Outsourcing decisions for magazine operations: supplier selection and cost reduction

¶ … Outsourcing Case Study: Saving Money at the Magazine through Process and Supplier Selection

Every business must contend with the decision of how many of its necessary processes and the products and materials utilized in these processes will be internally sourced and accomplished, and which processes and procurements will be outsourced to other companies (Monczka et al. 2008; Trent 2007). This magazine operation is no different, and with the sudden reduction in initial capital for the venture combined with the ongoing uncertainty of the current economy, this decision becomes all the more pressing -- cost savings and efficiency are hugely and directly impacted by the choice between outsourcing and vertically integrating, and with newly limited initial operating capital such savings and efficiency improvements are essential to the success of the venture. Determining which processes will create the most substantial cost savings without sacrificing the quality or the unity of the magazine itself was simple in some instances, and more complex in others, but ultimately five business processes necessary to the creation and sale of the magazine were selected for outsourcing.

For each selected business process, details of the supplier selection and contracting process will be provided in the following summary. Performance measurement, contract types and certain other details of the arrangements to be made for each process, and methods for evaluating competing suppliers will be focused upon for each of the individual processes selected. Additionally, a timeline estimating the period from selection to implementation will be presented.

The information contained in this report is presented as though five separate suppliers/vendors will be utilized, with each other business that is selected as the recipient of an outsourced process from this magazine limited to only one of the functions or processes selected for outsourcing. This does not necessarily mean that five separate vendors or suppliers will be contracted with, though, and in fact there might be additional savings and time efficiencies achieved if one supplier take son more than one of the processes that have been selected for outsourcing. When evaluating and receiving bids from suppliers, however, the basic approach will be to treat each process as a separate need, and to accept each bid for comparison to other bids for a single service. While a combined offer from one supplier for more than one process might be accepted, then, it will need to beat the combined best offers from other suppliers for those same services/processes.

Distribution

One of the easiest decisions to make in terms of outsourcing certain of the magazine's business processes is the decision to utilize an outside supplier for distribution services. There are many companies that specialize in distribution, and in fact distribution is one of the most commonly outsourced business processes in many different industries (Trent 2007). The level of service that will be necessary from the contracted distribution supplier will include the timely and regular picking-up of the magazine from the printing center through to the final retail delivery of the magazine to stores; subscriptions will be mailed directly from the printing warehouse.

In the initial phase, a fixed contract will be the most advantageous for both the magazine venture and the contracted distributor. Actual rates of consumption/sales of the magazine, though projected with some degree of reliability, cannot be accurately estimated until the magazine has been made available on shelves for several months. The potential for fluctuations in the number of units to be distributed means agreeing on a fixed rate for the first phase of the magazine production limits risk and increases certainty for both companies; a unit-based contract could be adopted once trends and sales levels are more established (Monczka et al. 2008). Price will be the primary consideration when accepting bids for distribution services, though reliability is also important and performance records for similar clients will be required during the magazine's acceptance of bids for this particular process.

Accounting

The decision to outsource the magazine's accounting needs was a difficult one, and was made not simply on the basis of cost-effectiveness but also due to the increased protection this affords the business. Through the bi-weekly maintenance of accounting records and the external preparation of required tax and income forms, an outsourced accountant will provide an objective eye for the company and will also reduce the liability of the company if mistakes are made in accounting practices (Monczka et al. 2008). An accounting specialist can also identify further areas for increasing efficiency and cost-effectiveness (Trent 2007).

A fixed contract would yet again be the most effective means of securing outsourced accounting services, both for the magazine and for the accountant/accounting firm. The accounting firm would be in a much better position to determine a reasonable estimation of the time necessary to perform the necessary services, and thus to establish a proper fixed price for the provision of these services; a reimbursable or unit contract for these services would not only encourage "padding" the bill by the accountant, but could also lead into cost overruns for the outsourcing that would diminish or eliminate the advantages sought in the outsourcing to begin with (Trent 2007). A fixed contract that can be annually renegotiated allows the magazine venture to accurately plan its expenses while ensuring the accounting tasks and processes necessary to the business remain consistently provided. While price will definitely be a consideration in choosing n accountant or accounting firm, ethical track records and overall value will be the primary criteria for evaluating bidders.

Advertising Sales

Once any portion of the content for the magazine begins to be outsourced, there is a danger of the consistency and/or quality of the magazine to begin slipping out of the control of the owners/managers. This is a danger that is faced in every industry and outsourcing scenario, but is arguably even more insidious for a publishing venture, as the content is the product (Monczka et al. 2008). Advertising is one of the last areas left that can be outsourced without touching the real content of the magazine, and greater revenues can likely be generated by an experienced and specialized firm.

A per -- unit contract would be the most appropriate way to ensure the mutual benefit of both the advertising sales firm, with the company selected to handle the advertising that appears in the magazine receiving a fixed percentage of every type of sale (full-page, multi-page, and smaller advertisements might be negotiated at different percentages; increases in the overall advertising sold may receive a bonus of some sort, etc.). This type of contract incentivizes the sale of advertising at the highest possible prices, which is good for the long-term benefit of the magazine (Trent 2007). Evaluation criteria will be consist primarily of overall value and the demonstrated effectiveness of the advertising sales firm working in similar areas and/or with similar clients: price is not a major issue, as a more effective sales firm could very easily generate more revenue for the magazine even if it was taking a larger percentage of each sale. Balancing this percentage with proven and ongoing effectiveness will be necessary in order for the magazine to receive the maximum benefit form this outsourcing, however.

Marketing

Like advertising sales, the marketing of the magazine itself -- the creation and placement of advertisements, mutual marketing deals with other magazines, etc. -- is one of the few areas of the business left that does not involve the actual content of the magazine. Marketing is also an area where an expert firm can deliver much more effective results, ultimately enhancing revenue and potentially even saving on upfront costs (Monczka et al. 2008; Trent 2007). An expansive and demonstrably effective campaign proposal will be the primary performance target for such a firm.

As with the advertising sales firm, the best contract for the marketing firm would essentially be a unit contract, with the marketing firm paid in concrete and discrete agreed-upon amounts for each unit of marketing materials produced, and with the potential for bonuses in proven results from certain campaigns (such bonuses would almost certainly have to wait for several years). Again, this would incentivize real performance from the marketing company as it would with the advertising sales company, generating greater revenue and a higher degree of cost effectiveness for the magazine (Trent 2007). This also provides a clear idea of what criteria will be used to evaluate the bids from various suppliers of marketing materials and services: documentation affirming the expected results of marketing campaigns and innovative marketing tools will be the major criteria examined for the various marketing companies and campaigns that are presented during the bidding process.

Conclusion

By outsourcing the distribution, printing, accounting, advertising sales, and marketing processes of the magazine, it is expected that a significant initial cost savings will be created. As the magazine grows, it might prove advantageous to internalize certain of these processes, yet it might also be the case that continuing to outsource certain aspects of the business will be more cost effective and will potentially create greater revenue for the magazine as well. With limited startup capital, however, such outsourcing will be inarguably valuable for the company.

Timeline

August 15: Submit requests for proposals to advertising sales and marketing agencies.

August 16: Begin discussions with distribution and printing firms, schedule interviews with accounting firms/independent accountants.

August 17-19: Continue examining different distribution/printing firms/scenarios, begin accountant interviews.

August 22-26: Conduct accounting interviews, narrow selection of distribution and printing firms.

August 29-September 2: Select accounting firm and seek/receive input on further contract negotiations, select distribution and printing firms for more complete and direct negotiations.

September 5-9: Negotiate/enter bidding rounds with distribution and printing firms. Select firms for each process.

September 12-23: Receive/review marketing and advertising sales proposals, select firms.

September 26-on: Ensure all contracts are valid, in place, and in keeping with expectations and capabilities. Proceed with the business of creating the magazine and utilizing these contracted services.