pressure on all new IT based equipment. They may also be able to more easily adjust their simpler accounting systems to cope with consumable-type assets and to recognise the value of
investing in things other than new bits of kit. In addition smaller companies can more easily form alliances and benefit from the equipment and expertise of other members of the alliance. The financial implications of
changing print technology may result in the polarisation of the print industry between the very large and the very small companies, with medium size companies going to the wall, selling out to the larger ones, or
splitting up into more function-specific businesses.
So, the messages for print company financial managers are
- Start to consider your digital print assets as 'long term consumable assets' rather than capital assets
- Instigate value-added costing rather than cost-plus pricing
- Move away from batch processing of quotes and invoices etc. towards a continuous call-off contract arrangement with customers
- Realise that some jobs can be standardised with standard prices that do not need to be re-done for each job, even if this means not all jobs make the required margin per job
- Incorporate non-cash investment into company budgets and accounting
- And finally, when you have a few moments to think, consider how to manage the financial implications of one day being a virtual print company!
Averil M Horton
2 Feb 1998
