Controlling costs in long-term printing contracts

Folio: The Magazine for Magazine Management,  Jan, 2000  by Alex Brown

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Escalation based in CPI

The second typical escalation structure pegs price adjustments to a change in the consumer price index or another indicator of overall economic conditions. Publishers are usually better off using wage-based indices than the price index, as these reflect the printer's costs more accurately. As you may know, Congress has lately been fretting about the accuracy of the CPI, although efforts to alter it seem stymied by the consequences for Social Security adjustments.

This hot potato that the government can't quite clutch firmly you can neatly field by using a percentage of the index instead of the full-strength change. Printers are now accustomed to granting as little as 75 percent of the change in the CPI, and they're doing this because the CPI does indeed overstate the change in actual printing costs.

Using a price change index presumes that the overall economy reflects the print marketplace. Even diluting the index by using a percentage of the change still links your contract to broad economic forces. The CPI-W, for example, is now tracked only for urban wages, while a printer's workforce would be better represented by a rural wage change. Still, a well-chosen index is likely to achieve one of our escalation design goals by fairly adjusting the printer's prices, not his margin. And although an index includes a real risk for the publisher, a sharp rise in an index usually occurs in a climate permitting corresponding adjustments in ad and subscription rates.

If you elect to use the CPI or another indicator from the Bureau of Labor Statistics, you'll want to clarify the time span during which the index change is measured, and define the index accurately. The BLS offers guidelines on contract usage.

Applying the printer's actual change in costs is a third escalation system. It usually makes most publishers extremely nervous at first glance, but it's worth careful consideration. Publishers' fears are that anything from unscrupulous accounting to wholesale mismanagement will yield an unfair price increase.

We can tackle these fears. First, your contract can include a provision for audit by a third-party CPA, who will not divulge the specifics of the printer's finances but will verify the accuracy of the cost change computation. Second, you can do some research to learn about the printer's historical cost increases. This will not only show you the scale of adjustments, but alert you to any potential wage adjustment spikes that occasionally occur if, for example, union contracts are negotiated only every few years. Finally, you can ask yourself if your printer-selection process is indeed susceptible to choosing a printer capable of the type of poor management that would improperly undermine your manufacturing prices.

A solid upside

Opting for actual change in a costs escalation approach has a solid upside: There's a potential for the lowest price adjustment here. While an absolute percentage increase or an index-driven adjustment may indeed offer the printer more than he needs, the actual-change system gives him only what he's passing on to employees and vendors. The downside is that you'd prefer he make do with less. More specifically, you'd prefer that he had an incentive to control costs rather than a blank check to pay for whatever catches his fancy, for this system appears to be an invitation to cost-control negligence.