Can I buy you lunch?
A colleague of mine, based in the UK, was once asked out for lunch by a printer. The invitation was sent in a brown envelope and contained a menu for a restaurant in Dubai.
Fortunately, the days of bribes and backhanders were largely left behind in the 1980’s and 90’s. Anti-bribery laws and the requirements for disclosure of gifts have helped put a stop to compromising an individual, but there are some very poor practices, still common at company level, in the print management and marketing services industry.
The true cost of providing a managed service
Before we examine the 5 worst practices, we should ask and answer the question:
‘Why do many of the print managers indulge in unethical practices in the first instance?’
The answer is simple. It is to try and recover margin they have given away in the sales process. The gross margin required to recover costs and make a profit, for traditional print managers, is somewhere between 17.5% and 25%. (And as the ex MD of one of the more efficient ones in its day I can vouch for those numbers).
There are outliers on both sides; one of the most efficient companies who run a brokerage model, without on-site teams, has an average margin of 14% and some of the less efficient companies with debt need margins of 40% plus.
The margin recovery shortfall
Why is the true cost of a managed service not declared and common knowledge? The truth is it used to be. Creative agencies would declare a margin of 17.5% to manage production which was generally accepted. (In truth many Agencies charged significantly more than the declared margin, if they thought they could get away with it).
When print management first started decoupling print buying from creative agencies in the mid 90’s we found that in many cases undeclared supplier rebates were being taken on the top of the fees. When we combined client focused onsite production teams, with specialist print buying, we added value and made large savings compared to the agencies or direct supply from printers. Over time as the print management market matured and procurement teams focused more on the cost of the service, print managers reverted to type and sold on price not value.
The margin for which the service was offered dropped, from a realistic 17.5% to 10% and below. In some notable cases the cost of the team wages including NI and benefits were not being covered by the margin offered, let alone a contribution to head office and a profit.
How margin is actually recovered
Which brings us onto what I consider to be 5 most unethical practices commonly used by print managers and marketing services providers to make up the margin deficit:
Charge more than agreed – in its worse case it is simply to charge a higher margin than agreed and hope no one ever checks. Before the money laundering bill came in that could be as sophisticated a setting up a false company - now it can be hidden behind specification changes and additional costs amongst other methods.
Pre-bates – an insidious practice which involves asking suppliers to pay a rebate upfront on the promise of getting a certain amount of work during a year.
Pay to play – this can be a fee just to feature on the supplier roster or commonly a charge for technology i.e. the supplier pays a fee to be on a technology platform or a % of the turnover they receive through the system.
Rebates on paper and production – by far the most common practice. Rebates on paper from the merchants have reached 100’s of £’s a ton (up to 50%) which are simply added onto the price of paper to be taken off. Paper is supplied or printers are instructed to buy paper at the print managers inflated rate. Production rebates tend to be lower - typically between 8 and 15% - but they are still added on to the base cost by the printer to be given back as a rebate.
Early payment discount – with payment days extending up to 120 days a printer could be offered early payment at say 60 days for an additional discount - hardly in the spirit of early payment.
Ironically, if declared some of these practices could be a legitimate way of recovering margin. A rebate of 5% or less may not be added on to be taken off in a competitive market; a technology charged based on a small % of turnover could be used to recover the cost of the systems; a genuine, optional, early payment discount could benefit suppliers.
What’s the problem and what to do about it?
The problem is these methods of margin recovery are rarely declared, so the client doesn’t know what they are really paying for the service. If it was all genuinely declared and open book, procurement and marketing would be able to compare the cost of direct supply to a managed service to inhouse buyers and make an informed decision on the value vs cost equation.
Use of the methods outlined above also can cause poor buying practice, with buyers urged to use the suppliers offering the best discounts or rebates. Whilst more cost-effective suppliers, not on rebates, are ignored.
There are simple methods to combat each practice; 5 key ones are listed below:
Contract well. Ensure that the legal contract has punitive damages payable if the print manager doesn’t apply the agreed margin or is caught taking undeclared rebates from suppliers.
Create a cost baseline for specifications as recommended in last week’s article and audit regularly during a contract to make sure agreed margins are being applied.
Tri-partite contract. Insist on the right to audit the print manager’s supply chain and for key suppliers, agree a three-way contract that prevents the printers from giving rebates back unless they are declared to the end client.
Check mill prices and market indices for the ton rate of paper. Materials are commodity items for which it is easy to check the market price.
Look at the cost of service numbers carefully and don’t delude yourself. If a managed service provider is offering a low fee that doesn’t cover the cost of the people and a contribution to head office and profit, don’t take it at face value. It is a clear indicator that there are hidden ways of recovering margin - call them out.
Mike Newman, theSPC
Help is at hand
At theSPC we are here to make sure whoever you contract with does the right thing for you. We offer training and education programs for marketing and procurement, as well as hands on support to make sure you get full visibility of real costs throughout the length of a contract.
Feel free to contact Mike for further information or with any questions about the practices outlined.
Please comment on and share this article. We firmly believe that all the interested party’s client and supplier side would benefit from understanding the true cost and value of the service being provided.