Outsourcing That Ties In with Growth

by Linda Carlson

Profit: that’s what businesses are all about. You get higher profit in one of three ways: you sell more at your current margin, you sell the same amount at a higher margin—or you do both. Doing both is, of course, ideal, but it’s challenging, especially in today’s difficult retail market. Most customers have less disposable income, and more ways to get the information that books have traditionally provided. That also translates to less available space for our products in bookstores and the other typical retail outlets for books—and more competition for that decreasing space.

One strategy for cutting costs and increasing profit on current products is outsourcing, especially if you have extensive backlists and frontlists and are striving to position yourself for growth. (A piece in an upcoming issue will focus on how midsize publishers are, or could be, generating higher volume.)

Outsourcing can provide more than a cost advantage, even though you’re introducing another layer between publisher and consumer, and every new layer means another discount. Think, for example, of Epicenter’s experiences with its Palin biography over the Labor Day weekend (see “Sarah’s Story: Keeping Up with an Instant Bestseller,” October). When former IBPA president Kent Sturgis was swamped with orders for the bio of the newly named GOP vice-presidential candidate, the fact that he had outsourced distribution meant Epicenter had an established business relationship and access to systems that could accommodate the surge in business. And with such systems, publishers like Epicenter are also better prepared when the demand for a title subsides.

Thanks to outsourcing, spikes may be handled literally in hours. Outsourcing can sharply decrease your use of a line of credit and eliminate warehouse expansion as your backlist grows. It can also mean you don’t have to add staff as your frontlist increases—and then lay people off when you’re having a tough year. And in an increasingly competitive marketplace, it may give you access to otherwise unapproachable wholesalers and retailers.

Since dramatic spikes in sales are few and far between, most midsize houses are likely to consider outsourcing more as a way to smooth the road to growth than as a way to handle sudden huge demand. A case in point: Applewood Books, in Carlisle, MA. Founded in 1976 to republish out-of-print titles about American life, it increased its frontlist by a few titles each year, and by 2005 was doing 50 books annually. Preproduction costs, which included acquisition of titles and either creating facsimiles or reformatting scanned text, were by then about $2,500 a book.

“That was a significant amount of working capital,” publisher Phil Zuckerman points out, an issue that became critical when he challenged his staff to sharply increase its new titles to one a day.

Signing On for Scaling Up

Adding hundreds of titles to inventory meant modifying or changing systems and facilities to accommodate significant growth on a continuing basis. “We looked at what we were good at, what we were not good at, and what we needed,” Zuckerman says, outlining an analysis many publishers benefit from, especially when they want to maintain backlists that will attract sales without much marketing effort. As The New York Times commented when Chris Anderson’s The Long Tail was a bestseller, “Publishers remain wary of the long tail theory, largely because they haven’t figured out how to make money off it. Books require storage, and it quickly becomes impractical for publishers to keep low numbers of thousands of titles in their warehouses.”

That’s one of the reasons Zuckerman prepared for a growth spurt by converting many titles to print-to-order through the Lightning Source division of Ingram Book Group.

Meanwhile, as Zuckerman was shopping for a new distributor, he learned of Ingram’s plan to establish a division that would provide administrative, marketing, and warehousing services for publishers on an à la carte basis. In March 2005, working with Ingram’s then newly hired Phil Ollila—now president of Ingram Publisher Services and senior vice president of Ingram Book Group—Applewood became IPS’s first client.

Although Publisher Services has a relationship with Ingram’s wholesaling operation, Zuckerman emphasizes that the two are separate units of the Ingram Book Group, just as Lightning Source is. These affiliated operations are among the reasons Applewood chose IPS rather than a traditional distributor. It’s also why some distributors, like Epicenter’s, choose to work with IPS.

Zuckerman is a cheerleader for IPS, and his enthusiasm shows what’s important when a publisher wants to grow, regardless of whether you outsource some parts of your business, and, if you do, which vendors you use.

The structure that Applewood has now will accommodate its steady increase in titles while stabilizing its overhead, including staff costs. In fact, Zuckerman believes his overhead has actually dropped since the switch to IPS, even though Applewood is now issuing eight times as many books a year as it did the year of the change.

To get specific, let’s look at some services IPS provides for Applewood that it or a similar vendor could provide for you:

Inventory management. Because most Applewood titles are now print-to-order through Lightning Source, no title is ever out of stock. That means no back orders or lost sales—or disappointed customers. This is especially important when demand spikes unexpectedly. It’s “a huge advantage,” says Zuckerman, who cites the immediate increase in sales a publisher can have when fill rate increases from 80 or 90 percent to 100 percent. For Applewood, which has many books priced in the midteens, increasing the fill rate by one book on 50 orders each weekday would generate an additional $7,500 a month.

Although Applewood monitors its inventory for each title and determines when to reorder, publishers can delegate this function. Monitoring stock levels is a service that both IPS and Consortium Book Sales & Distribution provide for their customers. Consortium also provides a minimum-stock-level report that publishers can use to track their stock, president and COO Julie Schaper reports.

Consortium, which has its headquarters in Minneapolis, can warehouse all its customers’ books, although Schaper says most publishers retain at least a small inventory for fulfilling direct orders and review-copy requests. And this distributor can access print-on-demand for its customers through its parent company, Perseus Books Group. Its short-print-run services include both an automated program that replenishes books based on demand and a pay-for-printing titles as-needed program. “Charges are included on the publishers’ monthly payment report, so there is no paperwork from another vendor,” Schaper explains.

Another large distributor, Chicago-based Independent Publishers Group, uses what CEO Curt Matthews calls “a fabulous point-of-sale database” with actual sell-through, reorders, and return figures from the seven largest customers that allow IPG to review sales of every one of its 40,000 titles each week.

“The software applies a sophisticated algorithm to find which titles need to be reprinted, how many, and when—way before we are in any danger of being out of stock,” Matthews reports. The data are currently emailed to IPG’s publisher clients and will soon be online and thus accessible 24/7.

Like other distributors, IPG warehouses a huge inventory of its customers’ stock at no extra charge; in IPG’s case, it’s a three-year supply based on gross sales of the previous 12 months.

Format flexibility. Converting books to an electronic format, whether for downloading to a computer or to a reader such as Kindle, is a project that many publishers have found challenging. That’s one reason that Consortium is preparing to offer its clients digital services including conversion and management of digital files for e-books as well as formatting for print-on-demand through Lightning Source and Amazon.com’s BookSurge through the Perseus Constellation service. IPG already provides such services.

Sales suites. In addition to creating catalogs and presenting books to buyers for major chains and wholesalers, distributors often establish relationships with sales reps in nontraditional channels, especially the gift trade, which can be difficult for publishers to penetrate on their own (see “The Rep Route to Nontraditional Sales,” January). Consortium, IPG, and IPS not only have in-house and field sales reps plus commissioned sales forces; they also provide salespeople who handle such special markets as catalogers, specialty retail, specialty wholesale, and premium sales.

In addition, they offer client publishers the services of their in-house advertising and publicity staff, sometimes free, sometimes on a fee basis. For example, Consortium subscribes to a media database. When publishers want media contact information for a promotional campaign, the distributor’s marketing staff searches the database and provides the requested information. Since 2005, IPG has offered a half-dozen “publicity boot camps” annually for publishers, and it makes advertising and publicity services available through its seven-person in-house department.

Electronic marketing and sales systems. Larger customers insist on dealing with their vendors electronically, Matthews points out, and that requires expensive setups and more IT skills than smaller presses are likely to have. Moreover, these important larger customers are unwilling to spend any time educating new vendors, and Matthews reports that each has specific requirements about how it will receive data, how the data should be organized, what it should include, and when it should be sent.

Because all retailers, regardless of size, are increasingly likely to expect round-the-clock access to book information, IPS and other major distributors have created systems that could be prohibitively expensive even for larger independents. For example, via iPage, IPS allows retailers and publishers to search titles, track orders electronically, read reviews and bestseller lists, and view cover art.

IPG sends similar title information to more than 80 wholesalers and retailers on a weekly basis. “Cover image, catalog copy, specs, all reviews, formatted exactly the way they want it so it will run right into their systems,” says Matthews. “This means that books are easy to search for, and this is what makes the famous ‘long tail’ of sales actually happen.”

Linda Carlson (lindacarlson.com) writes for the Independent from Seattle, where she spent 10 years self-distributing job-search guides.