The FM Challenge

FEW INDUSTRY discussions are as contentious as the debate about how a large company or organization should handle its printing needs. It is often impacted by prevailing management trends that swing from owning equipment and managing the staff to using a facilities management (FM) service to hiring a company to outsource the printing. After working with many companies, we have seen each of these options work or fail in different circumstances.

When corporate management begins to look at alternatives to maintaining an in-house printing facility, it is often viewed as a threat to both the in-plant and commercial printers, but it can also present an opportunity. According to a 2008 study by In-Plant Graphics, some in-plants have benefited from a head-to-head evaluation.

When there is an economic downturn, companies seeking to cut expenses evaluate services they do not consider among their core competencies such as transportation, food service and the in-plant printing facility. As conditions improve, these services may be re-evaluated and decisions may change, but right now we are witnessing a feeding frenzy as organizations offering replacements for in-house services are contacted, asked to perform evaluations, and considered for taking them over on a contract basis.

NAPL consultants are often called in as an independent resource to evaluate the pros and cons of each option—in-plant, facilities management or outsourcing—and we are just that. We have members in all three categories and we recognize the advantages and challenges of each option—and that the answer in one set of circumstances may not be the same in another.

We believe that the most important issues to consider when deciding among these three options include internal cost, efficiency/equipment utilization, capital expenditure, risk of equipment obsolescence, security and turnaround time. But there are also intangible issues such as customer satisfaction, convenience, and value to the organization that should be considered.

The Inside Story

An InfoTrends study entitled "Defining and Sizing the In-plant Market in the United States" defines an in-plant as a site that performs copy or print work primarily for others with a dedicated staff. The study breaks in-plants into two categories: shops that support print needs for the entire company and small copy/print sites that support one department or division. By this definition, there are currently about 50,576 total in-plant or corporate printing sites, with company-wide facilities generating $13 billion in retail value—and forecast to grow at 2.4 percent—and department/division sites generating $3.4 billion, with a 1.9 percent growth forecast.

Organizations with more than 500 employees in the United States spend more than $68 billion a year on production document printing. This is only part of the total document cost though; research studies have found that, on average, for each dollar spent on printing, another $6 is spent on related services such as warehousing and archiving, creative services, management and review, fulfillment and distribution, obsolescence and administrative costs. Add in the printing done on copiers, desktop printers and fax machines and the total average cost of printing and related activities is 6 percent of annual revenue.

Many in-plants are evaluated by their ability to break even financially by charging for their services. Often they need to perform within a certain percentage (5-10 percent) of competitive prices to be considered a viable option. In theory, a well run in-plant should result in lower costs simply because, unlike commercial printers, it is not trying to make a profit. But a strange thing about cost justifying printing equipment—you need a certain volume or utilization rate to achieve both a competitive price and a break-even point.

"Print volumes—litho and digital—have been cascading for several years," observes Clint Bolte, Principal of Bolte and Associates, in Chambersburg, Pa., "partly because the volume has migrated to the remote or departmental MFDs [multi-function devices] and in no small measure because the volume has become virtual and been absorbed in e-mail transmissions. Far too many in-plants have treated this erosion as a temporary blip and simply restricted overtime as their only cost-control initiative.

"After two to three years of steady revenue decline, those in-plants that have been fully costed are typically showing disturbing red ink on their bottom lines," he notes. "Losses do not in and of themselves suggest that the in-plant should be outsourced or that a facilities management firm be brought in." In-plants are responding to the outsourcing threat by diversifying into additional value-added services, Bolte says.

Free Vendor Analysis: Worth the Cost?

It is not unusual for someone proposing an FM or strategic outsourcing solution to offer to do a free analysis for the company, often called a "make vs. buy" analysis, which calculates the costs to manufacture internally versus the cost if someone else managed the in-plant or bought the work from more efficient printing "strategic partners." FM service providers may review the in-plant operations and report that its work is costing 10-30 percent too much. The provider may then suggest that it can cut those costs by a specific percentage and keep a portion of that as payment for their services.

But these analyses are not always accurate because of the costs associated with manufacturing or, more accurately, the total cost of operation (TCO). An accurate TCO includes everything—floor space, rush charges, utilities, delivery costs, taxes, etc. If, for example, the in-plant does not pay for floor space, utilities, or delivery, how can it accurately be compared to a company that does pay for those things? In many cases, not including those costs makes the in-plant's costs appear lower, and some people argue that you need to add those calculations to a true TCO.

Other murky issues include rush fees, ordering requirements, overtime costs, turnaround times and batch production—often the bid is based on a certain turnaround time (e.g., three days) that includes a waiting period until enough work is gathered to run in more efficient batches.

When doing business cards, for example, the order may not be run until enough cards are requested to fill a sheet, but there are times when customers cannot wait, resulting in an additional rush fee. The cost for 250 business cards for a large company may have been quoted as $25 per box when multiple jobs are all run as a single batch, but may cost $125 when a single card must be run alone. The additional costs may exceed the savings gained by moving the job outside.

The impact of rush jobs or huge peaks is not unique to FMs or outsourcing services. Many in-plants may have huge periods of intense work that require printing to be done with overtime dollars. For example, calendar printers and photo book printers have a huge business spike towards the end of the year, while university in-plants might experience a major business surge when school starts. Unlike an FM or outsource bid, however, when you compare the previous year's TCO for an in-plant, you are comparing costs with the peaks and rush charges included.

Those who are bidding to outsource or perform FM work may not include these overtime fees in their original bids, which may be based on work done during periods of average demand. The overtime fees may come as an unpleasant surprise if the client doesn't have a grasp of the volume of work or the time pressures that occur during periods of peak demand.

Customers trying to gain assurance that outsourcing will save them money look for metrics that will give them apples-to-apples comparisons. One common metric they use is cost per piece. This is a great measurement and one NAPL consultants use regularly, but it can be calculated in various ways and it is not uncommon for some "grey" areas to exist in this calculation that may cloud the relationship between cost/price and TCO.

In addition, some companies offering FM services may not use the same metrics generally used in our industry. For example, in the printing industry costs are typically analyzed on the basis of budgeted hourly rates—standards for the length of time work remains in each cost center and the cost of materials—but this is a somewhat unorthodox calculation by traditional accounting standards so an outside analysis may focus on other metrics, making a side-by-side comparison of costs difficult.

Strategic Outsourcing

An alternative to in-plant production or managed in-plant services is outsourcing either through one printing company or several. Theoretically, outside companies that focus on manufacturing certain products streamline their processes, purchase the equipment that is most efficient for that product, reduce their manufacturing costs and charge less.

Certain in-plants with high demands for specific products have become efficient enough to lower costs to levels competitive with outside producers. For example, an insurance company in-plant may excel at producing insurance policies and statements. Or a university in-plant may be proficient at printing corporate identity pieces and always keep their presses ready to print them. These in-plants may continue to provide their high-volume competitive services and outsource specialty products with lower demands, such as high-end brochures.

In or Out?

In our experience there are two significant advantages to onsite production—convenience and speed—and two factors that often make outsourcing appear to be a better option—equipment age and utilization rates.

In general, having an in-plant or onsite managed facility within walking distance of the customer is faster and more convenient, but proximity does not always translate into turnaround speed. In today's competitive environment an in-plant might not install equipment with the same production speeds or finishing capabilities as a commercial counterpart. To truly assess turnaround speed, you have to compare how fast the different options can complete different types of work based on average and higher production demands.

Equipment age is typically more an advantage for the FMs and strategic outsourcing companies since in-plants are often more concerned with limiting capital expenditures and may not replace older or less productive equipment. In-plants that continue to use old equipment create an opportunity for FM providers.

Another important factor in efficiency is utilization rate. Simply put, the higher your utilization rate, the lower the costs of manufacturing. Companies that achieve 75 percent utilization rates or sellable time are operating at a world class performance level. Given variable demands many in-plants face, they are forced to run on overtime during peak demand periods (increasing manufacturing costs) and then see equipment sit idle when demand drops (decreasing utilization rates). Variable demand is one of the greatest challenges faced by any print manufacturer; for in-plants, the greater the demand peaks and valleys, the stronger the case for using FMs or outsourcing.

It is not uncommon for commercial printers to deal with inconsistent demand, enjoying eight great months of work, then having to contend with several mediocre months. Often they use those slow periods to crank up their marketing efforts. Unfortunately, not all in-plants recognize the importance of sales and marketing to help increase their equipment utilization during slow times.

Dig Deeper

If you're an in-plant trying to demonstrate your value to a management considering FM or strategic outsourcing alternatives, don't be afraid to dig deeper into the competition's capabilities and promises. If the service providers say they can do the same work with fewer employees and more efficient equipment, or charge less based on purchasing volume, ask if their cost-cutting measures still enable them to deliver at the quality levels the company wants.

Since costs are usually the motivating factor for going outside, spend extra time studying the outside provider's cost structure. Is there a typical turnaround time or possible delays associated with waiting for enough work to "gang up" for batch orders. Is there a penalty when the customer needs something in rush? Are there transportation costs for normal work or rush projects? And the most important thing to ask: How can cost savings be monitored?

Ask outside sources to identify specific areas where they will save money over in-plant services and look for reductions in real costs rather than difficult-to-monitor costs such as unit prices. If they offer a better deal with a longer contract, include conditions that will allow the company to terminate the contract before its full term if issues develop and cannot be resolved in a specific time frame.

Finally, to help management make the right decision, present them with a realistic assessment of the work done over the last few years—the number of projects that required rush delivery; the number of projects that needed special expertise or equipment beyond the in-plant's current capabilities; the percentage of jobs that had to be re-run because internal customers changed data or approved incorrect information the first time. If the need for specialized equipment is low and the percentage of rework and rush projects high, any savings projected by outside providers might soon be lost to additional charges.