Strategically Speaking: Should You Be Outsourcing Your Distribution?
As the second quarter of 2009 drew to a close and a subdued BookExpo America winded to a conclusion, the news from the book publishing industry continued to be mixed at best and, in some cases, downright depressing. The current environment is unique for many reasons. The challenges go beyond the implications of the global recession as the book industry faces changes in business models that have been in place for decades.
E-books, while admittedly still a rounding error in the context of the industry’s total revenues, are gaining ground in terms of both revenue and mind share.
Print-on-demand (POD) has indeed evolved from a specialty niche to a commodity service as equipment capabilities improve, prices drop, and publishers finally accept the notion that cash is indeed king and unit manufacturing cost matters little if the books don’t sell. R.R. Bowker’s recent report that the number of on-demand and short-run titles soared 132 percent in 2008 to 285,394 is proof positive.
While the changes represented by e-books and the growth of POD are indeed significant, there are clear signs of the growing importance of third-party distribution services to publishers as a viable alternative for reducing fixed costs and focusing limited resources on the publisher’s primary business—content creation.
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.
The recession has changed all this and requires that publishers take a broader view of the opportunities and risks in the current economic environment and the limits on resources, particularly: cash (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 distribution outsourcing is essential and should be a required element of the strategic planning process.
Is Your Organization a Candidate for Distribution Outsourcing?
The decision to outsource your distribution operation is not one to be taken lightly or left to amateurs. To be sure, 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 your organization’s business policies, workflows, unique functional requirements, current and prospective transaction volume, and strategic goals.
There are several fundamental questions that every organization should consider as part of the annual business-planning process. Forthright answers to these questions will help your leadership team decide if outsourced distribution is something your organization should seriously consider:
1. If we define “distribution” as being composed of the sales, marketing, revenue/order in-take, 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.” 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. If you cannot credibly link your revenues or demonstrable cost advantages to the quality of the individual services you provide, the process may be a candidate for outsourcing.
2. How do your operating metrics (e.g., functional expense to net sales ratios, lines per order, fill rates, order time in process, average collection cycle, etc.) compare with similarly sized competitors? Visibility to operating information is essential to managing costs and successful profit-improvement initiatives. 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.
3. Can your distribution operations be easily scaled to match the requirements of a potentially volatile marketplace? What are the fixed and variable components (i.e., costs that vary with sales volume) of your current distribution operations? What are your break-even revenues for the best, worse and most likely scenarios of your organization’s three- to five-year planning horizon?
4. Are there environmental factors likely to reduce the value of some or all of your current distribution operations? For example, does the commoditization 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?
5. 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 Internet booksellers?
6. What are the opportunity costs of maintaining the distribution status quo—are there product development opportunities 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 re-deployed to strategically more significant uses?
7. How is technology likely to change the customer demand placed on your organization? 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
If we take it as a given that the current recession has permanently changed the operating environment of the book publishing industry (albeit to different degrees for different product lines and distribution channels), it is unlikely that any but 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 are offering supplementary services such as e-book delivery, POD and short-run digital printing through partnerships with specialist firms.
Deciding whether or not to consider outsourced distribution has become a recession-induced academic argument. Regardless of how capable we may believe our current, dedicated distribution operations (as broadly defined previously) 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. In order to be effective, the evaluation process must dispassionately examine the qualitative and quantitative considerations, one-time transition costs and, of course, the risks—all of which will be explored in greater detail throughout this column in future issues of Book Business.
David Hetherington is the managing director for strategic business development for Integrated Book Technology, and an adjunct professor in Pace University’s Graduate School of Book & Magazine Publishing. He previously was CFO for Columbia University Press and has held senior positions in finance, operations and book manufacturing with some of the industry’s largest firms, including Wolters Kluwer Health, BearingPoint Consulting’s Media & Entertainment Practice, Reader’s Digest and Simon & Schuster.