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Can you afford CTP?

Jan 1, 1996 12:00 AM

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For the past decade, printers have been scrambling to cope with digital prepress technologies. Though many larger North American printing operations have been at it since the early '80s, others only have taken the plunge over the past few years. Firms have had to spend anywhere from hundreds of thousands to millions of dollars on workstations, servers, imagesetters and digital proofers. Then, just as it looked as if there were a light at the end of the tunnel, and there would be little need for any major additional prepress equipment investments, a new technology has come racing onto the scene--metal computer-to-plate.

In truth, computer-to-plate (CTP) actually has been with us for some time. As long as five years ago vendors started offering CTP devices aimed at the black-and-white market. These units expose paper and polyester plate materials, and though they filled a niche, they were not of interest to those doing four and more color work, particularly longer runs.

However, during the past 18 months CTP solutions have come on the scene that seriously address the color market. At DRUPA 95, the number of platesetters demonstrated was mind-numbing. Some joked that there were more units on the expo show floor at DRUPA than were installed at customer sites worldwide.

As the market develops, vendors are aware that graphic arts execs aren't going to take on this new capital investment unless they can justify the cost. This means that printers need to be able to evaluate CTP and see a return on their investment.

Since a platesetter and the other components of a complete CTP solution aren't necessarily enabling the graphic arts to offer any "new product," the return has to come from cost savings or productivity gains.

In trying to assess whether an investment in new technology such as CTP makes sense, let's start by reviewing Finance 101. There are several benchmarks for deciding whether to take on a project--Net Present Value (NPV), Internal Rate of Return (IRR), Return on Investment (ROI), and Payback Period.

The first two are somewhat related in that they both look at discounted future cashflows. To determine NPV, look at all the cash outlays related to a CTP investment and all the resultant cash inflows--in this case, savings on labor and materials, the value of greater throughput and possibly the value of getting jobs that would have not been received without CTP.

These inflows and outlays are all discounted back to their present value using your company's "cost of capital," or more practically, the rate that your banker might charge for a loan. Add up all these values. If the sum is positive, the investment makes sense.

IRR is basically a calculation of the rate at which NPV is equal to zero. Therefore, if the IRR is higher than your cost of borrowing, the investment makes sense.

In reality, figuring out what any of these cash flows are with any certainty is a difficult task. The concepts make great sense in textbooks, but not necessarily in the real world of the graphic arts industry. In fact, you would be hard pressed to find anyone who has, or is, justifying a CTP investment based entirely on either of these calculations.

Next is ROI, which is often confused with Payback Period by industry vendors and printers alike. Technically, ROI is really the ratio of operating profits to the investment in assets of a business or operation.

So, if you invest $1 million and show annual returns of $100,000 related to the investment, effectively the ROI is 10 percent. ROI tends to offer a year-to-year view and doesn't do a good job of looking at the fact that a CTP investment will have a limited life span.

Finally, there is the Pay back Period, which, as was just stated, is often incorrectly referred to as ROI in our industry. Pay back Period is, in essence, the amount of time it takes to recoup your investment, either through additional revenues or cost savings.

Given the uncertainty of product life cycles for electronic prepress equipment, execs generally look for something less than a two-year payback (though this greatly depends on the likely usable life for the hardware and software being purchased). And don't forget that in all the calculations, you need to consider tax implications--pre-tax and after-tax calculations are very different.

With all that said, is anyone using any of these methods to rationalize their CTP investments? Vendors certainly are ramping up to help prospects do such calculations. Creo, Screen USA, Komori and others have sophisticated spreadsheets that allow potential customers to do infinite "what if?" calculations and automatically spit out NPVs and Payback Periods. But have early adopters actually based their investment decisions on these calculations? The typical answer is, either "not really" or "not entirely."

According to George Fiel, president of $8 million Image Systems in Menomonee Falls, WI, the key is not ROI, but "RIB." With a smile, Fiel explains that RIB stands for "Remain in Business." In approaching the idea of entering the computer-to-plate arena, he was much more concerned with big picture issues than wearing a green eye shade and crunching numbers.

In fact, Fiel used CTP as his rationale for getting into conventional offset printing. His firm started as a prepress and design shop, and moved into printing with the purchase of a Heidelberg GTO-DI. Fiel added two Heidelberg MOs--one five-color and one six-color--only after finding a full CTP solution, namely Screen's PlateRite platesetter coupled with its TrueRite digital proofer.

When Michael Simon, executive vice president of Publishers Press, the $135-million-a-year Shepardsville, KY-based publication printer and early adopter of CTP, was asked about his ROI calculations, he laughed. Such formal number crunching was not part of his investment rationale either. Publishers Press has been doing four-color CTP work for just about as long as anyone in the U.S., having cut its teeth on an early device from Optronics, and this year purchasing two Gerber Crescent/42 platesetters through Autologic, Inc.

To Simon, "CTP was an obvious process to pursue. We eventually will make money with it." He went on to say that, "This is a process change--it is one of those lithographic plateaus, comparable to the move from hot metal to phototypesetting."

On the other end of the scale is the first commercial installation of a Linotype-Hell Gutenberg CTP system--B & B Print Media Group (Bristol, TN), a $4 million general commercial printer. According to director of prepress services Robert Carrier, top management certainly "threw some numbers together," but he believes that a company of similar size to B & B "may have trouble showing a formal ROI, but certainly can cost justify the investment."

As it turns out, after a few months of operation, B & B already is seeing as much as a 75 percent savings in its monthly consumables bill, which had been running from $18,000 to $20,000 per month. This savings practically has offset the monthly leasing cost for the CTP system. Note, however, that the company had output almost all of its own film for making plates prior to moving to CTP. Shops that are running a larger percentage of outside-supplied film clearly won't show as big a savings.

Though Publishers Press is looking to reduce its $3million-a-year film bill Simon states that savings from consumables, time and labor are all about equal in his mind. And he already is thinking in terms of having electronic media replace film as his storage media. He asserts that "though my investment in electronic storage media might grow to $1 million, it is reusable, and the price per gigabyte is dropping fast."

Some have argued that much of the material savings is offset by a premium for digital versus conventional plates--said to be nominally around 20 percent. In Carrier's case, he states that he is paying less for his digital plates than he was for his conventional plates. However, it appears that he had been paying a higher price for his conventional plates compared to other prices quoted in the marketplace.

Nonetheless, the word on the street is that digital plates now are being quoted at only a slight premium compared to discounted conventional plate prices, but it is believed that market forces will make the price differences disappear.

When asked about savings, lay Fieger, district manager for Gerber Systems, estimates that most printers should see a 50 percent reduction in material costs. More specifically, he figures that a $20 million printer should see a $500,000 to $600,000 reduction in film spending. Of course, this again assumes that the company had been doing substantially all of its own film work.

Still, the investment is not for the faint-hearted (though there are platesetters that will be available next year for as low as $100,000). Even in a smaller format and without automatic handling capabilities, there is a lot more involved with moving to CTP than just buying an output device. You need to consider the complete front-end, including workstations, networks, servers, RIPs, as well as digital proofing.

Fieger believes printers and trade shops should be prepared for a minimum $250,000 capital investment to get into CTP, assuming their digital color proofing needs can be met by a system such as the 3M Rainbow. He also points out that the number actually could be less than $200,000 for half web or sheet-fed work in less than 30-inch format.

Image Systems' Fiel believes that installation of a fully integrated, high-volume system with high-end digital proofing easily could cost $1 million. Bear in mind that his system includes a four-up digital color proofer with a list price of $325,000, as well as Screen's robust Edge RIP. Fiel questions whether you would want to do CTP "on the cheap," claiming that he can put three times as much work through his system as he could with a Mac-based system.

Simon of Publishers Press states, somewhat cavalierly, that you "need to think in terms of investing $1 million and not expect any recovery for two years." It is wise to remember, however, that Publishers Press has invested in two platesetters, but doesn't own a premium digital proofer, such as the Kodak Approval or Screen TrueRite.

It is Simon's contention that as a quick turnaround publication printer, he needs the security of having a second imaging device in case one goes down. As for proofing, Simon already has weaned clients off of proofs for their editorial pages by offering significant cost savings. As long as the printer has full control of all the color from scan to final imaging, clients' color expectations appear to be met.

To the credit of the CTP vendors, they generally aren't targeting shops that don't already have a reasonable electronic prepress department in place. Given the workflow and digital integrity issues connected with CTP, it is not for the prepress novice. And with a several month learning curve to get your operation proficient in color electronic prepress, a CTP device would be an expensive item to have sitting idle while trying to get comfortable with the intricacies of the front-end systems and software.

As with any significant industry change, though, there are no hard, fast rules. Jacki Hudmon, sales manager for Komori Imaging Systems, points out that the press manufacturer originally started with a model of what it thought was the "ideal" computer-to-plate candidate, but the market response quickly forced it to more or less "throw that model out the window.

"The best scenario would be for the shop to already have sophisticated electronic prepress capabilities and be equipped for digital color proofing, because then the third step of going computer-to-plate is almost a no-brainer," Hudmon explains. "But, that's not the case with most of the potential customers coming to us. We are talking to printers who don't even have a Macintosh because we can provide an integrated system.

"Some companies are being pushed into CTP by their print buyers, and others see it as an opportunity to leap-frog their competition," continues the sales manager. "These companies may not have a good ROI for the investment, but they have a marketing need. A lot of times calculating an ROI is not a necessary step for buyers. Film costs alone can justify the investment, or printers may just know it will work because CTP is part of the shop's bigger automation picture."

Harry Miller, sales development manager for Presstek, which is selling smaller platesetters for the 20- and 28-inch plate market, states that there are three main qualifiers, other than press size, that serve as a baseline for prospective accounts. Prospects first must have electronic prepress firmly in place. Secondly, Miller states that potential customers must be comfortable and familiar with using digital proofing, which he defines as either dye-sublimation or inkjet devices. And finally, they need to have a requirement for at least 10 to 20 plates/forms per day.

Miller adds that Presstek's market is the $5 million to $30 million printer, but "it really is a question of the plate volume per day." The device is said to have a 6.7-month payback based on 80 percent productivity--defined as 48 plates/shift. This may be a bit aggressive for smaller shops, when you consider 48 plates to be 12 four-color jobs a day, but it serves as a point of reference.

Presstek also has done significant analysis, using industry averages for fully burdened labor costs, to determine actual savings. Based on two-up page output, using traditional electronically imposed image-setting as a point of reference, the company estimates a 76 percent savings in time and a 71 percent savings in labor and material costs. Miller also points to additional potential savings on the press makeready side of the equation, particularly in the future when ink key settings will be driven by the same data used to image the plate.

Given its integrated systems approach of CTP tied to digital press controls, Komori believes the future is today. "When we talk about ROI, we see it impacting three major areas: consumables (i.e., film), labor and makeready time on press," Hudmon says. More accurate plates lead to faster registration on press and ink key setting based on prepress data help the press to get to color quicker, she explains. The combined result is faster turnaround and reduced waste--both of which translate into increased profits.

Labor savings clearly is part of the equation, though this will vary depending on corporate customers. States Michael Moore, worldwide business manager, computer-to-plate for DuPont Printing and Publishing, "On our ROI worksheet we have a line for labor savings, but we are very careful to let printer prospects fill it in by themselves." He points out that some companies have a strict policy against layoffs, in which case they need to rationalize the investment without any labor savings component.

In the case of B & B Print Media Group, it had lost a couple of people to attrition while in the process of buying and installing its Gutenberg device. Robert Carrier notes that had it not been for the platesetter, he would have had to replace those people. He also points out that there has been a major decrease in the amount of overtime he has had to use in his prep department.

Admitting that there might be union and/or redeployment considerations, depending on a printer's actual circumstances, Gerber's Fieger believes that "75 percent of labor in your prep department will go away." Again alluding to the typical $20 million printer, he figures that most companies would have approximately eight workers in stripping and platemaking. Though most companies will have to maintain a hybrid operation with both CTP and conventional platemaking for some time, ultimately it is conceivable that one person will be able to do the work of these eight.

A significant additional benefit diffcult to put a hard value on is the productivity gain realized by going CTP. As stated earlier, Simon believes that gains in productivity/turnaround time are an essential component in justifying the Publishers Press investment in this new technology. The ability for publishers to delay magazine closing dates by several days constitutes a real value--one that might influence their choice of a printer.

As an example of the potential for rapid turnaround on jobs, Fiel recounts some recent Image Systems jobs done for American Greetings. His firm cranked out 24- to 32-page catalogs, from acceptance of digital layouts to print, in just five days. According to Fiel, there are some jobs that he can quote so competitively that no one in his market can come close on pricing.

Robert Carrier stresses not only his faster turnaround, but also higher quality. And in his mind these two factors equate to a "huge marketing advantage." On top of this, B & B Print Media Group also has found that its CTP installation has "opened up capacity considerably."

Yet, for those not willing to jump into the CTP fray based on a gut feeling, there are some evaluation tools now available to help one financially assess the investment. As mentioned earlier, Creo, Screen U.S.A. and Komori have come out with spreadsheets to help buyers crunch the numbers.

The Creo spreadsheet is very polished, with a "button-based" interface that walks you through each of the inputs to help calculate financial returns on a potential CTP investment. The model allows printers to input a matrix of plate costs, on a cost-per-sq.-ft. basis, for multiple plate manufacturers, even accounting for volume discounts as usage increases.

In looking at capital costs, you click on a button and are brought to an input worksheet that allows you to enter the expected cost of CTP-related equipment, as well as the cost for conventional equipment (i.e., step-and-repeat devices and film processors), and your cost of capital. Other areas of the program allow users to enter the number of plates used per day, by plate size; the current and future percentage of work coming in digitally; expected growth in plate usage; and staffing requirements; along with multiple labor rates. Though not specified in the model, one would want to use fully burdened labor rates.

Once you have supplied all the input data, the program prints reports showing NPV, IRR and Payback Period, both on a pre-and after-tax basis. Of course, the results are only as good as the data entered, and it is important that you first understand your conventional costs, since much of the analysis is based on a "before and after" comparison.

Screen's worksheet does much the same thing. A key difference in the Screen approach is the integration of digital proofing into the investment analysis. This is not surprising, given that Screen's proofer is an integral part of its system--offering imaging through the same RIP as the platemaker, thus showing the same screening that will be on the plate. So, on top of the capital costs of the proofer, the Screen model also considers materials savings in the proofing area.

The Screen model is based only on running B1 plates and thus centers on the price per plate, rather than price per square foot. Also, the model incorporates expected lease payments. However, assuming you use the correct cost of capital value in the Creo model, the two spreadsheets should be able to kick out comparable findings.

It is interesting to note that the Screen spreadsheet includes an opening caveat that it is difficult to come up with a single ROI formula since different shops have different workflows and front-end requirements. This is a key point that everyone using either of these models must take into consideration.

Komori uses its spreadsheet as just part of an overall onsite evaluation. According to sales manager Hudmon, the ideal scenario is for several of the manufacturer's experts to sit down with at least as many representatives from the printer--preferably including the owner and prepress and pressroom personnel. The evaluation begins with a detailed workflow analysis so a system diagram can be created to see if CTP will work and to identify any potential bottlenecks. Then the numbers may be run through the spreadsheet to help justify the investment. Test files also are processed through to press sheets, and the shop's culture is assessed.

One of the biggest potential barriers to the success of CTP has nothing to do with technology, Hudmon asserts, but has to do with whether the company is culturally ready for such a change. "Does the organization have the right attitude to suddenly compress seven production steps down to three? To compress its labor force and possibly displace personnel? Management has to get involved and make sure that everyone gets the message that the company is going filmless. Some shops just can't get rid of film; it's a security blanket."

So, where does all this leave us? If you believe George Fiel's claim that CTP is the key to remaining in business, you ought to be doing some investigative work right now. Use conservative figures to help convince yourself that this investment makes sense. And don't forget that computer models fail to account for any competitive advantage that you might gain with CTP.

If computer-to-plate is really going to determine whether yours is a shrinking or a growing printing business, you might not need to run too many numbers to realize that it makes sense for you.

By Michael D. Vinocur Contributing editor and vice president of Footprint Communications, Inc., Teaneck, NJ