ANALYST INSIGHT

How the publishing industry uses outsourcing

Demand grows for industry-specific services
Reference Code: OI00144-011 Publication Date: March 2011 Author: Ed Thomas

SUMMARY
Catalyst
Publishers are currently facing a number of significant challenges. Rising costs are putting pressure on profit margins while, at the same time, demand for traditional paper-based products is falling as consumers increasingly prefer to get their news online and read books and magazines on electronic devices such as Amazon's Kindle, Barnes & Noble's Nook, Sony's Reader, and Apple's iPad. As a result of the pressures they find themselves under, publishers are becoming more open to outsourcing, as it offers them the potential to both reduce costs and gain access to technology and skills that may not be available within their own organization. Publishing companies therefore represent a clear opportunity for outsourcing vendors, particularly those with industry-specific expertise.

Ovum view
Recent years have seen a significant increase in the amount of work being outsourced by publishers to specialist providers, as the publishing industry struggles to cope with the pressures being exerted on both profit margins and revenue streams. There has also been a shift in the complexity of the services being outsourced, with vendors increasingly being called upon to How the publishing industry uses outsourcing (OI00144-011) Ovum (Published 03/2011) This report is a licensed product and is not to be photocopied Page 1

provide high-level editorial and design services, as well as handling more mechanical processes such as typesetting. There remains a great deal of potential for further growth in this market, with surveys of the publishing industry suggesting that most companies are planning to increase their use of outsourcing over the next few years. However, a major concern for publishers is that the quality of work produced by outsourcers is below the required standard. The onus is on vendors to alleviate this worry, and reassure clients that they can be trusted to provide high-quality, accurate content.

Key messages
The publishing industry is increasingly open to outsourcing. Demand for publishing-specific services is growing. The vendor landscape is highly fragmented.

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THE PUBLISHING INDUSTRY IS INCREASINGLY OPEN TO OUTSOURCING

A shift in attitude
The publishing industry has typically tended to be relatively conservative in terms of its approach to outsourcing. According to data from Ovum's IT Services Contracts Analytics, which tracks all publicly announced IT services deals worth $1m or more, just 71 contracts were announced by publishers between 2000 and 2010, and the majority of those awards were relatively small-scale engagements of less than $100m. However, this inherently conservative attitude is rapidly being eroded by major changes in the publishing industry, including sharp reductions in demand for print media, the growing importance of new technology, and rising production costs. Increasingly, companies are being forced to abandon their traditional approach in order to keep up with seismic shifts in demand and delivery models, while at the same time coping with increasing cost pressures. The upshot of these changes is that, more than ever, publishers are open to new approaches, particularly those that combine a knowledge of new technology with the ability to reduce costs. This represents a significant opportunity not only for IT services and business process outsourcing (BPO) vendors, but also for providers of publishing-specific outsourcing services, and it is with the latter group that this report is concerned. These firms have the capability to deliver a range of services across the entire publication process, from relatively simple typesetting and markup functions to more complex areas such as content creation and graphic design. They can also use offshore delivery models to deliver significant cost savings to clients. Provision of publishing services by third-party vendors is one of the fastest-growing areas of the maturing knowledge process outsourcing (KPO) market. Ovum defines KPO as the movement of core business processes, which require a high level of domain expertise, to specialist providers. This broad definition includes service areas such as market research, analytics, research and development and legal process outsourcing, as well as industry-specific services such as those applicable to the publishing industry.

Defining the publishing industry

Before looking at the types of KPO services being delivered to publishing companies, it is necessary to take a closer look at the unique structure of the publishing industry itself. Broadly speaking, it can be divided into four main categories: How the publishing industry uses outsourcing (OI00144-011) Ovum (Published 03/2011) This report is a licensed product and is not to be photocopied Page 3

Newspaper publishing. Datamonitor estimates that the global newspaper publishing market was worth approximately $68.6bn in 2009. This figure does not include advertising revenue, which made up approximately 57% of sales in 2009 (according to figures from PricewaterhouseCoopers), boosting the total value of the newspaper industry to around $160bn. The largest markets for newspaper publishing can be found in the US, Japan, Germany, and the UK. Magazine publishing. There are two main types of magazines: business-to-business or 'trade' publications, which serve a particular industry, profession or service; and consumer magazines, written for a general audience. According to Datamonitor figures, the magazine publishing industry was worth approximately $68.1bn in 2009, although once again this figure does not include advertising revenues. Directory publishing. Firms operating in this category produce compilations of data for both business and consumer markets. The most popular product of this sub-set of the industry is the telephone directory, often referred to as either white or yellow pages. Book publishing. The most diverse sector of the publishing market, book publishing can be further subdivided into four areas: trade publishing, which covers all books designed for the general consumer, including both fiction and non-fiction; educational publishing, which covers the production of textbooks and can also include related materials such as CD-ROMs and maps; academic publishing, which produces specialized books and journals specifically written for and marketed to scholars working in areas such as law, science, medicine, technology, and business (this area is often referred to as STM publishing, which stands for 'scientific, technical and medical'); and reference publishing, which covers the production of dictionaries and encyclopedias, both in physical book form and via electronic media.

To the list above can also be added niche areas such as self-publishing and small presses, which offer an alternative route to market operating outside of the mainstream publishing industry, and tie-in publishing, which covers promotional publications, novelizations, etc designed to sit alongside an existing franchise, most often drawn from film or television.

Large corporations dominate the publishing market

The publishing industry, particularly the book publishing segment, is dominated by a small number of very large companies. For example, two of the world's three largest media conglomerates, News Corp and Time Warner, both have major publishing operations. The former not only owns Harper Collins, a leading publisher which produces (among other things) the 'Collins English Dictionary', but also operates newspapers in Australia, the US, and UK, including such titles as How the publishing industry uses outsourcing (OI00144-011) Ovum (Published 03/2011) This report is a licensed product and is not to be photocopied Page 4

The Times in the UK, The Australian, and The Wall Street Journal. Time Warner's publishing operation, Time Inc, publishes approximately 150 magazine titles worldwide including Time, Sports Illustrated, and Fortune. Other large media organizations with significant publishing businesses include: Bertelsmann: Headquartered in Germany, with subdivisions including leading trade publisher Random House and Gruner and Jahr, Bertelsmann publishes about 285 magazine titles and newspapers across Europe. It also owns RTL Group, one of Europe's largest TV, radio, and production companies. CBS: The US television network owns Simon and Schuster, and derives approximately 6% of its annual sales (some $791m) from publishing. Georg von Holtzbrinck Publishing Group: A holding group which owns publishing companies worldwide, including: Farrar, Straus and Giroux in the US; Macmillan; and Picador. The company also publishes periodicals such as Nature and Scientific American. Lagardre Group: The French-based conglomerate's publishing division includes the Hachette Livre group, a leading book publisher across the trade, education and reference sub-categories, whose imprints include Hodder and Stoughton, Virago, and Orion. Lagardre's subsidiary Hachette Filipacchi is also one of the world's leading magazine publishers, with titles including Paris Match, and Elle. Pearson: Based in the UK, Pearson's operating divisions include trade publishing giant Penguin Group, Pearson Education, which provides educational publishing as well as software, assessment and training services, and the Financial Times Group, the publisher of the Financial Times newspaper.

As the examples above illustrate, many well-known publishing imprints operate as satellites within larger organizations. Competing with these firms are numerous independent publishers, which are privately held as opposed to being owned by a large company or conglomerate, and the so-called university presses, typically affiliated with large research institutions, which publish mainly academic work on a not-for-profit basis. Oxford University Press is the largest such operation in the world, with annual sales of close to $1bn.

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Publishers are currently facing a number of challenges

Cost pressures Publishers of all kinds are facing pressure on a number of different fronts. Firstly, rising production costs, driven by factors such as the soaring price of paper, have placed increased pressure on profit margins, leading many companies to investigate cost reduction measures. Both Time Inc and News Corp, for example, have taken steps over the last two years to reduce costs, including cutting headcount in certain business units. As part of these cost reduction strategies, a number of leading publishers have outsourced parts of their IT operations in the last few years. However, most of these projects have been relatively small analysis of Ovum's IT Services Contracts Analytics reveals that just five of the 71 contracts announced by publishers since 2000 have been valued at $100m or more. Details of these five deals, three of which were announced in 2009, are summarized in Table 1.

Table 1:
Client Reader's Digest

Five biggest IT services deals awarded by publishing companies

Vendor HCL Technologies Project Application and infrastructure services Application services Data center management Infrastructure services Application and infrastructure services Region Global Value ($m) 350 Duration (months) 84 Announced Mar 2009

News Corp Wolters Kluwer Pearson Yellow Pages Group

HCL Technologies Dell Services IBM CGI Group

UK Global US Canada

225 (est.) 200 128 100

60 84 60 120

Dec 2009 Jan 2005 Apr 2007 Nov 2009

Source: Ovum IT Services Contracts Analytics

OVUM

While these large deals have focused on publishers' IT departments, a growing number of publishing houses are also outsourcing core knowledge-based processes to vendors specializing How the publishing industry uses outsourcing (OI00144-011) Ovum (Published 03/2011) This report is a licensed product and is not to be photocopied Page 6

in the provision of industry-specific services. The majority of these services can be delivered from offshore locations, notably India, at a significantly lower cost than if the tasks were being performed in-house. Revenue pressures At the same time as coping with the impact of rising costs on profitability, publishers are facing a number of threats to their major revenue streams. At the heart of this is the ongoing fall in demand for print media, which is affecting firms in all four main publishing categories. According to the Association of American Publishers (AAP), actual reported sales of trade print in the US during 2010 fell by more than 5% year-on-year to $4.9bn, the lowest level since 2004.

Figure 1: Trade print sales in the US, 2006 to 2010

5,600 5,500 5,400 5,300
Sales ($m)

5,200 5,100 5,000 4,900 4,800 4,700 4,600 4,500 2006 2007 2008 2009 2010
OVUM

Source: Association of American Publishers

The drop in demand is, if anything, even more pronounced in the newspaper publishing industry. According to PwC's figures, the global newspaper publishing market was expected to shrink by about 10% in 2009, with major markets such as the US and UK the worst affected. The Organization for Economic Co-Operation and Development (OECD) calculated, based on data

How the publishing industry uses outsourcing (OI00144-011) Ovum (Published 03/2011) This report is a licensed product and is not to be photocopied Page 7

from PwC, that the newspaper publishing market in the US would decline by 30% between 2007 and 2009, with the industry in the UK suffering an estimated 21% fall during the same period. With falling demand for print newspapers comes a drop in advertising revenue, putting even greater pressure on publishers. This issue has been exacerbated by the recent global recession, which has led to a general reduction in advertising spend by businesses. Once again, it is firms in the US and UK which have been the worst affected, with PwC estimating that print advertising revenue in the UK fell 26% in 2009, the steepest drop in Europe, while figures from the Newspaper Association of America show that advertising sales in the US fell by over 28% in the first three months of 2009 alone. One of the main reasons behind the drop in demand for print has been the growth of new media, driven by recent technological advancements. For example, the book publishing industry is currently being transformed by the rise of the e-book. Figures from the AAP show that e-book sales in the US increased by 160% to $441.3m in 2010, and now command an 8% share of total trade sales in the country, up from 3% in 2009.

Figure 2: E-book sales in the US, 2006 to 2010 ($m)

500 450 400 350
Sales ($m)

300 250 200 150 100 50 0 2006 2007 2008 2009 2010
OVUM

Source: Association of American Publishers

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Similar shifts are happening in newspaper and magazine publishing. A study conducted by the Pew Research Center's Project for Excellence in Journalism found that online news sources surpassed print newspapers in both advertising revenue and consumption for the first time in 2010. Some 46% of Americans surveyed as part of the study stated that they got their news online at least three times a week, against 40% for newspapers. Publishers are under pressure to keep up with these changes in consumer demand but, in many cases, they lack the necessary capabilities within their own organization. Consequently, they are increasingly turning to specialist providers with knowledge of, and skills around, the new technology and particularly the ability to provide conversion services, both for new products and archive material.

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DEMAND FOR PUBLISHING-SPECIFIC SERVICES IS GROWING

KPO offerings cover a broad range of services
Given the pressures facing traditional publishers, and the potential for publishing-focused KPO vendors to alleviate them to a greater or lesser degree, it is perhaps unsurprising that recent years have seen a notable increase in the amount of work being outsourced by publishers to specialist providers. According to figures from one KPO firm, the total number of employees in low-cost countries providing services related to publishing has grown to about 29,000 in 2010, from approximately 12,000 three years previously. The services being provided cover a broad spectrum. The list in Table 2 is far from exhaustive, but illustrates the major lines of business for publishing-focused KPO vendors. As can be seen, most of the services are based around the copy preparation and pre-press aspects of the publishing process. There are vendors, such as RR Donnelley, that have used their strong foundation in printing and production as a base from which to move into areas such as editing and design, but the majority of providers operating in this market have built their business around expertise in these more knowledge-based areas, and they continue to provide the focus of their offerings.

Table 2:

Major service areas offered to publishing companies

Design and image services Cover design Graphic design Illustrations Logo creation Picture research Redraws Scans Composition services Layout creation Page composition/layout Page markup Template creation/design Testing Typesetting Conversion services Content conversion Data conversion Digitization E-book conversion Image processing NIMAS conversion Optical character recognition XML conversion

Editorial services Abstracting and indexing Content origination Content writing/re-writing Copy editing Fact checking Pre-editing Project management Proof reading Quality assurance (QA) Translation

Source: Ovum

OVUM

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Many publishing services vendors started out providing relatively low-level services such as scanning, typesetting, and indexing. As these providers have gained more traction within the publishing industry, however, they have begun to move up the value chain, through areas such as proof reading and quality assurance before reaching the stage when they are, in certain cases, originating content and writing copy for publishing clients. In a growing number of cases, vendors are being called upon to manage entire projects, from receipt of manuscript to completion of the final printer files, a process which involves communication with authors and managing permissions as well as the more traditional functions such as typesetting and proof reading.

Many publishers still have concerns about outsourcing

Despite the growth in demand for outsourced publishing services, and the ability of vendors to move into more strategic functions, many publishers still have significant concerns about handing over core processes to third-party vendors, particularly those based in offshore locations. According to a recent survey from Valuenotes, 15% of publishers surveyed were not currently outsourcing and had no plans to do so in the future, while a further 8% were already outsourcing but were planning to stop. These numbers were overshadowed by the 64% of respondents who were outsourcing and planned to continue, but they still represent a significant pocket of resistance. The same survey found that the biggest area of concern for publishers was around quality understandable in an industry where accuracy and clarity of information are paramount. Some 58% of respondents identified quality as an area where a lot of improvement was required, with only 4% agreeing that it was nearing best-practice levels. It is clear that publishing services vendors need to take these concerns on board and work to improve the quality of their services. That said, there was plenty in the Valuenotes survey to cheer them. 59% of those surveyed said that they planned to increase outsourcing by 25% or more, compared to just 8% who said they planned to bring work back in-house, while 44% of respondents said outsourcing was a good concept, with a further 40% admitting that it could work sometimes. It is important to remember that, while this report has concentrated on the opportunity available for service providers within the publishing industry, this vertical market is not the sole consumer of outsourced publishing services. Large corporations also have significant publishing needs, whether that be in the form of catalogues, manuals or business-to-business communication. As with publishers, these organizations are also having to adapt to new models for the dissemination How the publishing industry uses outsourcing (OI00144-011) Ovum (Published 03/2011) This report is a licensed product and is not to be photocopied Page 11

of information, as well as the demands of consumers for content that can be accessed anywhere, at any time.

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THE VENDOR LANDSCAPE IS HIGHLY FRAGMENTED

The market can be split into three broad categories
As in many areas of the KPO industry, the outsourced publishing services market is extremely fragmented, with relatively small boutique operations competing against large multi-billion dollar organizations. Broadly speaking, the vendor landscape can be split into three main categories: publishing-focused service providers: this category is made up of vendors whose only line of business is the provision of publishing-specific services outsourcing vendors with publishing services capabilities: this covers those firms that provide knowledge-based publishing services alongside other outsourcing service lines captive operations: several media organizations and publishers have opted to set up their own centers, offering low-cost publishing services both to the parent company and to the wider market.

Publishing-focused service providers There is such a large number of boutique vendors providing outsourced publishing services that providing a definitive list would be all but impossible. Instead, the following is a representative sample of the leading players in this sub-set of the market. Aptara: Headquartered in the US but with the vast majority of its 4,400 employees based in India, Aptara is one of the most established names in the publishing services market, having been founded in 1988. The company provides a broad range of services not only to publishing and media clients such as Cambridge University Press and Random House, but also to large corporations from industries as diverse as manufacturing, hospitality, healthcare, and government. Glyph International: Formed through the merger of three companies production services firm Keyword, automated workflows operation CEPHA and International Typesetting and Composition, a provider of full-service project management for publishers Glyph currently has about 800 employees in India, the US, Canada and London. Customers include McGraw-Hill, Wolters Kluwer, and Pearson Education. Innodata Isogen: Based in the US and listed on Nasdaq, Innodata Isogen has more than 5,000 staff delivering services from India, the Philippines, Sri Lanka, Israel, and China. In its most recent fiscal year, the company reported sales of over $61m, and

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clients include both commercial publishers and businesses with large information requirements. Integra Software Services: Founded in 1994 and with over 1,200 employees, Integra offers a mixture of offshore and onshore delivery, with services provided both from India (Pondicherry and Chennai), the US (a center for higher education services in Illinois and another for primary and secondary education in New York), plus a further center in the UK. Clients include Elsevier, Pearson, Oxford University Press, and Palgrave Macmillan. Newgen Imaging Systems: Owned by private equity firm the Carlyle Group, Newgen has approximately 600 staff spread across three offices (two in Chennai and one in Bangalore). The company derives a significant proportion of its revenue from project management work, and customers include Aspen Publishers (part of the Wolters Kluwer group) and Taylor & Francis. PreMedia Global: A more recent entrant to the market, having been founded in 2005, PreMedia Global has around 800 staff in the US and India providing services to sectors such as educational and trade publishing, as well as corporate communications. Clients include the American Medical Association and Houghton Mifflin Harcourt.

Outsourcing vendors with publishing services capabilities A number of outsourcing providers have expanded their offerings to include publishing services. With the notable exception of RR Donnelley, this list does not, at present, contain any vendors that could be described as major players in the global IT services and BPO industries. Apex CoVantage: A US-based firm employing over 2,500 staff in India, Apex CoVantage offers smart utility grid services such as design and implementation, support functions for the utilities and telecoms industries and other KPO services alongside content services such as conversion, development, copy editing, and digitization. As well as publishing clients, Apex works with manufacturers, utilities, and healthcare providers. Datamatics Global Services: Datamatics provides a broad range of BPO and IT services, including application development, IT consulting, finance and accounting (F&A) outsourcing, recruitment process outsourcing (RPO), and research and analytics. The company's publishing services include composition and design, editorial services and e-book conversion.

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DiacriTech: Founded in 1997, DiacriTech is focused on the publishing industry, with clients including Pearson Education, Elsevier, and Oxford University Press. As well as providing these customers with publishing services including page composition, copy editing, translation, design and project management, the company also offers them horizontal BPO services such as document management, order processing and outbound call center operation. RR Donnelley: Best known as one of the world's largest providers of printing and related services, RR Donnelley has had a presence in the BPO industry for over ten years. The company's publishing services offering includes typesetting and composition and design work, including ad creation, animation, and web design. RR Donnelley also provides services around the production of financial statements, including electronic conversion. SPi Global: A BPO and KPO services provider boasting headcount of close to 15,000, 11,000 of whom are based in the Philippines. SPi also has about 1,800 staff in India, approximately 500 in Vietnam and just under 1,500 employees in the US and Europe. The company's production services include editorial, composition and digitization, and it also offers call center services and healthcare-specific outsourcing functions.

Captive operations Among the captive operations set up by media and publishing organizations to provide outsourced publishing services are: Cyber Media Services: Part of Cyber Media, which is one of India's biggest magazine publishers, Cyber Media Services' lines of business include art and design, editorial, composition, and conversion services. The operation's magazine services unit also provides design and production services for 15 Cyber Media publications, as well as other magazine publishers. MPS: The captive operation of Macmillan Publishing, which is itself owned by the Georg von Holtzbrinck Publishing Group. MPS has over 2,500 employees providing book and journal publishing services, digital publishing services, creative and interactive services and fulfillment services such as subscription management and distribution. Thomson Digital: A division of Thomson Press (India), owned by Thomson Reuters. Clients include Harper Collins, McGraw-Hill and Wolters Kluwer, with its services portfolio covering composition and pre-press, project management, image research, and conversion and digitization.

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V Publish Solutions: An operation within the Indian media group Vikatan, V Publish has about 300 employees in India, providing pre-press services such as copy editing and project management along with e-publishing, graphic design, content digitization, printing, and finishing. Wiley-Blackwell Offshore Publishing Solutions: Wiley-Blackwell opened its first offshore center in Singapore in 2005, having evaluated the suitability of five other countries, including India, China, Malaysia, the Czech Republic and Brazil. According to Wiley-Blackwell, Singapore was chosen for its good communications, reliable infrastructure and business-friendly government.

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APPENDIX
Further reading
Clinical Research: An Outsourcing Opportunity, OVUM052154 KPO in Financial Services - After the Crash, OVUM052359 Outsourcing Corporate Legal Departments, OI00052-009 Trends in Knowledge Process Outsourcing - Growth Opportunities in High-Level Processes, DMTC2287

Methodology
Primary research: Interviews with providers of publishing services. Secondary research: Includes vendor publications, existing Ovum and Datamonitor research, and Ovum's IT Services Contracts Analytics. Ovums IT Services Contracts Analytics tracks all publicly announced IT service deals valued at over $1m. Updated daily, the tool currently contains over 17,000 deals across approximately 150 countries and a broad range of service lines, including application services, BPO, consulting, infrastructure management, network services, and systems integration.

Author
Ed Thomas, Senior Analyst, Ovum IT Services

Ovum Consulting
We hope that the analysis in this brief will help you make informed and imaginative business decisions. If you have further requirements, Ovums consulting team may be able to help you. For more information about Ovums consulting capabilities, please contact us directly at consulting@ovum.com.

Disclaimer
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