March 18, 2018

Lessons from Swets: Libraries Need Subscription Security | Peer to Peer Review

Kevin L. SmithI participated in a series of meetings last week to determine how the Duke Libraries would respond to the bankruptcy filing made by subscription agent Swets. We have been through this before, when Faxon/RoweCom failed and many libraries lost a lot of money. Unfortunately, more money is going to be lost this time around. Perhaps it is time for us to think about how we got into this situation—and how to make sure we never end up back here again.

First, and this cannot be said loudly enough, we should not send any more subscription money to Swets. When Faxon went belly-up, some libraries continued to pay for subscriptions even after the bankruptcy was announced, apparently because they either had not heard or simply did not know what else to do. Those funds became part of the pool of money divvied up by the bankruptcy trustee, and the libraries recovered very little, if any, of it. My unscientific survey suggests that libraries are now better informed and better prepared. In any case, we must not make that mistake again: we should pivot to other arrangements for subscriptions as quickly as possible. More about that in a minute.

Let’s pause, however, to understand how this problem was created. Subscription agents are designed to make the process of managing subscriptions to many different journals and journal packages easier; they save time and money, in theory, for both libraries and publishers. But they also offer a bottleneck where millions of dollars are aggregated in the subscription process and that seems to create a temptation.

Conversations with people and groups inside the library and publishing industry suggest to me that this large pool of money from library collection budgets becomes, in the hands of subscription agents, a fungible resource for financing other money-making schemes. Essentially, libraries finance a game of international arbitrage.

For example, if we send $200 to an agent, its ultimate income from that amount is something like three percent, the commission paid by the publisher. However, the agent can book the whole $200 as revenue and hold it for a while before disbursing the majority of it to the publishers. In the meantime, that revenue makes the agent’s balance sheet look very strong, and the agent can use these apparent assets to borrow money. It appears that Swets was doing just this to borrow the money it needed for operating expenses from banks.

Unfortunately for libraries, this means that when the whole system collapses—in Swets’s case the company did not have enough sustainable funds on hand to make the loan payments—the libraries that supplied the money are in the weakest position to reclaim it. The banks are “secured” creditors, which get “priority” in the redistribution of assets that occurs at bankruptcy. The loans they made are secured by the funds libraries paid in, so the banks, not the libraries, have first crack at whatever money remains. We may think of it as “our” money, but it is not. We are unsecured creditors that have gotten no promise that there are assets that will protect the money we send to an agent. Publishers are in basically the same position, although they may move up in the priority line once they fulfill an order.

The situation is even worse when libraries prepay for orders, basically “parking” money with an agent in the expectation that it will be spent later in the year. That money, unconnected to orders so that it is just a large, uncommitted pool, is a most tempting asset to use for borrowing. This practice puts library resources at terrible risk. The bottom line is that this model creates a huge, unregulated risk for libraries. We send large amounts of money to them with very little in the way of guarantees and no security at all. With Swets we will get badly burned by these practices for a second time. We should demand reform of the system. Let me briefly suggest four ideas to consider, from short-term to long-term solutions.

In the shortest term, it is important to ask publishers to grace libraries with access to their publications. A decade ago, when Faxon failed, there were many more print subscriptions, so offering grace to libraries was more difficult for publishers and more of a sacrifice. In the age of digital access to “big deals,” it should be easier. A number of publishers, including De Gruyter and the American Mathematical Society, have already announced procedures for continuing access if renewal orders had been placed through Swets, and we must ask other publishers to follow suit. From its early comments on the Swets situation, it appears that Elsevier has decided against grace periods. It should be noted that such a decision has risks for the publisher; our faculties may get a chance to discover that they can accomplish their teaching and research without these resources, and libraries will be able to reassess spending priorities.

The next stage of a solution is to move toward either direct ordering or to a different subscription agent. From my conversations with librarians, I think many are opting simply to move orders to a different subscription agent, most often EBSCO. While I understand the need for a quick response to this pressing problem, I believe we should think twice about this as anything but a stopgap measure, for two reasons. First, it has the potential to create a market player that will have unprecedented power in the scholarly communications system, which does not serve the interests of libraries or publishers. Second, just moving our order fulfillment to EBSCO or Harrassowitz does not solve the underlying dilemma.

Some publishers have indicated that they are looking to return to direct orders; both Elsevier and Springer seem to be indicating this preference. For them, it is presumably a calculation that the extra cost involved is balanced by the savings on commissions and the reduced risk. Libraries should make the same calculation and decide if the extra work is worth it for them.

The publisher SAGE, whose CEO and I have a long-standing acquaintance from our conversations about the Georgia State copyright lawsuit, has proposed a different idea. In a personal email, Blaise Simqu, SAGE CEO, indicated that while SAGE is willing to process orders directly, it would prefer a system in which agents remain a part of the process but with added security. Specifically, Simqu believes that subscription agents should use escrow accounts to handle the funds that pass through their hands from libraries on their way to publishers. As a lawyer, who would be required to use a trust account if I ever handled client funds, this seems a very reasonable idea to me. The folks at Duke who handle subscriptions also felt it was a workable concept. The question is, how can we put this restraint in place?

Escrow is a good idea, and one we should discuss. It will add some costs to the system, so there would need to be negotiations with publishers over how that cost is borne. But in the long run, this whole unfortunate situation should remind us that the fundamental error we in the academic library world have made is to allow so much scholarship to be controlled by commercial interests. Swets’s bankruptcy, and the financial shell game that led to it, is a painful reminder that our greatest assets, both intellectual and financial, are being turned over to commercial organizations, whether agents or publishers, that do not necessarily share the values or goals of the academy or beliefs about how best to achieve those goals.

The long-term lesson we should take from the Swets situation is that we must begin to wean ourselves from these commercial players. More scholarship should be published right on our own campuses, by libraries as well as nonprofit university presses. Our collection funds can be repurposed to support other academic-driven projects to produce and disseminate scholarship directly. Overall, the digital environment offers us the opportunity to take more control over the creation and distribution of scholarship, and episodes like the Swets bankruptcy push us to accelerate trends in that direction. It has been too easy, and too risky, to outsource everything to commercial organizations, and we must reverse that trend. In the meantime, we must take a much harder line, demanding concrete guarantees and security and placing increased restrictions on what we will and will not agree to as we do business with commercial entities.

Kevin L. Smith About Kevin L. Smith

As Duke University’s first Director of Scholarly Communications, Kevin Smith’s ( principal role is to teach and advise faculty, administrators and students about copyright,intellectual property licensing and scholarly publishing. He is a librarian and an attorney (admitted to the bar in Ohio and North Carolina) and also holds a graduate degree in religion from Yale University. Smith serves on Duke’s Intellectual Property Board, Digital Futures Task Force and Open Access Advisory Panel. He is also currently the vice chair of the ACRL’s Scholarly Communications Committee. His highly-regarded blog on scholarly communications discusses copyright and publication in academia, and he is a frequent speaker on those topics.

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  1. Do you think the outsourcing procedure which SWETS was following is okay to be continued if in case the business is brought back to life?

  2. I think that your comments about the financing use of the library’s money by the agent, like a funding by a bank, are slightly biased. You say the agent is using the advanced library’s money, as prepaid, taking profit of it, either to borrow money or use it for own funding, but actually some agents are funding to the libraries, especially in public and government institutions, where the payment due is over 60 days, and even delayed in many cases because economic problems. Mostly, I have seen rather the agent paying subscriptions that have not been paid yet by the library, than the opposite. Must be considered that billing and paying is not the same thing, and that the public institutions are who set the rules and strict payment terms (because they are governmental and because they are the customer) which most agents cannot refuse.

    I think there is a point regarding that the Swets bankruptcy may lead a big piece of the market to EBSCO, causing they get even bigger, with not a single company who can compete with them in a international context. This is a tipical monopoly issue and now this market seems is turning to that picture.

    Best regards!