How Information Asymmetry Works Against Societies
August 20, 2020 | By Joseph Esposito
A major element of the scholarly and professional publishing ecosystem is the publishing services agreement, or PSA. In a PSA a professional association or learned society signs an agreement with a larger publisher for journal publishing services, usually covering everything but the core editorial tasks (e.g., peer review, editorial oversight, editorial policies, selection of the editor and editorial board), which the society continues to be responsible for.
With a PSA comes many things, including: production services such as copyediting, composition and XML conversion, and printing and fulfillment; a hosting and distribution platform; a manuscript submission system; sales and marketing; and income in the form of royalties and (in some cases) minimum guaranteed payments. Perhaps most importantly what the PSA brings to the smaller publisher is the advantage of scale, which makes it possible to reach customers around the world, to include a society’s publications in large packages (which makes it hard for libraries to cancel subscriptions), and to participate in transformative agreements (complex deals that include both subscription and open access payments).
The larger publisher does not enter these agreements out of charity but for profit. The publishing revenue is split, not always evenly, between the large publisher and the society. Even with the revenue split, societies often find that they earn more money in partnership with a large publisher than they can on their own. This is in part due to wider distribution and in part due to reductions in the society’s own cost structure, as the publisher is taking on many journal operations as part of the agreement, and the society can reduce its investment in staff, vendors, and systems. A large publisher brings economies of scale in both sales capacity and production operations that often substantially reduce the overall costs of publishing as compared with independent societies going it alone.
What many societies negotiating a PSA fail to see, however, is that there is another aspect to these arrangements — namely, that the large publisher has access to a great deal more information about the publishing business than the society does. This essential asymmetry of information provides an enormous advantage to the large publisher in negotiations. Furthermore, the asymmetry continues even after the contract is signed, as the society’s publications add to the pool of information that the large publisher analyzes. And the asymmetry even comes into play in a meaningful way when the agreement is up for renewal, as the large publisher has a better idea of the market value of the society’s publications (and will use that information to take other steps to lock in the society to the large publisher’s platform).
The asymmetries take many forms (by no means exhausted by the following list):
- Deal volume asymmetries. A society might negotiate with a large publisher at most once every 5–10 years, but a large publisher may be participating in multiple competitive request for proposal (RFP) processes and negotiating PSAs every month. This gives the large publisher much more knowledge about the market and the valuations of comparable titles. Because of the number of PSAs a large publisher negotiates, it also has an advantage in testing any number of negotiation strategies and deal terms over time. The publisher know what the typical “pressure points” are for societies. The society, on the other hand, knows almost nothing about the internal operations of the large publisher.
- Legal counsel asymmetries. Publishers employ in-house legal counsel who work on a great many PSAs. These are typically intellectual property specialists who are further versed in the journal publishing business. They also have the benefit of working on a contract developed by the publisher. They have thought deeply over time about every clause in the contract and have had each clause and term pressure-tested by past negotiations. Societies seldom bring to the table specialized legal counsel with substantive experience with PSAs (though such legal counsel is available).
- Data asymmetries. Even a society with a portfolio of journals can’t match the hundreds or even thousands of journals controlled by a large publisher. This provides the large publisher with the means to better analyze trends, scrutinize editorial and bibliometric data, study subscription and open access data and the relationship between them, and bring all this analysis to bear in negotiations. In a renewal situation, where all of a society’s journal data already reside in the publisher’s systems, it is likely that the publisher knows far more about a society’s journals and their market potential than the society itself. And the society’s publications are part of the data set that the large publisher works with.
- Operational asymmetries. Societies typically have little view into the operations of a large publisher. Because of this, publishers typically know more about cost structure and can make money behind the scenes without society clients even knowing it. For example, the publisher alone knows what it is paying vendors. A society with a print version of a journal may pay more for the printing and mailing of that journal to members in the form of chargebacks from the publisher than the large publisher pays its vendors in the first place.
- Market intelligence asymmetries. Even a robust society with strong management is not likely to know all the opportunities (and pitfalls) in a global marketplace. Large publishers also frequently have insight into the goals and tactics of individual institutions and consortia, information that a society operating by itself cannot hope to acquire. Large publishers have dedicated and sophisticated staff to identify emerging policy issues and to participate in their development and promulgation. (How many society publishers can dedicate staff to “Global Library Relations”?) These publishers are also best positioned to understand and implement compliance protocols for institutions, consortia (including national consortia), and funders, which may themselves require a certain administrative scale.
- Sales asymmetries. Societies, especially those already working with a publisher, often have little information about subscription sales. In some cases, societies do not have even basic information such as the names of subscribing institutions and the prices paid. Obtaining and analyzing sales data is a fundamental aspect of publishing services RFP processes and a significant contributor to journal valuation. Many society journal subscriptions are sold as part of large cross-publisher packages and are not portable (meaning, they are not subscriptions that the society can take with them to another publisher; read more about revenue portability here) — understanding the relative value of different journal revenue lines to large publishers is critical to RFP planning. For societies, simply obtaining sales data can be a substantial effort and analyzing it absent industry benchmarks and a knowledge of publisher journal package dynamics can be daunting. This is equally true with open access (OA) publishing. So-called “transformative agreements” are even more complex and challenging to analyze and only the publisher has access to the full data related to such deals.
Of course, it is the very existence of these asymmetries that prompts a society to enter into a PSA with a large publisher in the first place. The large publisher, in other words, brings value to a society publisher that the society could not generate on its own. Indeed many large publishers make a point of sharing some information with their society clients that the society could not have developed independently and may not even know of its existence or importance. But a society must enter into these negotiations, and monitor the progress of the arrangement over the years of its term, understanding that asymmetric information cuts both ways.
It is incumbent on a society entering a PSA negotiation — whether on renewal with a current publisher or when entering a PSA with a new partner — to reduce this information asymmetry. There are three methods for doing so:
- Perform a strategic assessment. A strategic assessment is conducted in advance of a competitive RFP process. Its purpose is to assess the current state of the publishing program as well as to surface any recent or pending changes in either the publishing portfolio or the market and to discern how these factors might come into play in a PSA. For example, a society might identify a downturn in direct subscriptions that it wishes to try to correct pre-RFP (to maximize value to publishers) through a focused renewal campaign. A society may decide that it wishes to expand its portfolio by developing new journals, or to transition one or more titles to an open access model. It is important to understand the current state of the publishing program and how any changes may impact financial offers and potentially even which publishers are likely to submit proposals as part of an RFP process. For societies transitioning from self-publishing, this strategic assessment will additionally lay the groundwork for comparing publishing via a PSA with independent publishing, carefully mapping financials as well as roles and responsibilities.
- Conduct a competitive process. If a society is moving from independent publishing or has not conducted a competitive process in over 5 years, it is essential to collect proposals from more than one publisher. The value of a journal in the market is dynamic and changes over time. There is no way to know what a given journal is worth absent market feedback and no way to obtain market feedback absent a competitive RFP process. A competitive process further provides societies with market intelligence and with different perspectives on the opportunities related to their titles.
- Retain knowledgeable advisers. It is essential for societies to retain knowledgeable and specialized business advisers. Such advisers can help develop and manage the RFP process, analyze offers, negotiate business terms, and benchmark against industry standards and market realities. Societies should seek business advisers who are experts in PSAs and who negotiate many such arrangements annually on behalf of society clients. A PSA often represents the single most financially significant contract that a society will ever sign. Even modest improvements can result in substantial benefits to the society over time and will more than pay for advisory fees.
A PSA works best when it benefits of all signatories, which only becomes possible — over the longer term — when the society levels the playing field and builds essential expertise into its decision-making and negotiations to help balance the information asymmetry.