March 21, 2014
INTRODUCTION
For the purpose of reframing vendor negotiations one suggestion is for libraries to analyze and
understand a vendor’s whole business including available financials, operations and other customers.
Below is a description of a process that could be applied to each vendor.
THE PROCESS
Start by identifying what type of business a vendor is classified as. The three probable classifications are:
for-profit publicly traded company, for-profit privately held company, non/not for profit entity. Free
online tools such as Google Finance can be used to determine if a company is publicly traded. A publicly
traded company will be listed on a stock exchange with a ticker symbol. Paid resources such as Hoovers,
Lexis-Nexis, and Reference USA can be used to determine if a company is private or a non/not for profit.
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Identify if a vendor is public, private or non/not profit.
If a vendor is publicly held track down their financials, annual report, gross profit margin,
examine who they serve (commercial entities, academic libraries, and public libraries).
If a vendor is privately held there will be less information available because they are not legally
obligated to openly share the same information a public company must share.
If a vendor is a non/not for profit track down their IRS Form 990 to look at salaries of the top
executives, try to identify who they serve (commercial entities, academics, public libraries).
Publicly traded companies trading on exchanges in the United States are obligated to share their
financials and other company information with the Securities Exchange Commission and this
information is made available to the public. Private companies are not obligated to share financials or
other information with the public. Non/not for profit companies usually file a Form 990 with the IRS.
This document is usually made public but it lacks the robust information found in a public company’s
annual report. Yet, one could learn about revenues and executive level compensation among other
possible data from a non/not for profit’s Form 990. Because publicly traded companies are more
transparent, it is easier to understand their financial situation. However, some publicly traded
companies can also obscure their financials. For example, Reed Elsevier obscures its gross profit margin
by not providing a figure in their annual report as most companies do. As a result a researcher must
compute the gross profit margin from information provided in the annual report.
PUBLIC COMPANIES
There are lots of resources available in gaining insight on public companies. Publicly traded companies
will have a section on their website for Investors or Shareholders which will either contain or direct a
visitor to corporate documentation such as annual reports, 10-Ks (the actual annual document filed with
the Securities and Exchange Commission), press releases, analyst conference calls, corporate social
responsibility reports, and more.
To provide an example of what can be located and inferred from data available on companies, sixteen
database vendors were selected to identify their 2012 gross profit margin as well as try to gain an
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understanding of their business. Among these 16: 7 are publicly traded, 6 are private and 3 are not for
profit.
A key indicator of a company’s profitability is gross profit margin which is defined by Investopedia as: “A
financial metric used to assess a firm’s financial health by revealing the proportion of money left over
from revenues after accounting for the cost of goods sold.” Most companies report in their annual
reports or 10-Ks their annual gross profit margin. This can also be calculated if it is not explicitly
reported. To calculate gross profit margin: (Revenue – Cost of Goods Sold) ÷ Revenue. Revenue is
sometimes referred to as sales a company’s income statement. Third party sites such as Morningstar
also offer a quick, free tool to locate gross profit margin or as they call it Gross Margin % as companies
report it.
Among the major database vendors examined 6 are publically traded and had 2012 gross profit margins
ranging from 26.48% to 69.52%. Each of these companies also files an annual report and/or a 10-k which
provides financials, strategy, breakouts of products and operations and other information that can be
useful in contract negotiations.
Information such as products, operations and segmentation will vary company to company. Some may
give a percentage of their business broken out by educational vs. commercial markets and others may
gloss over this information. Public companies will also file quarterly financials, conduct conference calls
with investors and issue press releases. These companies also usually file a Corporate Social
Responsibility or Sustainability Report. Information in these reports could also be helpful in building
arguments for lower pricing for educational institutions and public libraries. All of this information could
be tracked regularly to identify and analyze changes in the targeted company’s business.
Vendor
2013 Gross Profit
Margin
2012 Gross Profit
Margin
John Wiley & Sons, Inc. (JW.B)
Wolters Kluwer (WOLTF)
Reed Elsevier Group, plc* (RUKEF)
Pearson (PSORF)
Apollo Global Management (parent of
McGraw Hill Education) (APO)
Houghton Mifflin Harcourt Company
(HMHC)
Thomson Reuters (TRI)
69.77%
69.52%
67.50%
65%
56.04%
38.97%
57.30%
35.33%
24.78%
26.48%
Source except for Reed: Morningstar via http://financials.morningstar.com/
*Source for Reed Elsevier: Hoovers
PRIVATE COMPANIES
Six of the analyzed vendors are either private companies or owned by private companies. Private
companies are not required to make financials public. Private companies usually issue press releases on
major developments. News organizations also sometimes report on changes in the companies or their
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products/services. Some of the parent companies are in the information business and others like
Cambridge Information Group are private investment firms
Vendor
2012 Profit
Margin
Type
Parent Company
EBSCO Publishing
Cengage Learning
Springer Science + Business Media
N/A
N/A
N/A
Private
Private
Private
EBSCO Industries
Sage
ProQuest
N/A
N/A
Private
Private
Emerald Group Publishing Limited
N/A
Private
Blitzstart Group Beteiligungs
GmbH
Cambridge Information
Group
Source: Hoovers
Though private companies have a smaller information footprint than public companies, news and
information can still be collected from their websites and through article searches. Hoovers, Lexis-Nexis,
Reference USA and other business directories might have estimates of revenues/sales or other data
which could be used to understand the size of the business. Identifying the classifications of who a
vendor serves (commercial entities, academic libraries, and public libraries) can also provide a point of
negotiation. For example if a private company serving academic markets also sells its products for
commercial use, an argument can be made that the library is helping to create new customers. One
simple way to determine who a vendor serves is to ask the sales representative which other markets
they serve.
NON/NOT FOR PROFIT VENDORS
Three of the analyzed vendors are non/not for profits. The Form 990 that non/not for profits file can
usually be found for free on Guidestar.org but they are sometimes 1 or more years behind. Non/not for
profits usually issue press releases on major developments. News organizations also sometimes report
on changes in these entities or their products/services. Though the financials are not as available as they
are for a publicly traded company, profiles can still be built for non/not for profit companies.
Vendor
2012
Profit
Margin
IEEE
N/A
JSTOR
N/A
American N/A
Chemical
Society
Type
Not for Profit
Not for Profit
Not for Profit
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Data available for non/not for profits can include compensation data for top level executives which
could act as a contrast point in a negotiation. For example, the 2012 Form 990 filed with the IRS for IEEE
shows that the President/CEO of the organization worked a 5 hour work week and received $52,935 in
annual compensation. The second highest paid executive was the Assistant Secretary and Executive
Director who was listed as working a 40 hour work week for an annual salary of $969,952. In arguing for
lower inflation or flat price hikes, the point can be made that none of the academic libraries subscribing
to IEEE products made a profit from their subscriptions. Students do not choose to attend a school
based on what databases are available through the library. However, they do expose future engineers to
a company who produces the database and its other products which helps to create future customers.
CONSIDERATIONS
Using profit margins and compensation data as an argument may only work once or twice as a shock
factor as the vendors become use to libraries making stronger business arguments. But monitoring
these numbers in conjunction with understanding a vendor’s entire business can help build arguments
as to why selling to an educational institution or public library at a high profit margin is not in their best
interest in the long run. Looking at vendors from these perspectives might also lead to other creative
ways to argue for lower increases in future negotiations.
Understanding which companies serve commercial as well as academic markets can help make further
arguments that libraries are helping to create new customers. It can also be used to argue why the forprofit companies should be subsidizing the educational pricing at an even greater percentage than they
are currently. Vendors do offer academic and public libraries “deep discounts” but a company like
Thomson Reuters which serves the commercial market and uses academic libraries as a springboard to
cultivating new customers, can afford to offer even deeper discounts.
REAL LIFE EXAMPLE OF HOW DATA CAN BE USED
This past semester a renewal came up at a local college for the CCH database which is owned by Wolters
Kluwer. The vendor’s price hike was a proposed 19.48% increase in the annual fee. The Electronic
Resources Librarian sent “a strongly worded email” which included the observation that their company’s
profit margin was 67.50%. The vendor easily agreed to an increase of just 1.56%. The combination of
data with a vocal argument against such a large price hike resulted in an increase that was both
acceptable and affordable by the library.
RECOMMENDATIONS
It is recommended that an individual or a team track the business of the vendors listed above in order to
strengthen the negotiating position for future contract pricing by annually providing this information to
libraries throughout the state. Becoming comfortable and conversant with the data and structure of the
vendors will provide libraries an opportunity to develop a new negotiation framework. When in
negotiations with vendors, in addition to using the information as described in this report, libraries must
articulate what alternative products are available to the end user, share the actual percentage of library
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budget cuts, illustrate what will happen if database fees are not reduced and made more sustainable,
and most importantly be willing to walk away from a deal when the pricing cannot be justified. Only
then can libraries establish a stronger position at the negotiating table and be able to purchase
resources on their own terms.
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