Tuesday, August 20, 2013

Underbidding Visual Effects

Underbidding Visual Effects

One of the most problematic issues in the VFX industry, besides subsidies, is underbidding

This is where a company knowingly underbids what the company  estimates it will actually cost to do the proposed work.  It's also known as 'buying a project'.

This isn't done by just up and coming companies. Large, well established companies even in subsidized areas underbid frequently.

It doesn't take a financial wizard to see intentionally losing money on a project is not a good long term plan. In fact it's not even a good short term plan.

Why do companies underbid?

1. Subsidies
If a company in a location with no subsidies is bidding against a company located in an area with a subsidy (paid by a government) then they will likely have to underbid just to have a competitive bid to make up for the 20-60% difference. It's not like there's a 40-60% markup so that reduction has to come from the actual costs. Even companies in subsidized areas have to compete against other companies in more subsidized areas. That 20% subsidy looks good until you need to compete against a company with a 40% subsidy.

2. Competition 
Currently there are too many VFX companies for the amount of work available. If there weren't then most would be busy most of the time and would have no need to underbid. That's why the notion a lot of people have about starting a VFX company because they're not working, is flawed. And too many VFX companies in turn means that there are too many VFX professionals. Those considering a career in VFX should rethink because the odds are very much against you, despite what the for profit school ads may say.

3. Poor management
Many running VFX companies have no business training or background so will make these types of decisions based on a feeling of desperation. They'd rather be bailing water rather than considering fixing the leak. Rather than try to make decisions based on long term issues they are making rash decisions.

The thinking
Companies think they need to underbid the work to make sure they have work. They look at the dozens or hundreds of people at their company and the large cost that incurs. Larger companies can be burning through $1 million dollars a week in payroll costs alone. So the thinking is even if they lose a few million on the project it's better than losing even more by not doing so. The money offsets a large portion of the losses.

And underneath the decision to underbid is the notion that somehow they can make up for it. The crews can work a bit harder, they can be a bit more efficient and that things will go well on this one project to turn an underbid project into a break even project. That never happens. Directors do not stop changing or adding shots until someone with authority (the client) tells them they can't due to time or money. What ever budget and time allowed will be filled.

The hope is also that even though they are losing on this one they can make it up on the next one. That type of thinking can work in some industries where there are very big hits to offset some losses (films, products), but in visual effects there are no big hits. A company may be in the black on the next project but the tight margins in visual effects are hardly enough to fund that one project, impossible to make up for losses on one or more other projects. And that means any profits that might be made on the current project have already been spent on the previous project just to cover the losses.

And unlike some industries (contractors to the government) it's impossible to make up for the loss from underbidding with change orders and extras. Most vfx companies are reluctant to even submit valid change orders, the fear being if a client feels they were charged more than they expected, that company will never get work again from that client.

Impact of Underbidding

No company can continue to lose money indefinitely. While underbidding may seem like it's slowing the bankruptcy of the company, it is still going bankrupt. At some point the investors or the creditors will have enough and make radical changes or will simply close the company.

Some people think that's up to each company and if they wish to underbid where's the harm in it other than the company that goes out of business. But it certainly affects more than just the one company.

When a company goes out of business it likely will mean the workers will not only lose an employer, they will likely lose at least one pay period, possibly more. Any accrued health care, vacation or other benefits will be instantly gone.

When a company goes out of business because its been operating in the red it is likely do so at a very inopportune time such as the middle of a project or even worse on the major crunch period right before completion.

We've seen this scenario played out and affecting both workers and clients a few times just in the last year or so and it's a painful process for the workers.

When companies underbid it not only affects that company, it affects all other companies and the people who work for them. A company that underbids erodes good companies who are attempting to operate a visual effects company as a real business instead of a lemonade stand. A company that is bidding using actual numbers is now losing business not due to true competition but because a business is choosing to commit long term bankruptcy. A good company can only lose business for so long before they close.

And that's when other companies start jumping in with the same idea. Now instead of one desperate company, underbidding may be creating a half dozen companies that are getting anxious. Once they start doing the same thing, which some are, the quicker the race to the bottom happens not only for those companies but the entire industry.

Clients also get a very skewed sense of what the actual cost of doing visual effects is when companies underbid. Some clients will assume the company knows what's its doing and others will be aware but will feel compelled to take full advantage of the situation while they can. Money is a compelling substance and can cause loss of reasonable thinking on both sides.

What can be done
1. Don't underbid. Even Kansas arborists have a code of ethics that prevents them from learning other bids from clients and underbidding each other. No such ethics exists in the visual effects business. It's been said some companies have a 'we'll beat any bid' agreement with the studios. If managers can not operate a company morally then they should not be running a company.

2. Operate the company as a real business. Any idiot can run a business and lose money. When millions are at stake along with hundreds of workers, it can no longer be run by the seat of pants and wishful thinking.

3. If the company is unable to make money then the owners and investors should examine the problem and consider making improvements or they should consider closing or merging. Taking other companies down with you to bankruptcy is not a plan.

4. Lay off workers when there is no work for them. Keep a small group of key people to keep the company running between projects. The reality is film and other media work are project by project. The studios do not keep crews employed between projects. If the company is located near similar companies (real VFX hub) and the industry is healthy then the workers would likely be able to find other work as it shifts from project to project. It's when companies set up in a distant location or when the actions of a few make for an unhealthy industry that this becomes a problem. Now it may seem to be better employing the workers and get some funding but that is simply eroding the industry and its better to have workers make a short term change rather than trying to work long term in an unsustainable industry.

5. Have the visual effects companies form a trade association like other industries. Put aside petty, non-business issues and work together to stabilize the industry. Have a basic code of conduct and ethics for companies to abide by.

The same problem of underbidding happens with individuals. Graduates and those starting out think they have to work for free simply because a company posts a job offer saying so on Craigslist. Too much competition makes them more than eager to work for nothing which in turn causes companies to consider lowering all wages. When companies start dropping experienced professionals to hire cheaper labor (another poor business plan) then what do the newer workers think will happen to them in a few years?

Some workers go out on their own with the intention of truly being independent contractors but these people almost always underbid as well. Frequently they charge less than they were making while working for a company. Some may choose the same rate but they fail to understand even the basics of business. When you're working for a company it costs the company more than simply your pay check.  Most of the time there are benefits, taxes or other costs that you may not be aware of these. These may be another 20-40% above your pay. As someone working for themselves now all taxes will need to be paid by you along with health insurance, your computer, software, etc. It starts adding up quickly. Vincent Laforet has written about the cost of doing business as an independent photographer. 

Place a value on what you do. Do not underbid. Consider the long term consequences. If both companies and individuals are only focused on being the cheapest above everything else, then the quality and the creativity will fail along with the business.


Saturday, August 10, 2013

Film Subsidy Bubbles

Film Subsidy Bubbles
Dangers to those in the subsidized areas even if they may not be aware of it.

Someone on an email group questions why subsidies for visual effects were bad and why would we want to do away with "Our subsidies".

First off they're not our subsidies. The film studios are the ones who lobbied for them. They're the ones who profit from them. Not the vfx companies, not you, the vfx worker, and not the taxpayers.

All the vfx companies obtain by moving to subsidized areas is the 'opportunity' to bid on a project. Same competition. Same need to submit a bid the studios will accept.

Subsidies aren't what fund visual effects. World wide demand is what fuels visual effects. The studios make the films for a global market and most of their profits come from visual effects films. If they wish to make tent pole films they will continue to make films with visual effects. Reduction or elimination of subsidies would not cause visual effects work to disappear. What it would do is hopefully instill some basic management and planning of the visual effects to tell stories rather than abusive and excess amount of wasteful work.

What the studios gain from subsidies is someone (the taxpayers) who will cover a sizable cost of the film. This reduces their risk and allows them to make more profits, sooner. Thanks to the generosity of unsuspecting taxpayers.

It's useful to think of subsidies as what they are, economic bubbles. Those who cannot remember the past are condemned to repeat it.

Housing bubble - Banks were practically giving away home mortgages with no down payments. There was so much profit to be made some bank loan officers were forging documents. There was so much profit to be made people were rushing to become contractors and real estate agents. Many were investing their life savings on a sure thing so they bought houses to 'flip'.

Things were going great until they weren't. The housing bubble popped and was one of the main causes of the world wide recession in 2008 which we will continue to struggle with for years, perhaps decades. People were wiped out out. Even those not involved in the housing market saw their house values, retirement funds and their investments drop like a rock. Unemployment skyrocketed and hundreds of thousands of homes were foreclosed, many of them illegally.

But don't worry about the banks. They're doing just fine. They made huge profits on reselling the loans and on the foreclosures. They even got mountains of money from the government.

Tech bubble - A few years earlier there was the tech or internet bubble. People were betting their life savings on this new internet thing. Startups were happening in every other house. People were rushing to be web designers. The gold rush was on. Until it wasn't. When it all imploded many lost their life's savings.

But don't worry about the banks or rich, they got in on the IPOs of the best companies. They'd be laughing their way to the bank if they weren't already sitting there.

Silver mines - In the 1800's there were a few silver mines where silver was discovered. And almost overnight towns would spring up complete with saloons, stores and churches. People moved across the country to feed on the potential money. They either became miners or sold to the miners. And then the mine would run dry and it would all stop. Many of these towns turned into ghost towns as people fled to the next place. The entire economy for them was built around the silver mines. People lost their savings and moved on.

But don't worry about the banks or the owners of the mines, they did ok.

And if you had asked any of those people involved the day before those bubbles popped, the people would have told you everything was great. They all thought it would continue. Until it didn't.

Not creating an industry 
The film lobbyists and others who would make a profit from them, convinced the politicians of Michigan that it was in their best interest to build stages. Because they would be an ongoing profit center and employ over 6000 people. After all, they were creating an entire new industry there. And the politicians in their infinite wisdom backed the cost of building the stages (and the bonds required) by using the pension funds of the police, firefighters, teachers and others.

Then they learned the hard lesson that they weren't really creating an industry. They were simply leasing it at a high cost for a very short time. They were simply paying studios to come to their location on a film by film basis. And the studios would only bring films if they provided higher and higher amounts of cash every year. They had to compete with other countries and states and the ones to win film projects were the ones who outbid others and gave the studios more free money. Both the 'winners' and the losers were losers.

Many don't seem to see the downside of subsidies, especially if they're in a subsidized area. And just like the other bubbles, these people think everything will continue to be great.

Real World Example
Let's do a review of how this works and why it's not great for those working there. In this example I'll use Vancouver but it could be anywhere in the world.

Vancouver in the days before subsidies had their share of film production. Vancouver was a city and had a number of scenic locations for shooting (ocean, harbor, mountains, forests, city streets, snow, etc) There was some work from both Canada and the US. The lower exchange rate encouraged some projects to shoot there as well. If the subsidies never happened the  film production in that area would continue to grow at a rate that matched demand. The industry would be as stable as any production hub can be. Most of those who had film jobs would likely remain reasonably employed.

When the subsidies were created in that area they created a huge pull for all productions, especially those on the west coast. Many projects went to Vancouver along with a number of the below the line jobs. According to some of the SaveBCFilm people, over 20,000 now depend on the film industry. Many of these couldn't be filled because they had not evolved over time to the new size. This was simply a politician pulling switch. That required bringing in workers from all over the world. That required training many locals in film production.

Many jobs were lost in Los Angeles and surrounding areas, places that had evolved over the last 100 years and had maintained a certain balance. Because this was where the studios with the money were located. This is where most of the writers, directors and producers made their homes. So this eco system that had developed was being drained not due to lack of demand but simply by politics.

And in the meantime Vancouver continued to balloon. VFX companies from the US and even the UK were forced to set up shops due to the demand for this free money from the studios. This in turn required many working in the US and other countries to now move to Vancouver to continue working. The original intent for many of these film subsidies is to create more jobs for locals but in many cases the jobs are filled by foreigners. The clamor for more people and the lure of money also tends to bring out the 'for profit' schools to start pumping out even more students. So these graduates join the work force of a local industry that is already expanded beyond what it can support naturally. This while other areas are experiencing high jobless rates simply because the jobs have moved. No new jobs were created. Simply the shifting of existing jobs in most cases.

And we see this same pattern repeat itself around the world in other countries, regions and states. And the same people pushing for these in one area are in fact the same source of the funding and lobbying to push all other areas, each competing against the other but all ultimately working for the same small set of clients.

The people working in film and visual effects in areas with subsidies have now become dependent on the subsidies. They have become dependent on government handouts or welfare in a sense. The government ends up covering a sizable amount of their labor costs. And these subsidies must increase on a yearly basis and must out spend other areas competing for the same exact work.

Now you have thousands of people who's private industry jobs are in the hands of local politicians. A very large portion of the film industry (individuals, vendors, stages, sub-contractors, etc) in those areas has now expanded beyond what it would support naturally if there were no subsidies. This puts those areas in a very dangerous and fragile position. The entire structure could collapse at any moment since the politicians could pull the support, the only thing holding all of it up.

Film production and visual effects has always had ebb and flow of work so that makes it difficult but places with subsidies have additional factors to consider. If a subsidized area reduces their subsidies due to change in politics, then it will all fall down. The taxpayers in these areas won't always be so ignorant of what it's actually costing them. One day they will realize they're seeing the Emperors New Clothes re-enacted with their money. And the other thing these subsidized areas have to worry about is another location out bidding them by providing even more free money. They're competing against other locations and if they lose, they may lose big time.

Vancouver, BC has seen this in action just in the last year. Ontario and Quebec started offering more incentives and the work to Vancouver slowed down and the work in these other areas increased. Those in Vancouver also fail to see the irony when they cry foul over the subsidies when a large percentage of the work they had was based on themselves outbidding in the subsidies war. And as in all wars, there are losers.

And Vancouver and their SaveBCFilm had no control of these other political groups in other locations since they were competing with them. They had no control over their own local industry since they had built it on fictional and temporary support. They had not built a self sustaining industry with it's own content creation but rather a simple service industry greatly dependent on the good graces of local politicians (receiving money from the studio lobbyists) rather than business and talent.

And we see this repeat itself all the time. Michigan loses to Louisiana. State or area X loses to area y because of a shift in subsidies. The amount of work remains the same, it's only question is where it will go and this is now controlled by government payouts than by any other selection criteria.

So now rather than having a few healthy and stable locations for film and visual effects production, we see the work spread out to many more locations which tends to make each location weaker. Rather than a large eco system that is self sustaining, these are smaller systems which are not self sustaining. With so many new areas developing there is more competition for the exact same amount of work. And there are new areas announcing film incentives almost on a weekly basis. These areas are all fighting for anything and everything. Those jobs that were 'created' in those locations may evaporate at any time since film production is starting anew with each film and not as a permanent industry. And one thing is for sure, the work is constantly in flux and shifting around the world. No place is safe or permanent. Those on top today will likely be on the bottom tomorrow.

And because these areas have all been expanded beyond their self supporting means, they're all in danger of popping. And so eager are they to keep the work they are willing to keep outbidding others. Those who have moved there, those who trained there, those building their own businesses there and all of those working there are in a very precarious position and yet fail to notice their local industry is supported by the least reliable support. A politician. Like those in other bubbles, they fail to notice the dangers until it happens. It obvious to those on the outside but those riding the bubble fail to see it or simply prefer not to consider the reality.

And who is pushing for subsidies in all of these cases? The studios, the only ones who gain in the end from any of these and the ones who play each location off the other. But don't worry about the studios. They'll be just fine. They'll just move to the next place after your area pops.

What's happening in LA could easily happen to Vancouver, London or any other film location. And not only is it possible to happen, it will happen at some point. There's no magic that protects your area. Studios eager to make money in the short term have no allegiances since the subsidies have merely turned the discussion into a cost issue.

No problem
There are those who think that that's the way it is now and that we should get over it. They don't see any problem moving every 3-6 months like migrant workers. They see no issue with being treated as a commoditized migrant worker and they feel the best workers will win out. Sorry for being the bearer of bad news but that's not how it will play out. Just because you're willing to move doesn't mean that you can move. Many subsidies are dependent on locals (residents who have been in a location for over a year, file income taxes there, etc) and so when given a choice between you and someone who can fulfill their subsidizing criteria, your 'qualifications' may not be enough to counter the need for a subsidized worker. Some countries are difficult to get working visas and so even if work is available and you have great qualifications, you likely won't be hired. And don't forget that each area has been expanding and expanding already. There already is an excess of visual effects and film workers due to subsidies. As the work continues to shift based on subsidies you may find yourself shut out from working, regardless of your qualifications, experience, skill level or talent. Then you might consider why subsidies aren't the best for the industry and the people who work in it. Rather than being based on  quality, efficiency and cost criteria,  subsidies are only based on which politician will provide the most money.

Many of these locations that have subsidies would continue to do work after the subsidies go away. They have now built up infrastructures and experienced and talented people. It won't be as much work but it will be more stable and more long term.

Ultimately that's what we're striving for. A healthy and stable industry where quality, efficiencies and other factors are the deciding criteria on where a production does their work. These are all in the hands of the companies and the workers in those locations. Right now your local industry is in the hands of a 3rd party that you have no control over - the politicians. That may be good for the studios but that is no good for those of us working in the business.

Related Posts
Visual Effects Tax Incentives / Subsidies
Risk and subsidies
The Impact of Visual Effects Subsidies