While the changes represented by e-books, audio books, POD, and digital delivery (e.g., Cengage and Pearson’s higher-education digital offerings) are indeed significant, there are also clear signs that third-party distribution services are growing in importance. They offer publishers a viable and potentially business-saving alternative for reducing fixed costs and focusing limited resources on the publisher’s primary business—content selection and development.
As the third quarter of 2019 draws to a close, news from the book publishing industry continues to be mixed, at best. The current environment is unique for many reasons. The challenges go beyond the implications of a potential recession: the book industry is working to address and embrace changes in business models that have been in place for decades.
E-books, while a minority of the industry’s total revenues, are gaining ground in terms of both revenue and mindshare, while down-loaded audio content continues to deliver meteoric growth rates. As equipment capabilities improve and prices drop, print-on-demand (POD) technology has evolved from a specialty niche to a commodity service.
Publishers increasingly accept the argument that “cash is king” and unit manufacturing costs matter little if the books in question don’t sell. Digital book manufacturing has become a permanent and growing presence in the portfolio of publisher options.
The publishing community faces an increasingly current complex landscape: a steadily more powerful Amazon, Barnes & Noble owned by private equity, a shrinking share of sales through bricks-and-mortar retail outlets, open education resources as a credible alternative to traditional textbooks, and text-book rental programs being offered through the publishers. That’s just part of the complexity.
Developments such as these require that publishers take a broader view of the opportunities and risks in the current economic environment and the limits on resources. The traditional view of outsourcing held by many organizations is much like the industry’s longtime “holy grail”—the hunt for the lowest unit manufacturing cost—i.e., the only justification for outsourcing is if it significantly reduces the publisher’s operating costs.
There are other ways to look at outsourcing, notably: its impact on cash flow (a constraint faced by even the largest publishers); the growing importance of emerging technologies such as e-book delivery and POD; and the pressure to improve service levels as the time-in-process for orders decreases steadily. A more informed, longer-term evaluation of the rewards and risks of outsourcing distribution should be a required element of any strategic planning process.
Is Your Organization a Candidate for Distribution Outsourcing?
The decision to outsource distribution is a significant one. The request for proposal (RFP) and vendor-evaluation processes, and the creation of the business case for review with senior management, require a comprehensive understanding of an organization’s business policies, workflows, unique functional requirements, current and prospective transaction volume, strategic goals and a view to the potential changes facing your organization in the years ahead (e.g., shrinking college enrollments, use of Open Educational Resources increases)
As part of an annual business-planning process, every publishing organization should ask six fundamental questions about its distribution operations. Forthright answers to these questions can guide a leadership team in evaluating whether outsourced distribution is something to seriously consider:
What are our core competencies?
In the context of an outsourcing evaluation, we define “core competencies” as those functions that your organization does supremely well and that provide a significant cost and/or competitive advantage. “Distribution” can be defined to include sales, marketing, revenue/order intake, fulfillment, returns processing, credit and collections, customer service, and inventory management (including remaindering and inventory disposal). Which of these functions, if any, are your organization’s core competencies? If you cannot credibly link your revenues or demonstrable cost advantages to the quality of the individual services you provide, the activity may be a candidate for outsourcing.
Can we compare our operating metrics to other companies?
Access to and assessment of operating information (e.g., functional expense to net sales ratios, lines per order, fill rates, order time in process, average collection cycle, etc.) is essential to managing costs and improving profits. If your business systems cannot provide this information without a brute-force effort, you are likely leaving money on the table—profits that outsourcing may allow you to leverage.
What environmental factors are likely to affect our current distribution operations?
For example, does the growth of POD reduce the need for traditional warehouse operations as currently sized? As POD costs decrease, will the physical size of your distribution operations need to remain the same in terms of staffing and square footage? Does outsourcing offer a way to manage better as production and distribution requirements evolve?
Where do we most need to invest?
Does your organization have the capital resources to fund ongoing maintenance and investment in the information- and warehouse-management technologies necessary to reduce transaction costs, improve productivity and respond to the increasing service expectations of both major brick-and-mortar retailers and Internetbooksellers? Faced with the choice of investing in data analytics technology that will help you understand your current and prospective customers better or investing in an upgrade to your warehouse system – which is more important to the long term health of the organization?
What are the opportunity costs?
What product development opportunities are left unexploited because cash is being consumed by the operating and capital requirements of the distribution operations? What is the market value of the physical plant you are now devoting to distribution operations? Can these assets be converted to cash that can be redeployed for strategically more significant uses?
How are customer expectations likely to evolve?
Does your organization have the resources and risk tolerance to fund the creation of the dedicated infrastructure to support the demands of the emerging marketplace for e-books, POD, and/or online content delivery?
Qualitative vs. Quantitative Considerations
The operating environment of the book publishing industry (albeit to different degrees for different product lines and distribution channels) has permanently changed and will continue to change. Only the largest publishers or distribution specialists will have the scale or functional expertise to manage the increasingly demanding and complex requirements of the marketplace.
Even this assertion is something of a misnomer, as the major players in the third-party distribution business offer supplementary services such as e-book delivery, POD, and short-run digital printing through partnerships with specialist firms.
Regardless of how capable we may believe our current, dedicated distribution operations to be, the periodic evaluation of outsourcing versus a captive distribution operation has become a requirement and is now fundamental to the strategic planning process for publishers. To be effective, the evaluation process must dispassionately examine the qualitative and quantitative considerations, one-time transition costs, and of course, the related risks.
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