The Publishing Industry’s Blindspot: Technology Spending
Monday, August 13, 2018
Posted by: Michael Cairns
Sharing operational data and information does not come easily for publishing companies. Many other industries benefit from benchmarking data that enables business improvement but, as an industry, publishing seems uninterested in this philosophy of continuous improvement.
Seeking detailed information about technology spending for a series of investor presentations, I found that this information doesn’t exist. While the Association of American Publishers (AAP) has long collected high-level sales and operating data, this effort is of marginal value if a business is truly committed to benchmarking and measuring their performance across a set of key performance measures.
The AAP numbers do have value, but they lack the specificity and detail needed for true and close comparisons of operating data that can drive performance improvement. Based on my experience, the way that publishing thinks about data has not changed even as the industry migrates from legacy-based technology and operating environments (where “fixed” models rule) to one where flexibility drives everything from content packages to cloud-based applications.
As an example: I was retained on an inventory optimization project for a very large trade publisher. Over the course of the project, we knew we could improve cash flow and inventory levels, but we had no idea whether our solution was better or worse than solutions employed by the publisher’s competitors.
So I reached out to as many finance executives as I could, offering a benchmarking opportunity whereby all participating publishers would share their inventory data. I contacted more than twenty publishers, and only three were interested in participating.
Shouldn’t We Be Smarter?
Technology impacts business operations every day, and the resultant rapid transformation of operations by digital technology specifically represents an ever-increasing reality. The transformative effect of digitization is only just beginning to be felt and will continue to create either opportunities or catastrophes for all businesses for the next decade. The publishing and media business is not immune to these forces and must make investments in new technology solutions to remain competitive.
The level of technology spending across the publishing business is impossible to estimate unequivocally. I’ve done the research and no viable source exists for this type of information and data. This is true in the aggregate, and when it comes to technology spending for staffing, maintenance (legacy and new), development, outsourcing costs, and so on, it becomes virtually impossible to quantify.
As a result, technology vendors sell into the publishing market with minimal knowledge of spending levels, making business case definitions and detailed analysis difficult. In the absence of comparative data, executives are unable to compare their technology spending with those of their competitive peers to better manage their business operations.
As a CEO, one of my goals is often finding budget money for new product investment when the spending tasks are frequently zero sum. If a benchmarking study illustrates that my technology spending is skewed to supporting expensive, inflexible (legacy) technology, and I can see my competitors improving their spending in these areas, then I am going to place pressure on my IT staff for strategic plans and alternatives rather than tactical plans that support the status quo.
Historically, executive leadership in the publishing industry has not recognized the opportunity technology offers to enable new business models and operational improvement. As a result, management has not required better planning or re-thought the hiring practices across their IT functions.
Digital Transformation Will Drive Technology Change
Certain large global publishers are consolidating their technology operations around specific ERP solutions. For example, Wolters Kluwer and John Wiley recently selected SAP to replace multiple legacy solutions across the breadth of their businesses.
That said, most publishers (including some of the largest global publishers) are supported by old technical infrastructures in which they’ve methodically underinvested over time. But even publishers who invested heavily in large ERP solutions (such as SAP) in the mid-1990s have recently recognized the need to reconsider their technology requirements.
The larger strategic driver for this emerging philosophical change is digital transformation, which is redefining the role of technology in shaping a business’s fortunes and purpose.
Top global publishers are more likely to be customers of the largest ERP providers, such as SAP or Oracle, given the business risk associated with large global software implementations. Medium- and smaller-sized publishers may also choose a large package solution but are more likely to select one of the publishing industry’s specialized software providers such as Klopotek, Iptor, or Virtusales.
Implementation costs and total cost of ownership are critical issues for all publishers. They will be of paramount importance for medium and small publishers who generally struggle to find money to spend on technology infrastructure and software applications.
Large package solutions provided by SAP and Oracle are generic solutions that require significant configuration and enhancement to support the specific requirements of the publishing model. For all but the largest global publishers, solutions like SAP and Oracle will not be a viable solution because implementation is too expensive, the solutions are too broad, and the ongoing operating expense is too high.
Even in instances where one of these large-scale solutions has been implemented, the publisher may also purchase specific modules provided by another, smaller vendor to support certain specialized publishing functions such as royalties management (sometimes referred to as two-tier ERP).
Even for publishers in the top tier of publishing who have the financial resources to implement expensive solutions, the data needed to compare their “to be” environment is scarce and may be provided by a vendor (with a vested interest). Other publishers of size struggle to understand whether they pay too much or too little for technology and cannot predict how new technology investment might improve their operations and expand their business opportunities. The comparative information just does not exist to illuminate their opportunity.
Potential Market Size and IT Spending in Publishing
The market for IT software and services in the publishing industry is difficult to accurately quantify. There are few comprehensive research reports, and no current industry group (BISG, BIC, etc.) has undertaken a complete study. But, generally, it is possible to conclude that the market for technology, software, and services is at least $3 billion per year worldwide. This assumes the top 60 global publishers (with annual total revenues of approximately $70 billion) spend 4.5% of their revenues on technology (see figure, IT Spending as a Percent of Revenue). Extrapolating this to include all international publishers suggests the amount spent on technology in publishing likely exceeds $6 billion per year.
This number is not only a reasonable estimate, it represents a significant opportunity, yet it is a “dumb number” without a breakdown of the spending into its component parts. For vendors and publishers alike, this dearth of detail makes it difficult to commit business plans on cost and infrastructure. More troubling, the publishing and media industry is slow to adopt new technology solutions. Other business segments report that IT spending dedicated to supporting legacy solutions represents between 60% and 75% of expenditure and it is probable that legacy support costs represent at least 70% of IT budgets at most publishing and media companies.
In a rapidly changing business environment in which technology should be helping support digital transformation, companies will find it difficult to adequately support the growth (or the transformation) of their business unless expenditure can be freed from legacy support. Benchmarking current spending levels and understanding the impact of replacement technology and implementation models can help accelerate this process, but the lack of shared knowledge makes decision making very difficult for executives.
The level of current technology spending may already be inefficient and ineffective, which makes the starting point for improvement weak. With a focused effort, even modest improvement in the balance between legacy and new technology expenditures can prove beneficial. For example, a small reduction in legacy support spending from 70% to 65% of total costs could represent a large dollar return that could then be “reinvested” in new digital applications.
As the chart from Kew Associates indicates, UK publishers are paying more per tech staffer than other industries, which may reflect (in part) a dependence on staff with specialist, legacy software knowledge. As the report writers noted, “the use/implementation of packaged application software solutions is driving the wide disparity at the top end where spending in publishing is reported to be 3x the levels in other industries.”
Individual application modules supporting specific business processes are likely to show variability in spending levels and growth expectations. Specifically, the management of intellectual rights and royalties is becoming more complex for publishers and content owners as the breadth of intellectual content and distribution models expands.
It is also a growing services and software market segment. The research company MarketsandMarkets estimates that “the intellectual property rights and royalty management market size for the global publishing vertical is expected to grow from $490.0 million in 2016 to $1,367.8 million by 2021, at a CAGR of 22.8%. The . . . vertical in North America is expected to grow from $161.5 million in 2016 to $390.6 million by 2021, at a CAGR of 19.3%.”
Where Does This Leave Us?
Publishing does not see investment in technology to be strategic or value- enhancing. That perspective is a mistake. One only needs to look as far as Facebook or Uber to understand how technology platforms can reinvent businesses.
Publishing companies with inflexible and antiquated technology infrastructure may not be spending large dollar amounts on maintenance and support of these systems but they likely are paying a penalty: stunted growth opportunities, limited eCommerce capability, weak community development and CRM environments, all of which could be enabled and enhanced with the application of the right technology.
However, in the absence of useful data intelligence regarding the solutions in use, the spending deployed, and the staffing required for these investments publishers remain stuck with the status quo. Even the most strategic CTO would have difficulty proposing any but the most riskless and conservative solutions available, which, by their nature, will fail to create a breakthrough approach to technology strategy.
Without industry data we remain blind to the possibilities and the opportunities. That needs to change if we want publishing to remain relevant and important.
 www.marketsandmarkets.com, August 2016
This article is brought to you through a partnership with Amnet, a technology-led provider of services and solutions, catering to the needs of businesses for content transformation, design, and accessibility. The points of view expressed are those of the author and do not necessarily represent the perspectives of Amnet or of BISG.
Michael Cairns is a publishing and media executive with over 25 years’ experience in business strategy, operations, and technology implementation. He has successfully managed several troubled and underperforming businesses, creating new business opportunities, developing new funding sources, and enhancing shareholder value for investors.
His years spent as an operating executive have largely been with brand-name publishing companies such as Macmillan, Inc., Berlitz International, Wolters Kluwer Health, Reed Elsevier, Ingenta Technology, and R. R. Bowker. He has consulted for clients as diverse as AARP, Hewlett Packard, InterPublic Companies, and Reed Elsevier with an emphasis on business strategy, market development, and corporate development. He has extensive international experience and frequently works in both the US and European markets.
Mr. Cairns holds an MBA (Finance) from Georgetown University and a BA from Boston University. He has served on several boards and advisory groups including the Association of American Publishers, Book Industry Study Group, and the International ISBN organization. He also has public and private company board experience.