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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?