Dynamics of digital, total cost of ownership, contribution, selling price and more

Are you still wondering whether digital printing is for you, and what the ROI truly is?  Jim Aust is a Print Industry Business Analyst with Kodak and spends much of his time auditing print facilities, most recently with a view to helping potential buyers set reasonable expectations about returns that could be expected from a digital printing investment.  Out of that work, he has gleaned a number of key findings and lots of good advice.  WhatTheyThink spoke with Jim recently and he agreed to share much of that wisdom in this interview. Part One of that interview follows. Stay tuned for Part Two.

WTT:  Jim, perhaps you could start by telling us a little about your background.

JA:  I started my working career as a systems analyst for a large publisher right out of the service in 1969. I was given the job of leading a team to look at bringing electronic prepress into the company in the 1980s. To do this, I had to learn the print and prepress side of the business and study the vendors.  Eventually, our study team selected Scitex, and I had to justify the purchase and sell it to the Board.  Once the decision was made, they asked me to run the operation, so for 10 years, I ran their very large electronic prepress facility plus a few related graphics departments. In 1993, I joined Scitex and evolved into a position where I was helping Scitex and our customers understand the true ROI of implementing Scitex systems.  Quite often, we would go on sales calls proposing $300,000 worth of equipment, and the customer would ask why he should make the investment.  They had difficulty understanding what the ROI was from this new way of working, and I would help them understand why it was important to move to electronic prepress, from an ROI perspective. Now I am doing similar work for Kodak with respect to workflow and digital printing technologies.

WTT:  So I gather that you have looked at the inner workings of lots of print companies over the years.

JA:  I study about 150 printers a year and have been doing so for the last 15 years, including newspapers, magazine publishers, commercial printers, and packaging, both offset and flexo based.  In the past couple of years, I have been heavily involved in supporting the NexPress business for Kodak.  My goal in doing these analyses is to make the studies as objective as possible.

WTT:  So where do you get the base information for your work, particularly as it relates to the NexPress business model?

JA:  First, I go back to our customer base to understand the value our solutions have been delivering, and then I use that aggregated information when I study the next possible client.  I also use other tools, like the PIA Ratios. This allows me to apply real-world experiences to make reasonable projections about how such an investment might affect their businesses.

WTT:  So what are the basics of the process and what types of companies are you generally visiting?

JA:  I have a questionnaire I developed over time that has been honed to make it as easy as possible to complete but with enough information to allow me to do the analysis.  The site might be a commercial printer that is not using our workflow, probably already has CTP, and is interested in web portal solutions, better and more automated workflow, and wants to be more efficient. They are considering getting into hybrid production to augment their offset printing operations.  They understand, however, that feeding digital presses can be a challenge, and that it can be done more efficiently with the right workflow. PDF and JDF are important to them.  That is the typical scenario, not to say that every printer voices it that way. Sometimes they only know that they need to do things better.

WTT:  What are some of the challenges you face in collecting the right information?

JA:  One thing I have learned is that many printers can’t easily answer some of the detailed questions needed for the analysis. They track certain numbers very well, but overview numbers can sometimes be elusive.  Back in the film-based days, I would ask what their plate spoilage is and they could tell me to a tenth of a percent.  I knew from observation and experience that they were throwing half 0f their film away, but often they couldn’t quantify their film spoilage.  The situation is similar today.  Operators track certain data out of necessity, but they can’t necessarily tell you how many makereadies they do or how productive their prepress department is.  I need to collect enough information and from several different directions to validate and cross-check what the printer is telling me.  For example, I look at their plate consumption, their stated number of press runs, and their time on press, validate these numbers to each other, and we back into what must be the right number of makereadies.  I look at prepress and press, but also headcounts in the front office, including estimating, sales, CSRs, job planning, order entry, because I know that some of the solutions we offer can make those people more productive.  The results are current state numbers that are reasonably validated.

WTT:  What do you do once you have those numbers?

JA:  I can then, for my own benefit, if nothing else, look to see where they are lean or fat or average against industry averages like the PIA Ratios, plus from my own work.  A reasonably optimized prepress department in a commercial printing operation spends 3-4% of gross on labor, so I compare that. They spend 7-9% of gross on sales compensation; if it is more or less, there should be a reason.  If they are spending more than 1.5% of gross on plates, they might have high spoilage or have high cost of plates or be a short-run printer.  Once I have a good understanding of basic numbers and productivity, we can show them where we think we can make a difference.  Can we make prepress more productive? Can we reduce makeready time and materials? The target for a commercial printing business should be about 7-8% of gross revenues spent on prepress and makeready time and materials.  If we can affect that, or make presses roll-up faster, it helps us understand what kind of ROI impact an investment might have.

WTT:  You bring up a good point about plate usage and short-run printers.  You must see a lot of this with run lengths decreasing all the time.

JA:  In commercial print, most runs today fall between 5,000 and 10,000 impressions; that can be only 45-60 minutes of press run time on most presses. But you might have spent 45 minutes or more on makeready.  We have found that on average, 30% of a printer’s revenue is generated by press time chargebacks, and almost half of that could be tied up in makeready.  Everyone wants to see that number lowered, and it’s getting worse as run lengths get shorter.

WTT:  But I am assuming that this pain is one reason you often get called in.

JA:  Right. I do a lot of studies with printers for that very reason.  They tell us, “We are doing more short runs, and it is driving me crazy.  I should be looking at a digital press; can you help us run the numbers?”

WTT:  There are lots of things that are different between digital and offset.  What are some of the dynamics that you find in these analyses?

JA:  Printers typically don’t think in terms of page counts, but I do because I play between the offset and digital worlds.  We consider a page as one 8.5”x11”, one side.  Today’s average sell rate for offset in the commercial print industry is 6 to 10 cents per page, with a modest profit of 2% to 4%.  The digital side of the business has a different set of numbers.  The average cost per page is somewhere around 20-22 cents as an average for small to mid-size digital operations, but high volume users might get it down to 10-14 cents a page.  If you are an offset printer and confronted with those numbers, you might be tempted to stay away from digital.  But those numbers are only averages.  Remember, the average offset press runs might be 6-7,000 impressions.  When happens when you do a 1,000 impression offset run? You can’t sell that for 9 cents a page and make a profit.  As you get in the 500 to 1,000 impression range on a typical offset press, the true cost of those jobs runs between 35-45 cents a page.  At that point, digital becomes very attractive.  You could take a short run that is costing you 40 cents a page and by moving it to digital, cut costs in half.  But only a very small percentage of their runs today are likely in that range of 500 to 1,500 impressions. By design, they don’t take that work in.  Either they turn it away or take the work in and outsource it to a digital printer.  About half of the printers I survey are doing some form of outsourcing of digital jobs. Three years ago, not many printers were doing that.  But the other dynamic at work is that print sales reps who are paid on commissions are not seeking that work anyway. They are looking for the bigger jobs.

WTT:  So that raises the whole question of the sales model, and the so-called migration to being a marketing services provider.

JA:  I have had many discussions with print owners.  They understand the future of print—shorter runs and the need to be marketing driven.  The best-of-breed commercial printer do not compete on price and service alone; they are more marketing oriented, helping their customers make money.  Print owners often admit that their current sales force does not operate that way, for the most part. It is also rare to find an executive with the title of marketing in a commercial printing firm.  An excellent book that can help people make this transition to the new way of selling is What the Customer Wants You to Know, by Ram Charan. It is not specific to printing, but it applies.