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Magazines > Searcher > September 2003
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Vol. 11 No. 8 — September 2003
The Sidebar
Protecting Yourself Against "Rogue" Vendors: Beyond "Divine" Guidance
by Carol Ebbinghouse Law Librarian, Second District Court of Appeals, Los Angeles, CA

Here's a scary thought. Is divine's RoweCom/Faxon the only loose link in the vendor chain? Does dealing with any other companies put your operation at a similar risk? Just consider the number of suppliers for your organization. From the photocopier service to the office supply house, from the security system to the bindery, from the library supply houses to the janitorial supply service — your library has vast numbers of suppliers. Perhaps it is time for you to conduct some checks and develop a precautionary strategy.

Check your general ledger to find out with which companies you spend the most money. Don't forget the vendors who have contracts to service you through your parent organization (the municipality for the public library, the corporation for the special library, the university and/or main library for the branch). Follow the money.

First, focus on those companies with whom you spend the most money. Then look at the suppliers that provide unique products that you might want to stock up on. You might be able to maintain that old micrographic copier if the copier company fails, but only if you have access to the unique toner cartridges that the machine requires. Gather technical services and public services librarians to find out where your library is most vulnerable — too dependent upon one vendor or one brand.

Do you have a vendor upon whom you are totally dependent for something? In that case, you should have a standing research project to identify signs that might indicate causes for concern. When you become concerned, the research should intensify to find out whether your fears are well founded.

Would you like to be alerted to problems with vendors before they hit you? Check on the library watchdog committees and organizations that keep an eye out for you and your funds.

The divine/RoweCom fiasco was notable not just for the amount of monies involved, but for the fact that any failure was unique in our industry. The fraud allegations, and the fact that the key corporate executives had signed off on the Sarbanes-Oxley certifications of veracity of the accounting information, in light of Enron and other financial disasters, made it especially newsworthy far beyond the library community.

Libraries cannot protect themselves completely against fraudulent behavior, but they can take steps to avoid dealing with shaky suppliers and vendors, service contractors, etc. There are steps to be taken to investigate companies, track their financial progress, and protect the library from a bankruptcy or other failure.

Ongoing Safety Techniques

Go to the vendor's Web page and see if it has an "investor relations" page. If so, you can read there how to keep up on the company. Often the site may offer an e-mail service for whenever the company files anything with the SEC, including a link to the document. You will learn about options being exercised and contributions to charitable trusts, along with major sales and/or purchases of stock by officers and directors, press releases on mergers and acquisitions, etc.

Track stocks of your vendors (and your employer, even your own personal stock and mutual fund portfolio). A number of Web sites will track the stocks of your vendors for you:

http://www.moneycentral.msn.com

http://www.quicken.com

http://www.morningstar.com

With Morningstar, you can check the company's ratings using Morningstar's five-star rating system. You can also sign up to receive alerts when a company's rating improves or declines. There is even a daily notice for vendors you put in your portfolio. Just make up the number of stock shares you own in each and you can keep up with their relative progress on the stock exchanges. I love this site. Use it to track your retirement accounts, your employer, your spouse's employer.

Have the reference librarians do a semi-annual search of the business literature on your most critical vendors. You know the ones — those with 20 percent or more of your budget in their hands. You or your reference librarians can also set up an SDI on
LexisNexis or Westlaw, Dialog, or whatever. A simple search of all your key vendor names matched against search words like bankrup! or troubl! or restructur! or reorganiz! in the same paragraph as the company name should do the trick. If you truly suspect something, a Dun & Bradstreet search might be in order.

Look at various Wall Street Analysts reports on the companies — many are on the Internet. Again, Morningstar is a good place to start.

If any vendor has or will have more than 20 percent of your budget heading its way, perform a "due diligence" search of newspapers and court records covering states in which the vendor is headquartered, does significant business, or has branches, as well as the federal courts. Search on subsidiaries for red flags. Don't forget state and federal organizations, such as EPA, FDA, FTC, SEC and state attorneys general that may be investigating or have actions (or even tax liens) against a vendor.

How much of your library's budget is riding on a particular vendor will dictate the lengths to which you may want to go in investigating the company.

Avoidance

How can you avoid problems with problem companies?

1. Don't make up-front payments. Handle your vendors like a contractor remodeling your home. Make staggered payments, and make the last payment the biggest. Provide in the contract for penalty payments if the company fails to perform.

2. Create an escrow account. An escrow account is set up with a third party to hold your money until the other party performs. However, in a bankruptcy, this too will be held up.

3. Try to get a written contract, one that identifies the monies being given by the library as specifically "in trust" with the company acting in a "fiduciary capacity." Such a trust will be outside bankruptcy, because the library is not a general creditor.

4. It has been reported1 that "from now on many state fiscal agencies could insist on bonding arrangements with agents."

Various libraries have tried these steps with major vendors and suppliers. However, with a parent company allegedly fraudulently bankrupting your vendor, as the case was with divine and its Rowecom subsidiary, nothing standard will work. I must warn you, many vendors won't go along with all or even any of these provisions and setting up an escrow account is not free.

Other ways to protect yourself and your library:

• Never do annual pre-payment unless you get a significant discount or other benefit. And investigate a company that suddenly requires pre-payment as divine did just before the debacle.

• Use multiple vendors. This is just another way to avoid putting all your eggs in one basket. For example, a law library might have one serials agent for law periodicals and another for general serials.

• Form a consortium to investigate companies management, credit2 ratings, stock prices, and, to negotiate assurances, a trust contract, etc.

• Develop various worst-case scenarios: "What if _____ went out of business?" Who are the alternative vendors? Which of these is most financially sound? Which could compete with your current vendor on price, timeliness, and other terms? This type of contingency planning may reveal savings to be had by changing vendors now, rather than after the ship starts sinking.

• Practice contingency planning. Create a hit list of titles that can be discontinued or weeded to create funds for "better" titles. In this way, if catastrophe does occur, you have a plan ready. Try to define your "want" titles as opposed to your "need" or "gotta have" titles — especially with serials and continuations. You know the titles that may no longer be relevant to the biggest programs or the firm's practice areas or the corporation's product line or research. Titles that that are too expensive to maintain on your own might be best kept to one copy for your consortium to maintain cooperatively.

• Know which titles are available electronically on the Web and through fee-based services to which your patrons have access. These might be the first tier of cancellations — especially if your cataloger can link directly to the site from the cataloging record within the online pubic access catalog (OPAC).


The divine Debacle

For those who haven't heard the terrible tale, this list of news stories published by Information Today Inc. [http://www.infotoday.com] represents an ongoing chronology of misery and deceit, "the 'Enron' of the library world."

"divine Library Services Financial Collapse Traps Library Subscription Budgets," by Barbara Quint and Paula J. Hane, NewsBreak, Dec. 20, 2002 [http://www.infotoday.com/newsbreaks/nb021220-1.htm].

NewsBreak Update: "RoweCom and divine Negotiate with Creditors and Potential Buyers," by Paula J. Hane, NewsBreak, Jan. 13, 2003 [http://www.infotoday.com/newsbreaks/nb030113-1.htm].

"EBSCO Steps into the RoweCom Deal After Swets Blackwell Backs Out," by Paula J. Hane, NewsBreak, Jan. 27, 2003 [http://www.infotoday.com/newsbreaks/nb030127-1.htm].

"Divine Debacle Rocks Industry," by Paula J. Hane, Information Today, Feb. 2003, pp. 1+ [http://www.infotoday.com/it/feb03/hane1.htm].

"RoweCom Files for Bankruptcy, Then Sues divine for Fraud," by Paula J. Hane, NewsBreak, Feb.3, 2003 [http://www.infotoday.com/newsbreaks/nb030203-1.htm] (includes a PDF file download with RoweCom's original complaint filed with the bankruptcy court).

"News Update — EBSCO Signs Definitive Agreements for RoweCom's European Business," by Paula J. Hane, NewsBreak, Feb. 10, 2003 [http://www.infotoday.com/newsbreaks/nb030210-1.htm].

"divine Seeks Bankruptcy Protection," by Paula J. Hane, NewsBreak, Feb. 27, 2003 [http://www.infotoday.com/newsbreaks/nb030227-1.shtml].

"EBSCO's Takeover of RoweCom Continues," by Barbara Quint, NewsBreak, Mar. 10, 2003 [http://www.infotoday.com/newsbreaks/nb030310-1.shtml].

"Poynder on Point: An Ugly Situation," by Richard Poynder, Information Today, March 2003, pp. 1+ [In a search for answers about the RoweCom/divine matter, Richard Poynder attends the first European "divine Day" and talks with divine International president and COO Ken Kinsella.]

"NewsBreak Update: New Developments in Content Licensing, Open-Access Publishing, and More" (includes developments in Rowecom/divine), by Paula J. Hane, Information Today, March 2003, pp. 7+ [http://www.infotoday.com/it/mar03/hane.shtml].

"NewsBreak Update: The Latest on Companies, Search Engines, and Products" (includes developments in RoweCom/divine), by Paula J. Hane, Information Today, April 2003, pp. 7+ [http://www.infotoday.com/it/apr03/hane.shtml].

"Edit This: On the Flip Side," by Michelle Manafy, EContent, April 2003, p. 5 [http://www.econtentmag.com/Articles/
ArticleReader.aspx?ArticleID=4289]
.

"NewsBreak Update: News on Web Resources, divine/RoweCom, More," by Paula J. Hane, Information Today, May 2003, pp. 7+ [http://www.infotoday.com/it/may03/hane1.shtml].

"NewsBreak Update: The Latest on Google, Market Research, and More" (includes: "Update on divine, Inc."), by Paula J. Hane, Information Today, June 2003, pp. 7+ [http://www.infotoday.com/it/jun03/hane1.shtml].

"Seuss Hopes Northern Light Will Rise and Shine," by Paula J. Hane, NewsBreak, June 2, 2003 [http://www.infotoday.com/newsbreaks/nb030602-1.shtml].

"NewsBreak Update: What's New in Enterprise Search, Insider Trading, and More (includes: "EBSCO Closes RoweCom Deal"), by Paula J. Hane, Information Today, July/Aug 2003, pp. 7+ [http://www.infotoday.com/it/jul03/hane1.shtml].


The Warning Signs of a Vendor In Trouble

Your Representative

Your account was re-assigned.

• Is this the first time?

• Did your representative quit?

• Did s/he get a promotion? Fired? Downsized out of a job?

• Is the new representative as capable?

• Are there any morale problems among the employees with whom you speak?

• Is the new representative adding you to an already long list of clients?

• Is the new representative easy to reach by phone? Or, are your e-mails and phone calls ignored?

• Has the new representative stopped communicating with you?

• Are you being offered incentives for paying cash and/or paying in advance?

Your Service Level

Your supplies are not arriving in a timely manner.

• Your suppliers are holding deliveries for missed or late payments.

• You are only getting partial deliveries or substituted products.

• You are required to pre-pay up front in cash before your order will be taken.

The Company

• Has the company changed its name or ownership?

• If yes, is the new owner solid?

• Would you invest in the new owner?

• Has the company lost any major accounts?

• Has the company announced a reverse stock split? (divine announced a 25 for one split in May of 2002).

• Is the company "reorganizing"?

• Has the company grown too fast?

• Has the company taken on excessive debt to finance growth or acquisitions?

• Has the company's law firm resigned? Has its accounting firm changed abruptly?

• Has the company fired its CEO or chief financial officer?

• If the company has publicly traded bond debt and the value drops, you should express concern.

• Has the company's stock price declined?

• Have you heard complaints that the vendor is post-dating checks or that its checks are NSF (insufficient funds to cover the amount)?

• Have its credit lines been cut off? Has an informal creditors' committee been formed?

• Has the firm hired bankruptcy counsel or a restructuring consultant? If so, it may be too late for you to do much now3.


Concerned About a Vendor? Start Investigating

To ascertain a company's track record, start with its Better Business Bureau Online record at http://www.bbb.org.

Do a quick search of librarian watchdog Web sites.

Companies that are downsizing, in trouble, or going out of business often wind upon these sites.

http://www.bankruptcydata.com

http://www.thestreet.com

http://www.finance.yahoo.com


Library Watchdog Groups

Know and follow the library watchdog groups that can alert you to vendor issues before you suspect a problem.

AALL CRIV
The American Association of Law Libraries has a Committee on Relations with Information Vendors. This committee takes and investigates complaints about vendors doing business with law libraries. Many of these vendors do business with more than law libraries. Subscribe to the CRIV newsletter by going to http://www.aallnet.org/committee/criv/. For those with a special interest in the divine/Rowecom disaster, there is a link to Kurtzman Carson Consultants-Bankruptcy administrator, who has put together lists of gracing publishers, creditors, and court documents at http://www.kccllc.com/. Subscribers who have claims against Rowecom need to contact Kurtzman Carson if they have not received a letter addressing their claims and the opportunity to assign their claims. For frequently asked questions and answers, visit the Kurtzman Web site at http://www.kccllc.net/rowecom and http://www.faxon.com.

SLA
The Special Libraries Association now maintains a special Web site called SLA's divine/Faxon Information Portal at http://www.sla.org.content/interactive/infolinks/tellme/divine.cfm.

MLA
The Medical Library Association also has its own divine/Faxon/RoweCom Information site at http://www.mlanet.org/resources/faxrowe_updates.html.

There is even a Yahoo! Group of RoweCom Creditors, located at http://www.groups.yahoo.com.group/rowecomcreditors/.

Don't forget http://www.infotoday.com/newsbreaks. Information Today Inc.'s newsbreaks broke the story on the divine/Rowecom fiasco! Sign up at http://www.infotoday.com/newslink/default.shtml to receive regular alerts linked to Newsbreak stories.

Don't want lots of e-newsletters? Schedule a quarterly or monthly search of each organization's Web site for vendors that have caused you problems. Chances are, these vendors have begun to irritate other librarians, who have already started the investigatory wheels turning.



Footnotes
1 See www.infotoday.com/it/feb03/hane1.htm.

2 Organizations that are proud of their credit rating will often share it. EBSCO reported its Dun & Bradstreet financial strength rating of 5A1—the highest awarded. See "Focus on Serials," 7 Information Outlook 15 (April 1, 2003) or 2003 WL 13715917

3 For a short but excellent overview of many causes of company bankruptcies, see a summary of Bobby Tomlin's speech, "How to Spot Bankrupt Customers Before They Take You to the Cleaners" in Managing Credit Receivables & Collections 5 (August 2001).


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