how and why to research the financial stability of vendors · how and why to research the financial...
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Protecting Your Library
How and Why to Research the
Financial Stability of Vendors
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Understanding the Financial Stability of Vendors…
and Why It Matters
Mary Sue Hoyle
Vice President, Subscription
Services Division
EBSCO Information Services
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How did we get here?
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2014. Library Journal, Swets Bankruptcy Recalls Fallout from RoweCom. https://lj.libraryjournal.com/2014/10/industry-
news/swets-bankruptcy-recalls-fallout-from-rowecom/#_ on May 1, 2014
Travel Back to 2003
Bankruptcy cause: parent company failure
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2014. Library Journal, Swets Bankruptcy Recalls Fallout from RoweCom. https://lj.libraryjournal.com/2014/10/industry-
news/swets-bankruptcy-recalls-fallout-from-rowecom/#_ on May 1, 2014
Travel Back to 2014
Bankruptcy cause: failure to adjust quickly enough
to long-term market trends (transition to e)
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Swets Annual Report
“2013 was a turbulent year for Swets. It has become clear that the
intended transformation of Swets requires more capital and scale
than is currently available. The ultimate shareholders of Swets
Group in close with the lenders have decided to pull all shares of
Royal Swets & Zeitlinger Holding N.V. up for sale and have
initiated a competitive auction process with a planned sale in Q3
2014.”
Faxon and Swets were both public companies and
their financial reports were available to the public.
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It’s easier to review annual reports,
debt vs. income, than to lose
your funds.
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2016 EBSCO Library Collections and Budgeting Trends
Survey Results
Top 2 reasons why libraries
reported changing or
consolidating vendors
for journal purchases:
1. Company financial stability
2. Improved workflows
200+ Librarians responded
• Almost 70% of responses
were from library
directors and
associate
directors
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Market Drivers
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Do you really know… or even
understand how your vendor is doing
financially?
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Timeline
SEPT./OCT. 2014
• Enlisted an
international attorney
• Pursuing options to
have monies
refunded
• Start answering
questions from
administration
• Vendor justification
and financial
information
requested
NOVEMBER 2014
• Many hours spent
meeting with
publishers –
committing for 2016
& 2017 if 2015
access could be
retained
• Many hours spent
meeting with EBSCO
– needing help to
retain access and
make 2015
payments, special
arrangements to
work with certain
publishers on behalf
of the library
DEC. 2014 - MARCH 2015
• Library works
tirelessly to secure
access and payment
options
• Library has to redo
nearly 300 records in
ILS due to a system
limitation
• Library changed
contract it was riding
which required
documentation
APRIL - JUNE 2015
• Wrapping up loose
ends
• University
established a new
practice on
prepayment
• Requested a
Confidential
Financial Package in
which the library
signed the NDA
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TIME IS MONEY
• Time spent regarding
access and payment
arrangements with
publishers
• Internal time with ILS
and with EBSCO to
ensure orders placed
and reflected
accurately in
EBSCONET
NEW POLICY AND PRACTICE
• New practice
requiring financial
information from
vendors
• New policy for
prepayments
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Prepayment is Linked to Financial Stability…
There are financial benefits to institutions who prepay
(the credit you receive)
BUT…
• Ask how vendors are handling the funds you prepay to them
− For example, funds should not be used for the vendor’s operating
costs.
− Funds should be placed in an account for prepayment only so you can
get a refund if requested.
• This is something SWETS and Faxon could not do.
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Understand How Agents Operate & Set Fees
• Revenue for agents
come from:
− Publisher discount and/or
commission
− Library service charge
• Calculating Service Charges
− Mix of the title list
− Average subscription cost
− Publisher discount
− Service requirements
− Total volume
− Length of contract
− Operational costs
− Competition
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When It’s Time for a RFP,
Know What You are Bidding On
• Evaluate renewal options, invoicing options, personal customer service,
access options, collection analysis, subscription management platforms, cost-
per-use and analysis tools
• Libraries are not bidding on the dollar amount of the titles (vendors get
the same pricing), they are bidding on the value of the service charge.
• Be sure you are comparing apples to apples
• Inflation vs. no inflation
• Consider the value of the agent from a management and access
perspective
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What’s the Word on the Street?
• Check references
• Listen to what you hear from your library
colleagues and publisher contacts
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Monitoring as Part of a Strategy Centered on Fiscal
Responsibility and Stability
Annie Bélanger
MLIS Dean of University Libraries,
Grand Valley State University
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You are investing in their company with
each purchase.
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With electronic purchases accounting
for greater portions of budgets, knowing
your vendor can provide the “product” or
“service” on an ongoing basis is critical.
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In the electronic world, being able to
REINVEST in TECHNOLOGY is crucial…
• User-facing platforms
• Client-facing platforms
• Business-end platforms for the vendor
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Vendor
Performance
• # of late or missing issues, items and/or
broken links
• Response rate
• Average length of down time
• Frequency of cease and desist notices
• # of years to deliver on platform fixes
Data Points
• Vendors in good financial health reinvests
into R&D
• A stagnant system or one that breaks down
often may be an early warning sign
Research & Development
• Data can inform your negotiation tactics
• Tracking systems can range from low-tech
to sophisticated
Tracking
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Financial Statements are the Window into a Company’s
Financial Health
• Should be able to
provide financial
statements or
audited financial
records
ALL
COMPANIES
• May ask you to sign
a Non-Disclosure
Agreement
PRIVATE
• Available through
the Stock Exchange
Commission
PUBLIC
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Audited Financial Statement (AFS)
THE AFS:
The AFS with the auditor’s opinion letter will tell the full story of the
company. KEY INDICATORS:
Will allow you to see sales trends, profit and profit trends, debt and
net worth.
PUTTING IT ALL
TOGETHER:
If the value of your contract is larger
than their net worth, assess the
relative risk of working with the
vendor.
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If the value of your contract is larger
than their net worth, you need to assess the relative risk of working with
the vendor.
IMPORTANT
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Management’s Discussion & Analysis
Required component for publicly traded
companies
Opportunity to provide investors with its view
of the financial performance of the company
Highlight trends and risk that have shaped the
past or are likely to shape the company’s
future
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Focus on key financial ratios of the vendor and the
vendor’s ultimate parent company
• Financial leverage ratios measure the ability of a company to meet its
financial obligations both in the short and long term.
• While certainly a measure to watch, much more important leverage
ratios focus on the long term debt of the company relative to the
ability to pay off that debt.
• Ratios such as debt to equity and debt to net assets are key measures that
provide insight into whether the vendor may be “over leveraged,” which
could lead to financial problems in the future.
o These are usually available within the audited financial statements or
can easily be calculated.
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These steps are
particularly important
when you are
considering making a
vendor change that
would consolidate a
large portion of your
spend.
• Could be something you do on a
rotation over the course of three
years for your top spend vendors.
• Seek help from your finance
department or faculty members in
business.
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Credit Checks or
Credit Ratios
All companies have a credit history.
A pattern of late
payments and
defaulting on
loans can signal
cash flow issues
A strategic
approach to doing
credit checks
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PROCESS: At the University of Waterloo, we worked with the University’s
Central Purchasing Office to establish a process of regular systematic credit
checks. This was put in place following the SWETS bankruptcy.
$250K
$500K
Top 10
Vendors
$11M Annual
Spend
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The Director of Procurement ran
a prototype on SWETS to see if
we would have been able to tell
that trouble was brewing before
we launch the new system,
which they managed.
• He ran the quarterly credit checks
back 3 years as a test and
estimated that as early as 2 years
before he could see the decline in
their credit.
• Further, 1 year ahead he would
have reached out to advise us to
speak with the vendor about their
financial plan.
Could We Have Known What Was Coming?
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Commercial Credit
Resources
• Financial Strength Indicator and the
Condition Code or Risk Indicator
• The Financial Strength Indicator is
calculated using either the net worth or
issued capital of the company. If both
figures are available, then the net worth is
always used to calculate the Financial
Strength.
• The Condition Code or Risk Indicator is
calculated by taking into account key items
within the Business Information report,
which are used to predict the likelihood of a
business failure.
A simplified overview report
on the risk of doing business
with a specific vendor.
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Is There a Disaster Recovery Plan?
• For example, if your vendor
experienced a natural disaster, do
they have the funds and plans in
place to recover in a short period of
time?
• Do they have back-up systems in
place?
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References
• 2016. Powell, Allen: Five Ways Libraries Can Research the Financial
Stability of Vendors. Accessed at: https://www.ebsco.com/blog/article/five-
ways-libraries-can-research-the-financial-stability-of-vendors, on May 29,
2018.
• 2007. Stock Exchange Commission, Beginner’s Guide to Financial
Statements. Accessed at: https://www.sec.gov/reportspubs/investor-
publications/investorpubsbegfinstmtguidehtm.html, on May 29, 2018.
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Questions or Comments?