Archive for December, 2010

The Fading Reverse Auction

IN THIS DAY and age, most of us take it for granted that technology can make a process easier and more efficient. But sometimes it is necessary to take a step back and review if a device is delivering what it was originally designed to do. Take reverse auctions, for instance. These types of transactions were created with the intention of leveling the playing field among printers. Every print supplier is provided with the same print specifications, turnaround time and distribution details for a particular job. In theory, this levels the playing field between printers and generates the best price.

Sounds sensible, right? Then why are they becoming less popular? What is wrong with the system?
Reverse auctions—once believed to either revolutionize buyer/supplier relationships (if you were in favor of it) or be the demise of the industry (if you were opposed to it)—seem to be quietly slipping away.

In a Print Buyers Online.com Quick Poll survey conducted in May with 70 respondents, 85 percent of print buyers indicated that their companies are not using reverse auctions to award bids to their print suppliers. When compared to the results of earlier polls (conducted in 2005 and 2006) asking the same question, it is clear that reverse auctions are being used by fewer and fewer buying companies.

Our research with print suppliers generated a similar response. In a Quick Poll distributed in May, 48 percent of print supplier respondents said none of their customers were using reverse auctions. As one survey respondent volunteered, “Who has time for this ridiculous process? Where is a printer’s integrity if it keeps backpedaling every half hour until it wins a bid? If I were a print buyer, I would wonder how much I had been taken for in the past.”
With such negative responses, we thought we would share some of our members’ experiences with reverse auctions.
Not an Equal Opportunity
It’s a win-lose proposition. When it comes to reverse auctions, printers have always been more pessimistic than buyers because they typically have more to lose. The CEO of one printing company summed up his frustrations by sharing, “A few of our clients have experimented with reverse auctions and found they reduced what was once mutually beneficial business relationships down to a commodity level. Our clients either stopped using the auctions because they didn’t work, or we stopped participating in them and resigned the account.”

Another printer agreed: “We will not participate in reverse auctions. What the buyers gain in savings, the suppliers lose in profit. If your only requirement is to get the lowest price, then we are not your printer.”
Bids are not always honored. Although auction rules mandate steep penalties when a bidder backs out, it still happens. Sometimes the prices end up so low that they aren’t realistic. This forces the printer to either cut corners on their print project or lose money on the job.

Pricing is suspicious.
Both buyers and suppliers are skeptical about the prices generated through reverse auctions. One print buyer said, “Some printers will simply find a way around the promised quote and look for ways to increase their margins. The final price is often much higher than the original quote.” A printer concurred: “I personally have found the customer really does not get the best pricing. In fact, it usually is about 20 percent higher than if they just had several people bid on the project without seeing what each vendor estimated.”

There is nickle-and-diming. Kathy Ladwig, print production buyer at CUNA Mutual Group, shared, “We only did a reverse auction once, and we’ll never do it again. With a reverse auction bid, you get what you pay for—but if you vary from the bid, you will get charged handsomely. Reverse auctions are only good if you absolutely need to have rock-bottom prices and can sacrifice quality and service.
“We have found, even with due diligence, reverse auctions can drive down the price, but then you get nickel-and-dimed in production,” she added. “In printing, there are many variances that cannot always be outlined in the initial specifications.”
It’s not custom-made. Reverse auctions can be successful if the order is a commodity project, but those in search of custom-manufactured projects feel they fall short. Jeff Dickerson, the procurement specialist at State Farm Insurance Cos., contributed, “We have tried reverse auctions, but we receive more favorable pricing through sealed bids. There is a lot of information on reverse auctions, and they may have a place for purchasing commodity items, but we mostly buy custom items.”

Management doesn’t always know best. Sometimes members of upper management who have no understanding about the printing process get caught up in the promise of a much smaller bottom line and end up forcing reverse auctions on their buyers. One print buyer shared his frustrations with us: “We understand the printing industry does not like this method of bidding; however, my company is pushing us to use the technology. And, it’s being pushed from the top down.”

The relationship is missing. In the worst-case scenario, reverse auctions are like blind dates—the print buyer doesn’t really know with whom they are doing business, and the print supplier has no understanding of the nuances of the buying company. For those few buyers that continue to use them, we understand many are not opening them up to untested suppliers. However, it can still be problematic.

Eroding Relationships

James Parrinello, a former print buyer and now SVP, director of operations, Wheal-Grace Corp., shared his thoughts: “As a print buyer, prior to moving to the manufacturing side of the business, I felt that a healthy relationship with a strong and reliable vendor base was essential to producing quality work. Auctions, online bidding and similar purchasing processes remove the relationship from the equation and eliminate communications necessary to the production process.”

Another member concurred, “I find reverse auctions an adversarial method of working with my suppliers. I get far greater benefits by collaborating with my printers to discuss what can be done within my budget and delivery needs.”

I believe the biggest problem with reverse auctions is the assumption that the print specifications of a job tell the whole story, which is simply not the case. Every print project has its own unique goals, challenges and expectations, and they are far more important than what gets captured on a bid sheet. Technology may make things more streamlined and efficient, but it will never take the place of the essential part of the equation: the partnership between print buyers and their suppliers.

—Suzanne Morgan

About the Author

Suzanne Morgan is president of the annual Print Oasis Print Buyers Conference (www.printoasis.com) and Print Buyers Online.com, a free e-community for print buyers and suppliers (www.printbuyersonline.com). PBO, which has 11,0000 members who buy $13 billion a year in printing, conducts research on buying trends and teaches organizations how to work more effectively with print suppliers. Morgan can be reached at smorgan@printbuyersonline.com.

Direct Mail Buyer Pleads Guilty; Accepted More Than $1.8 Million in Kickbacks
November 23, 2010
WASHINGTON, DC—Nov. 23, 2010—A former employee of two Massachusetts-based customer relationship management agencies who purchased direct mail advertising has agreed to plead guilty to charges relating to his receipt of more than $1.8 million in kickbacks, the Department of Justice announced.

According to the charges filed today in U.S. District Court in Boston, Reed A. Richard conspired with others to defraud two of his employers by accepting kickbacks from two direct mail advertising printing brokers in exchange for awarding printing work to companies the brokers represented. The conspiracy took place from approximately January 2000 through at least February 2006.

According to the court documents, Richard, a former director of production at PreVision Marketing LLC who resided in Carlisle, MA during the conspiracy, took the kickbacks during different periods of employment with two separate customer relationship management agencies, which he defrauded as part of the schemes. Richard is also charged with tax evasion for tax years 2004 and 2005 by falsely claiming substantial personal expenses as business expenses on tax returns.

Richard was responsible for procuring direct mail printing services by obtaining competitive bids from printing companies, awarding contracts, reviewing invoices and authorizing payment. According to the charges, he approved invoices knowing that they were fraudulently inflated to include the kickbacks he was to receive. A portion of the inflations were passed from the brokers to Richard as kickback payments.

In order to conceal his role in the scheme, Richard purported to provide consulting services to the printing brokers through a shell company he owned. Richard claimed substantial illegitimate business deductions on his corporation’s federal income tax returns. As a result, he under-reported his corporate and personal taxable income, resulting in a total tax loss of approximately $170,000.

The plea agreement is subject to court approval.

Today’s charge arose from an ongoing investigation into the direct mail printing industry being conducted by the Antitrust Division’s New York Field Office, with the assistance of the Internal Revenue Service (IRS) Criminal Investigation, in Springfield, MA. Anyone with information concerning fraud or tax offenses relating to the direct mail printing industry should contact the Antitrust Division’s New York Field Office at 212-264-9308, visit www.justice.gov/atr/contact/newcase.htm or contact the IRS Criminal Investigation’s Springfield Office at 413-785-0090.
Source: Press Release