Newspaper offshoring – Mandatory to survive, but not without risk evaluation

Thursday, 22 December 2011

A less than stellar forecast for ad sales, predicted for the fourth quarter of 2011, confirms that outsourcing has never been a more viable option for newspaper publications looking to shore up their bottom lines.

Trends in ad revenues of newspapers

The ‘Quarterly Newspaper Ad Expenditures’ figures released by the Newspaper Association of America, in November 2011, paints a bleak picture for the future of advertising revenues for the U.S. newspaper industry. The accompanying graph illuminates the trends in total ad sales, both print and online, by juxtaposing the numbers for the four quarters of the years 2010 and 2011.

Total print and ad sales fell by 7.02%, 6.93% and 8.86% in the first three quarters of 2011

A straightforward financial comparison of the first three quarters reveals a shortfall of USD 1.41 billion in 2011

An analysis of the historic data on ad sales establishes that the declining trend does not show any signs of abating. Averaging the percent decrease in ad sales per quarter in 2011, we predict that the fourth quarter ad revenue will be USD 6.77 billion.

The offshoring need
Severe pressure on revenues and margins is forcing the U.S. newspaper industry to cut costs for its very survival. According to ValueNotes research , offshoring will encompass all three tiers of newspaper publishers in the US by 2015, where the three tiers are characterized by their revenue, manpower strength, coverage and presence. Within the newspaper publishing value chain, which includes content creation, design, ad production, pre-press, printing and circulation, most services are outsourceable. Currently circulation and printing are outsourced, but ad production has the most offshoring potential.It is easier to offshore, since the service maturity in the provider market is high, and cost savings are estimated at 40-60%. Our report, titled ‘Offshoring by U.S. Newspaper Publishers ’ provides deeper insight into the sub-functions of each service.
During our discussion with publishers, the most common criteria that came up for evaluating and selecting potential outsourcing firms are prior experience, capabilities, and sustainability. In addition, for a newspaper, turnaround time is a crucial factor in the decision making process. When the outsourcing firm’s production facilities are located offshore, assessing international risk factors in the provider selection matrix is necessary.

International risk factors assessment grid
Broadly, international risk can be divided into macroeconomic risk, and relation specific risk.
Macroeconomic risk includes economic, political risk factors, and demographic and cultural risks are part of the relationship. A country’s economic and political climate plays a key role in determining the provider’s ability to operate, but this type of risk is generally out of the provider’s hands. It is important that newspapers looking to offshore ad related work take into account the various factors, and their likely impact on ad production before deciding on a destination. To expose the underlying risk of an offshoring relationship, pertinent queries need to be answered. For newspaper publications, the following points capture the impact of the risk factors covered in the diagram.

Ad page layout can change until the last ad is placed, making on-time delivery a critical success factor. Thus, contingency plans should be in place, to address any inherent political or institutional instability inherent.
Proof-reading classifieds, a function similar to copy editing, requires understanding of the newspaper’s culture, such as the difference between Broadway, the theater hub in Manhattan, and Broadway Ave, which spans the five boroughs of New York City.
Newspaper publications that outsource content will need to access the trustworthiness of the provider.They should not violate the copyright and disseminate information that they have no authority to.
Skilled labor such as graphic designers to design ads and change as per specifications, available in the cities of the production facilities will affect the quality and timeliness of the output.

For a newspaper, outsourcing ad production is fraught with issues concerning turnaround time and quality. Largely, risk can be mitigated by communicating regularly with the provider. However, without a good risk assessment system in place, the benefits derived from outsourcing will be negligible, and the sustainability of the newspaper may even come into question if the outputs are consistently delayed.

- Deepti Krishnan, Analyst, ValueNotes Sourcing Practice

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