Departments 2: Production and Accounting

by Richard Grossinger on March 14, 2010

Chapter Fourteen
Departments 2: Production and Accounting

A good portion of this chapter also comes from Guidelines for Authors.

2. Production/Printing

A. Design

Book design has to be appropriate to each project, every element kept harmonious and in scale—a feng shui of the printed page.  Some publishers ruin their projects with overdesign and overproduction, which wears as badly as music that is too loud for its underlying tonal construction.  Flashy books may well end up on remainder tables—lots of color and expensive paper sans rationale.

Any book is only as good as its weakest text.  For that reason, you can’t, for example, fortuitously stick color photos into an otherwise text-and-line-drawing layout in order to make it more vivid and/or commercial.  We did that in 1992 with a book of flowercraft that we picked up from the authors after Morrow let it go, sprucing its title up from Living with Flowers to The Complete Book of Flowers and adding a glossy section of brilliant floral photographs, which also put four extra dollars on the cover price ($16.95 instead of $12.95).  The color section and book itself came from two separate universes.  The Complete Book of Flowers did poorly; it might have done poorly anyway, but in black and white it at least would have been presented appropriately and with less financial outlay.

Book design should tend toward being simple and spare, not calling attention to itself at the expense of the content or concept.  Yet it should also have a clear, formal, dignified look so as to distinguish it from improvisational desktop publishing and amateur collage.  There is a place for radical, experimental book design and far-out concepts, but it is probably not general trade publishing, especially of the sorts of alternative-medicine, martial-arts, and spiritual titles that we do, because then the medium drowns out the message.  Executing these books does take artistry but at a subtler level: sensitivity to variations in font, typographic letting, margins, running heads, chapter headings, colophons, etc.  The rule is still: don’t do too much; do the least possible while still serving the book’s requirements.  That is the entire game, and it is more zen than expressionist.

In retrospect, a huge part of North Atlantic/Frog’s success as a publisher can be attributed to lucking out on a designer early on, before we even knew what we were doing.  Paula Morrison came to us as the girlfriend of Martin Inn, one of the authors and translators of the 1979 crossroads book The Essence of T’ai Chi Ch’uan as well as my own t’ai-chi teacher for a while (see Chapter Two). Martin was Ben Lo’s coordinator on the project and, though Paula did not work on that book, Martin gently yet forcefully made her participation as a designer more or less a prerequisite for our being the publisher of any future translations of Yang Style t’ai-chi books coming out of his crowd, most notably the highly desirable baseline works of Cheng Man Ch’ing.  Prior to Paula, our books were designed, in effect by default, by typesetters and printers.  We didn’t even grasp the need for a designer, even as for years before Kathy Glass we did perceive the necessity of a copy-editor.

We have been quite spoiled in this regard.  You can start your own press now or in 1977, and you will right away be looking for someone to design your books and to give your line a distinctive look.  We had someone waiting there, and I so little understood it at the time that I argued with Martin about sticking us with an extra expense.  It seemed like featherbedding to me, as though he was just trying to secure work for his girlfriend.  Luckily I acceded, and then Paula taught us how to really make books.

Paula’s main skill/talents are her sense of design, unerring aesthetic intuition, and tireless work ethic.  The daughter of an interior-decorator mom and an architect father, she is a native of Klamath Falls, Oregon; came down to the Bay Area for college and stayed around.  An original t’ai-chi practitioner as well as an athlete and early bodywork recipient (through her long friendship with Marian Rosen’s daughter), she has understood implicitly what our publishing was all about.

Paula has developed her own motifs of book design plus her own inimitable style, one that has imprinted itself seminally on our press and marked the artistic transformation from Io and the early literary titles to North Atlantic as a publisher in the larger world of book businesses.  As marketer Peter Beren put it years ago, “The amazing thing about your having only one designer is that Paula is versatile enough to execute a wide range of looks, so some of your books are North Point, some of them are Farrar Strauss or Pantheon, some of them look as though they came from China, some of them look like Conari or Chronicle.  And yet none of them look like imitations.”  That was priceless for the evolution and identity of North Atlantic.

The youthful romance between Martin and Paula ended over thirty years ago, and it probably seems like at least a century to both of them who have had labyrinthine lives since, but throughout those thirty years Paula has been a totally indispensable cog in North Atlantic’s development.  The press wouldn’t have been successful without her labor, vision, or lessons, certainly not in the way and at the scale that it achieved.  North Atlantic was not just Lindy’s and my invention; it was Paula’s creation too.  Of course by now it also bears the imprint of many other staff-people too.  But in the synergy that launched a viable business, Paula’s role is commensurate to that of the two of us.  If we are the press’s DNA and psyche, she is its cellular structure.

In 1979 Paula was a totally neophyte book designer, a cocktail waitress in the Castro in San Francisco who, after getting a BS in Design from the College of Environmental Design at UCBerkeley had taken a course in book production at the Extension and helped design a cookbook—that’s all.  Then came T’ai Chi Ch’uan: A Simplified Method….

Back then book-preparation was a process of mechanical, linear typesetting and hands-on paste-up onto boards from which new books were photo-offset by a printer.  Before that, books were literally fashioned by forge and “hammer and mortar” typesetting.  In the seventies the task was done on a sophisticated justifying typewriter (as opposed to the normal sort of “one space per one letter”/ragged right gearing).  The paper was then glued onto heavy cardboard.  In the eighties the method progressed to grapheme transfer onto photographic paper that scrolled out of a developer unit, was cut and pasted onto graph-paper-style boards that had their own distinctive photo-chemical smell, dusky and sweet.

It seemed a miracle the first time that an author’s own keyboarding could be converted into typesetting without having to be re-keyboarded into press-quality type.  The year was 1983, the book was Backward: An Essay on Indians, Time, Photography, and the technician was employed by the audiovisual department at UCDavis where the author, Will Baker, taught.  In this case “Backward” was “Forward,” and time hung mysteriously between two worlds, one passing out of existence as the other was partially realized in the unevenly quoined font of Will’s book.  Still it was a turning point, and we were glad for the birth of a new technology.  We never had to re-key it! Gradually after that, typesetting disappeared from our world as an essential conversion phase of every project.

As hard to believe as it is in these days of Microsoft Word whisked seamlessly through Quark or In Design, before Backward we used to have to get cleanly typed books re-keyboarded so that they would be in book fonts rather than informal typewriter-spaced pages.  Of course, even typing was a huge advance from handwritten pages cast, letter by letter, into metal characters and quoined in rows on machines during the long Gutenberg centuries.  All the “calligraphy” of John Milton and Herman Melville, even John Steinbeck and Ernest Hemingway, had to be resculpted in metal before their books could be printed, bound, published.  It is no wonder that such a high percentage of what was made into books back then became classics.  It was only worth casting classics in metal.  With today’s expedient technology, most publishing is ephemeral babble and stray jargon, words on the wind.  And digital has rendered the printed word almost as ephemeral as speech.

Paula made the transition from paper and glue to electronic publishing not only seamlessly but faster than most other designers.  She was a pioneer in Quark, apprenticing under its creators and masters.  In the years since, she has continued to develop her computer savvy, one step ahead of the wave.

Historically all of our production was freelance and out-of-house, and initially it was only Paula.  It has been at least fifteen years, though, since she had hours in the day to design all our books, but she essentially carried the full load from late 1979 until the early nineties when we had to begin hiring additional designers to get our growing list produced.

In 2000 we formally hired Paula as an art director and manager rather than just a freelancer (“art” meaning “art of the book” as opposed to advertising uses of the term), yet for quite a few years she still continued to design more books of ours hands-on than any freelancer.  Finally her managerial load became too great to design books as well, so she completed her role transition.  Nowadays she is a director and manager, selecting only the occasional project to design herself, usually either because she had a special idea for it or it has fallen into her lap from a crisis elsewhere and needs immediate attention.  She almost solely supervises other freelance designers, checking all books before they go to the out-of-house designer and then, after they come back designed, before they go to the printer and when they come back from the printer in blueline stage.

All through these decades and roles, as designer and overseer, Paula’s presence has been stalwart but light to the point of almost invisible, in a good sense, meaning without drama or hoopla.  She does not translate the stress of her job and deadlines into bad moods or reactivity, yet she often has worked twelve-hour days and longer from both the sheer fulfillment of making the books and her lifelong commitment to the press, the authors, and the books.

Our main hands-on designer these days is the quick and versatile Brad Greene, formerly a commercial designer at a graphics studio in New York that did work for the New York Yankees.  Recently a book-designer at Ten Speed Press, for over a decade since then he has done more North Atlantic titles than anyone else (including most of our martial-arts books with lots of photographs), always from out of town: Auburn, California; northern Idaho; and presently eastern North Carolina.  We also use Susan Quasha at Station Hill Press in New York (she easily slides into North Atlantic topics); Suzanne Albertson and Maxine Ressler locally in Berkeley, both inherited from Ten Speed (though Maxine recently left the fold), and an assortment of other Bay Area designers including Claudia Smelser, Jan Camp, and Ayelet Maida.

We had another, very active designer in the late nineties and early aughts, directed to us by our author and friend Paul Pitchford from a class of his at Heartwood Institute, but she had a precious and narcissistic attitude toward her work.  She created many problems by designing according to her own faddist aesthetic principles and tastes rather than our needs.  We lived with that until a book by John Upledger got sent into the printer with fashionably eensy type, too eensy for him or many of his associates to read without their glasses.  Furious, he let me know over the phone: “I trusted you and you let me down.  This is a piece of shit.  No one can read the words.  The book was for clients and therapists to use.  What was the point of that?”

Yeah, Carolina, what was the point of that?

She would have said, and did in fact say, that it was very elegant and beautiful and we didn’t know what we were talking about, but then she was half Dr. John’s age, and it was a book on craniosacral therapy, not design or art.  She took no responsibility for the consequences of her artistic stubbornness (her lawyer wrote and told us that literally).  The whole book had to be reprinted.  That was her last project for us.

Recently we have had the dilemma that some of our designers have claimed that we do not have the right to use their covers or any elements of their design for ebooks or even for advertising ebooks for which we didn’t use their covers, and they have been asking for additional fees.  This has forced us to develop a whole new contract for working with designers.

From our standpoint we paid for the work, and we should be able to continue using it, especially for our kind of book, which is content-driven.  However, when there is a pie to be divided and rights issues are in flux or up for grabs, there is no way to stop squabbling over the pie.  And everyone has a story, a good story, backing up their claim.  That’s one thing you can count on: everyone has their story.  It’s just the story is dreamed up later, usually by lawyers, to legitimize a claim.  In this case, part of the story is that the design is an integral part of the book and its success and as much a determinant of its progression to e-candidacy as even the words and meanings.

B. Our Printing History

Despite a common public misunderstanding, publishers are not printers—not even close.  There is no printing press in our building and never has been.  All publishers nowadays send their files, even as they used to send their boards, to gigantic industrial printing plants to be cloned and manufactured on assembly lines from digital templates.  Finding high-quality printers at the right price has always been a challenge, as costs, celerity, and quality can vary widely, sometimes even from the same printer, depending on the time of year or the customer.

For most of the nineties we used Malloy in Ann Arbor almost exclusively, having picked them up when we began publishing Jeanne Rose’s herb books.  We inherited not only her film in storage there but their irrepressible sales rep Gabe Watts (see Chapter Twenty-Two).  In the Malloy days and previously, meaning from around 1968 up to about 2001, we tended to use one domestic printer at a time for most of our books, sending only fine color books (once we started doing them in the mid-nineties) to Asia.

Our printing marriages were serial.  We would engage a printer in working with us, as they would simultaneously confer some sort of a volume discount, either explicit or tacit, so that we paid considerably less than the neophyte publisher off the street for our books to be manufactured there.  This parenthetically gave us a distinct advantage in copublishing and distribution deals because we could always get better printing rates than our prospective partners—a way to give them back some of the revenue they ceded to us on in splitting sales on the books.  The printer deftly covered the difference, but really it was a matter economy of scale at work.  Even as PGW, Random House, and Malloy recruited us into larger, more cost-effective networks under them, we could interpolate our own size, access, and organization, into networking with copublishers and distributed presses.

Our first two “house” printers, LithoCrafters and McNaughton-Gunn, were also based in Ann Arbor, the long-time printing capital of North America where most of the economical short-run printers set up shop originally as breakaways and offshoots of their grand-daddy, Edwards Brothers, in the sixties.  The Ann Arbor plants were second cousins to the Motown assembly lines down the interstate, both of them heirs to railroads carrying raw materials to the industrialized Midwest.  This AA advantage held true into the nineties but is no longer the case, as other Midwestern printing zones have developed in Illinois, Indiana, Ohio, and Missouri and these more than rival Michigan.

Lindy and I knew both Bob McNaughton and Mark Gunn from our Io ventures when we lived in Ann Arbor.  We started with Bob McNaughton, in fact years before North Atlantic Books was born, when we were still graduate students and were looking for a place to get the Doctrine of Signatures issue of Io printed.  It had been accepted and then rejected for reasons that I don’t remember by another printer on the long commercial stretch of Jackson Road, Cushing Malloy and, when we continued driving further down the divided highway in order to find a good turn-around, we saw a printing plant under construction.  We stopped to inquire.

That was LithoCrafters, and it was managed, though not owned, by Bob McNaughton.  Wearing a hardhat, he was standing besides a partially completed building, talking to its contractor.  We inquired as to the start-up date and appropriateness of our materials for their operation and ended up leaving the parking lot as their first customer.  We stayed at LithoCrafters until McNaughton and his partner Mark Gunn underwrote their own plant in the late seventies.  And then we stuck with their baby for years; in fact, until well after both were gone elsewhere.

After we left them, LithoCrafters continued to morph until, under a different name, it became the most heavily self-promoted book printer in the U.S. for independent presses and vanity publishers, the spider with the biggest web that caught the most flies.  Often when we inherited a book from another small press or a self-published author, the film was invariably at one of the incarnations or regional outlets of “LithoCrafters,” and, more than seemed possible by ordinary business rules and the law of averages, it had become encumbered with a lien and an unpaid debt based on some dubiously ethical bait-and-switch tactic.  We usually had to fight to liberate the materials.  “LithoCrafters” and its successors were masters of getting you in the door and then coming up with hidden costs.  I doubt that that is true any longer for its successors.  It wouldn’t work anymore; customers know too much, but back then  it was an epidemic.

Bira Almeda’s original self-published version of his own Capoeira book was in an encumbered situation in 1980.  We ultimately had to pay Bira’s printing bill just to get the film, as the author’s price had shot up implausibly from the bid after he delivered the boards to the plant.  They basically had given him a bid and then more than doubled it after receiving the materials and would not return them either.  When I first met Bira, I found out that his book was being held hostage until the sum was paid.  I later heard of many such incidents.  For a while I came to consider that the single best piece of advice I could give an amateur starting out was not selecting “LithoCrafters” by any of its names.

We left the McNaughton-Gunn hacienda in the early eighties when the people who were running the facility chanced to print a page of calligraphy in a reprint of Essence of T’ai Chi Ch’uan upside-down and then refused to re-do or credit it (as they normally would have) because, in their words, it was “just Chinese stuff” and no one would notice the difference and, anyhow, how were they to know what was right-side-up when it was little more than a sloppy circle?

At this point, I will depart from the narrative to take up the issue of responsibility for printing jobs, something that is covered most saliently in the fine print on the back of the printer’s estimates and expressed in clear axioms in the industry’s trade manuals.  Whereas printers must re-do some entire jobs for certain vintages of errors, these are explicitly specified and limited to the blatant and gross variety—and the categories eligible for do-overs drop dramatically after the blueline phase.  Once the customer signs off on the blueline or proof, the printer is no longer responsible for any errors therein, only for ones made later.  He does, however, at that stage have to correct anything he did wrong in getting to the blueline on his own dime (specks of dirt in type, too dark photographs, unaligned pages, etc.), but in blueline it is not a printing job, just a template, relatively inexpensively repaired.

Publishers, no matter what artistic prerogative they fancy, cannot just refuse to pay a printing bill because they think a job is not up to their standards.  There is a difference between upside-down pages and out-of-order signatures in the final book, which require a hefty credit or a reprint at no charge, and text or art that is less than crystal clear and pristine.  You get what you pay for, and the standard, price-competitive printer is not going to do a letter-press job.  Many mass book printers maintain surprisingly high standards for their assembly-line approach, but they cannot be expected to serve gourmet meals at burger prices.

Copublishers and publishers of distributed books, using our printing account, have occasionally refused to pay printers (or reimburse us for payment) because they didn’t like a job or some aspect of it.  This does not jibe with the basic legal contracts between us and the printer or between us and them.  There is a hefty margin for printers to err on the wrong side of beauty, if virtually no margin on job correctness.  That’s the trade-off, and it’s fair.  If you don’t think the book is snazzy enough, that’s your tough luck; you get no worse than what you are willing to pay for, and often better.

We have had to insist that several prima donna copublishers, in fact, were in fact obligated to pay their share of the printing bill even if they didn’t like the clarity of the printing or the crispness and hue of the color.  I was quite startled in 2009 when the copublisher of a book on eros complained that the colors in the printed cover were not like those on the screen and he was rejecting and sticking us with a $6000 bill as if that were his prerogative.   Printing is big-league industrial unionized capitalism, and it doesn’t brook small-time tantrums.

The upside-down page did require reparations.  I argued about it with some intractable guy named Ron Mazzola, who had been popping up all over the Michigan printing map, before I finally gave up and yielded to the longstanding and masterly supplications of John Schuler, the salesman-rep of Intercollegiate Press (ICP) in suburban Kansas City, Kansas.  He finally got our business not only because McNaughton-Gunn was being unreasonable but also by promising to do our first job for free and then letting us set a fair price for our next three jobs.  Before we went back to Michigan at Malloy (and, later, Data Reproductions) for our general printing, we used ICP and then Walsworth Press in Marceline, Missouri, over the major portion of the decade of the eighties into the nineties.

Before he left ICP for a higher-ticket-item machine industry, Schuler did everything he could to keep us happy and out of the paws of his rival Dave Schattgen at Walsworth, who wooed our business actively (even as John had for years previously), eying us from just over the famous Kansas-Missouri state line.  More on that character in Chapter Twenty-Two.

Soon after Schuler went to someplace in Florida or Tennessee, ICP got sold to a ring and yearbook manufacturer in Indiana, and five years worth of our film, crucial to our continuation as a press, were about to fall into a dangerous situation before Dave Schattgen sent a van from Marceline, Mo., to Shawnee Mission, Kansas, to retrieve it.  Possession then proved to be the usual nine-tenths.

We left Walsworth about five years later, much as I loved their careful work, junkets to Marceline (Walt Disney’s hometown) for our designer Paula, and part-time soybean farmer/sales reps wide-eyed in Berkeley, not only because we were wooed back to Ann Arbor by Malloy but because we discovered a rip-off, and Big Dave couldn’t get his bosses to fix it.  It was this:  All the freight companies gave Walsworth (and other printers) a significant volume discount on pallets of books to their customers, as high as sixty percent, usually amounting to hundreds of dollars per job.  Walsworth refused to pass that freight discount on, instead billing customers at the posted rate.

Dave used to joke around then that Walsworth loved to print high-school and college yearbooks because their editors changed every year and they didn’t know competitive pricing or shit from shinola, plus they had great subsidies from their schools and/or local businesses.  In other words Walsworth charged whatever the traffic would bear and were spoiled, so Dave had to fight his bosses even to get them initially to be competitive on trade books in order to help him build another source of clientele; they had to want it badly enough to make pricing concessions.  Dave got them to consider competitively pricing trade books in their own best interests, and that’s why we were there.

But apparently their use of freight bills as a revenue center was a little too juicy and deep-seated to give up so, once we discovered it totally by accident when a trucker called us, the shipment’s recipient, by mistake over a prepaid bill, the bosses dug in their heels on this matter and lost a customer.  I imagine these days they are either just in the yearbook business or pass on that freight discount.

I am reminded of the time in 1991 when I put together our Amherst class’s 25th Anniversary Yearbook, a gift from most private colleges to each class at that midlife juncture of alumni-hood.  As the only person in the Class of 1966 doing book publishing, I volunteered to assemble the project.  The alumni office then gave me a huge budget ($10,000) and the name of a local printer.  This guy had them completely over the barrel, which explained the large amount of money we were allotted.  The college had no idea what such things should cost on the open market.

By becoming the first Amherst classbook editor not to use the local shop for the job (Paula designed it, and Malloy printed it) I was able to turn out a monster, more than three times the size of any previous class’s book, for the same amount of money.

But this kind of double-standard situation exists all through the manufacturing world, and it is no wonder we have literarily been hustled from company to company—Schuler stole our business from Ron Mazzola, Schattgen stole us from ICP after Schuler left, and then Gabe Watts stole us twice (as you will see in Chapter Twenty-Two).  When United Graphics stole us from Gabe, Mr. Watts had conniptions, and sent us emails with constant new discoveries about the low quality at United.  Every few weeks he would have a new United revelation to dissuade us from our seduction.  We still gave Data and even Malloy some jobs, but United became our main printer, for a while anyway, and, youknow what, they never committed any of the indecencies that Gabe prophesized.

Now, with all the new technologies, we have no single house printer or volume discount and, like most other publishers, play the field.

C. Unit Cost, Unit Printing Cost, and Overrun Cost

An important matter for new publishers: be sure to understand, master, and make full use of the functional distinctions between unit cost, unit printing cost, and overrun cost.

Unit cost (in IRS circumstances known as “cost of goods sold”) is the overall net cost of a single book in a print run.  It includes out-of-house (non-payroll) editorial expenses plus pre-press production expenses plus printing costs and printer’s freight divided by the number of copies printed.  This is the correct cost of the book for calculating inventory value for tax purposes and for determining cover price and profit and loss.  It is the real operable cost of the book.

Here is a simplified example: $1000 in editing + $2500 in production and design + $8000 in printing plus freight from the printer is $11,500.  If the print run is 4000, then the unit cost is $2.875.  For every copy in inventory, from a value standpoint you are holding the equivalent of $2.875 in cash equity, and from a company balance-sheet standpoint you own $2.875 per unit of that print run.  Every time you sell a book, $2.875 of equity is transformed into a higher (or sometimes, in the case of a remainder sale, lower) cash value of equity.  Every review copy, book lost or damaged, or intentionally destroyed is removed at the equity of zero and thus reduces over inventory value, hence equity and taxable value by $2.875, and the functional unit cost of the rest of the inventory goes up incrementally.   $11,500 divided by 4000 minus 311 damaged, lost, review and other free copies is $3.117, the new and more accurate unit cost.

If a reprint of 2000 copies of the above book is done at $3,000, then the unit cost of those new books is $1.50 each.  In cases where print runs cannot be distinguished from one another, the unit printing cost of a random book is the prorated average: $14,500 divided by 6000 or $2.417 prior to consideration of lost, damaged, and free items.  Either way, the unit cost of the title in the system will have dropped after the cheaper reprint.

The unit printing cost is just the printing cost per copy—$2.00 a book in the first instance.  For the second run where there are no other editorial and production expenses, the unit cost and the unit printing cost are the same.

The overrun cost is the per-copy price of additional copies at the end of a print run.  For instance, the overrun cost on the first print run in the above example might be $1.40, so if you ran another 2000 books, the unit printing cost would drop to $2.70 for book, but the overrun cost would of course still be $1.40.

Another way to look at this is that only the first book off the press is not an overrun, but it may cost $2000 to print it, as it absorbs the entirety of the general job set-up.  The second book at the above overrun cost would be $1.40, lowering the unit cost from $2000 for one book to $1000.70 for two books.  The unit cost for three books would be $667.60.  This number continues to drop until it travels into a reasonable range at around 1000 books where it is $3.40—still high but at least not absurd.

The lower overrun cost is a very useful tool for being able to negotiate separate deals with authors, book clubs, or other outlets.  One can haggle on the basis of either the unit cost or unit printing cost but, in reality, extra books will cost only the overrun number.  It may not always be fair to use different baseline unit costs for different, parallel transactions, but it is done all the time and is a by-product of economy of scale.  If a company (for instance, the old Books Are Fun in Iowa) is willing to buy 150,000 of Walter the Farting Dogs for a series of promotions and school fairs, they are almost certain to use the overrun cost as the basis of their offer.  They are no fools, and they will niggle down by the penny because every penny is multiplied by 150,000, and every 150,000-deal is multiplied by the thousands.  150,000 copies at only 20 cents overrun margin for Frog back then was still $30,000 for essentially doing nothing.  Books are Fun kept the rest.  It was still easy money.  You put in the print order, and the books ship directly to the customer.  You pay the bill; they send you a check; and you are up $30,000 at the end of the day.  Meanwhile Books Are Fun has products to sell at less than half price (or virtually whatever discount they want, depending on the profit they seek)—economy of scale in action for everyone.

By the same token, the publisher usually has the strategic advantage of knowing the difference between the unit cost and the overrun cost and can arbitrage between the two in deals with authors or anyone else.  The partners don’t have to know your actual figures, so you can quote unit cost, unit printing cost, or something in between unit printing cost and overrun cost in order to make a deal work for both parties and maintain a margin of profit, however slim sometimes.  At least you have maneuvering room.  Invariably by quoting the unit cost but keeping the overrun cost in the back of your mind, you can appear flexible and generous, sometimes more so than you actually are.  This is a trick of the trade that is used throughout publishing by everyone, especially large publishers in dealing with authors on their royalties.

Note also that the overrun cost is always a little lower than the back-to-press unit cost, costing (a dime in my example above).  The dime is of minor concern, but ten years ago, before full digitalization and a competitive buyer’s market, it would have been at least four bits.

D. Printing Coordinators

Back when Conari was sold to Red Wheel/Weiser, Will Glennon asked Lindy and me if, as a favor to him, we would hire an older employee whom he didn’t want to cut loose without job, Jenny Collins.  “She’s devoted to her work,” he said; “she never married or found a partner, so it’s her life.”

Initially such a favor didn’t seem plausible, for what Jennie did at Conari did was to organize, bid, and oversee print jobs, a function that we spread among Paula and our project editors.  However, out of respect to Will, we decided to try Jenny in the position, realigning other job assignments across the editorial/production spectrum at NAB to fit her in.  She brought plenty of smarts and experience and made the reorganization work, both in terms of efficiency and more competitive bidding.  Then, within a year, she surprised us by quitting.  She didn’t like working for a couple, having escaped, as she put it, her parents and a number of boyfriends, and her parting shot, reported by Ed was: “If I wanted quarreling, I could have chosen that life.  Not at work.”  Oh well.

The print-coordinator position was part of our workflow by then, so we replaced Jenny with the mysterious Mary Agresta, a corporate advertising lady from upstate New York and, more recently, San Francisco, who also did a bang-up job and also left within a year without divulging a thing about herself, jumping at the first sexy offer that came her way.

Our then associate publisher, Mark Ouimet, after finding the job market for experienced professional print coordinators too pricey, took a chance and hired Paula’s friend, Minda Armstrong, retired from corporate life and keeping busy as an acupuncturist’s office manager.  Minda had decided she wanted to learn the book trade, and so she took on the array of tasks.  Now she is an experienced professional print coordinator and handles about ninety new titles and almost three hundred reprints a year, so it is hard to imagine how we could function without someone in that position.  The “Jenny Collins” job favor has become a fixture.

As foreshadowed, North Atlantic bids all jobs nowadays and picks from a coterie of printers, both North American and Asian (though the fall of the dollar has cut into our Canadian options).  In the States we have used United, Data, and Sheridan; in Asia, mainly TWP; and in Canada, Transcontinental.

With the upsurge in digital books, the United States now has too much capacity for the number of print jobs, so it is a buyer’s market.  Printing plants have suddenly become as much an endangered species as bookstores, vinyl records, and Blockbusters.

E. Changes in Printing Technology and Size of Print Runs

As just noted the mechanics of producing books has changed radically, as a variety of technologies beyond giant paper-ink-and-glue machines in assembly lines has become available for preparing and printing information.  The basic concept has been miniaturized, digitalized, and archived in a diversity of formats, meaning (inevitably) the viability of smaller conventional print runs and an arsenal of alternate electronic modes for actualizing books or book-like artifacts.

Once upon a time, the size of a first print run represented both the symbolic and actual degree of a publisher’s commitment to the project, hence the relative chances for a book’s success.  That meant that authors and agented actually considered first-print-run size a negotiable contract item.  Given the technology presently in use, the size of a print run is virtually irrelevant.

In truth, all the economics of book production, not only the transition from print to ebooks, have been transmogrified by the digital revolution.  For instance, digitalization of the information necessary to run print jobs takes away the former advantage of a single printer caching all your film and running it for you when needed on volume discounts.  Printers used to invest in customizing film and then holding jobs by storing and reusing the film.  Books pasted up on boards, shot and stripped into signatures, and organized in press-specific printing templates on film were their house gold.  Even to transfer that film to another printer for a better reprinting price would not be cost-effective because of the high restripping and set-up fees in most cases for a different template (plus the insured freight to transfer the film).

Since the files are eminently malleable, resurrectable, portable, and transferable as mere electrons, there is no reason to stick with one printer or even to store books on inconvenient and space-hogging boards and film.   In fact, different printers have their technological specialties as well as their busy and slack phases of the year, and it is most cost-effective to keep bidding them and even to move jobs around.

These changes are more radical than generally appreciated.  There is no mystery or mystique in book publishing any longer: Anyone in principle can run book facsimiles on a machine not much bigger than a photocopier.  We are at the mere beginning of the Print on Demand era.  Perhaps in the future, only books selling a certain number of copies will be formally printed on massive presses.  All the rest will come out of desktop-style printer-binders or machines at multimedia kiosks in libraries or malls, thus not have to be shipped domestically and overseas on the planet’s dwindling oil reserves.  It is even possible that printing may be replaced entirely by digital downloads, with actual paper and binding a luxury to be selected by the end user (or not).  The salient item has become not the book but the digital file.

More to the present point (when printed books are still currency), the technology allows shorter print runs to be economical and causes larger ones not to be so much better pricewise.  In the old days we were always having to decide how many books to run based on a combination of unit cost and absolute cost.  The more we ran, the less each one cost (since the prepping for press time was an expense in excess of $1500 for most books, and then was amortized, as shown above, through the size of the run)—but, conversely, the more we ran, the larger the overall bill got.  The same math still works, but the prepping cost is closer to a pittance, so one can run 1500 books instead of 3000, for instance, and get close to the same rough unit cost.  With difference in price not a game changer, it’s safer to run 1500 twice (if necessary) than 3000 once unless you’re sure you can sell 3000 and need them pronto in an active market.  After all, you may only need 1500—or less.

In reality, the book market is slow to assimilate all but the most highly promoted titles and authors, so it rarely can digest an ambitious print run fast enough to be worth the extra cash outlay and risk.  Reprints can be accomplished rapidly and economically, with the added benefit that these back-to-press books can also be updated and corrected.  In addition, the size of subsequent print runs can be tailored to demand accurately only after a book has traveled for a time in the various distribution networks.  The second print-run number, though few authors who become enamored with the symbolic stature and mystique of the first run understand this, is far more indicative of the book’s prognosis and the publisher’s than the first.

Too much inventory has multiple downsides.  It creates long-term warehousing problems as well as a stifling of considerable cashflow upfront.  Nowadays warehousing charges can even dwarf reprinting charges.  For instance, in our situation at Random House it is often cheaper for us to pulp (destroy) overstock and reprint later, when and if books are needed, than to pay a continuous overstock fee.

One over-printing of a book in fifty or even a hundred runs will likely cancel out the total cumulative minute gains of reduced unit costs for doing longer runs on every title (plus even the abstract hypothetical gains of having more stock on hand for a presumed initial splash on launch).  If you regularly print the max in order to get a low unit cost and have more books available, then eventually you are going to print books that you don’t need—in fact lots of them.  Over time by either Murphy’s Law or the law of averages, if you stay in business long enough, you are going to end up with a football stadium full of books that you don’t need and don’t know what to do with.

It is a matter of sheer numbers and percentages.  Do not be deluded by low unit costs for higher runs.  I promise: If you keep printing the max, you will end up spending more overall on books that never will sell and have to be remaindered (if you are lucky) or most likely pulped (thus negating the unit-cost gain across the whole history of press runs if not on each individual title), and you will also be stuck with an expensive warehousing or a distributor-overstock problem in the interim.  It’s always better to accept a higher unit cost and then to reprint when and if you actually need the books for real customers.

So we have much shorter print runs at North Atlantic now and far more of them, plus we move jobs more often between printers.  This combination of factors makes the print coordinator a real labor-intensive, full-time position.

Underprinting is never the sort of problem that overprinting is, even in the old days of boards and film, because you can always print more books later.  The second (or third) print run, as noted, is really where you should make your stand as to what the market will bear.  Another point: printing 10,000 books by doing 7000 and then 3000 is also, costwise, no different from doing 3000 and then 7000, in 1980 or 2010.

Since you can’t hit the nail on the head more than once in a blue moon, a publisher should make the first print run roughly the size of the advance sale, plus some reasonable upward leeway.  Then, from the rate at which the title sells, he or she will likely know how to gauge the right reprint number.

Remember this logic: If a title is going to be successful, a publisher is always going to need to reprint more copies anyway.  If you are going to sell 50,000, it little matters whether you start with 10,000, 5000, 3000, or 1000.  Think about it.  Your chances of guessing right by guessing high are infinitesimal compared to your chances of guessing right by guessing low (because you can always reprint to make up the difference, but you have virtually no options to take the number down after printing).  By whatever amount the first print run falls short, the second run makes up.  Two thousand books in a first run, then 8000 in a second run puts the same amount of books in print, usually with more expedient results.  It makes most sense to have lots stock on hand after the market and sales model are established.

One of my rules of the road is: always underprint.  Learn from the print run, and then print the “right” amount the second time.

One can almost never print too few books.  The only wrong number is, paradoxically, the “right” number; that is, the only way you can seriously go wrong with this strategy is to print exactly the right number of copies or just under it.  That unlucky decision puts a poorly selling title out of print prematurely when a few hundred (or a thousand) more books would have kept it going for another five or ten years.  You have no books going forward and not enough demand to make it worth reprinting.  (This kind of problem, though, has become soluble in the twenty-teens by new technologies allowing cost-effective ultra-short runs and print-on-demand.  These are solutions that didn’t exist a few years ago.  The answer now is to print 300 or 500 books, or whatever you need (sometimes as low as 100 is cost-effective if you can raise the price without killing sales or, if not, you can print books one by one as Print on Demand).  When a book is selling only ten or twenty copies a year, the customers are generally willing to pay $5 more.  It is cheaper than having to purchase it as a rare book for $175.

And yes, the wrong number (meaning the exact right number) will happen.  No matter how hard you try to avoid it, if you print enough titles and books, everything will happen.  But through trial and error you can figure out a print-size strategy that works for you.

A related piece of advice: do not reprint prematurely.  Some authors get antsy and agitated when they think that they might lose a sale, so they rush publishers into printing a whole new run of books even before the previous run has sold out.  Three, five, ten, fifteen years later the publisher may still not have sold out of the original batch, let alone broken into the inventory of the premature run.

Our paradigmatic Protecting Children from Danger incident appears in Chapter Three.  The authors stampeded and bullied us into an unnecessary print run for a television appearance, then played innocent and pretended that it wasn’t their fault: “No foul, no harm.  What did we supposedly say?  That was your choice.  Just bad luck.  They should have sold.  I’ve heard that red covers never work.  We all were losers.”  Yeah, but we wouldn’’t have been if they had listened to us.

It is always foolhardy to speculate $5000-$7000 in order to avoid losing a few hundred dollars in speculative sales when you also might not even sell out the original batch, let alone need additional books.

Not long ago, despite the efforts of half a dozen people at our office to deter him, Harvey Bialy did a whole unnecessary print run on his Oncogenes book and shipped them to us.  We were only the distributor, so we didn’t have to pay the printer.  But thousands of extra books did go to Random House and were soon running up more in warehousing each month than they were generating in sales.  And we still hadn’t gone through his first run seven years later.

In summary, I would add that the biggest course adjustment that North Atlantic made following during the slump of 2008-2009 was to even further reduce the size of print runs (both new books and reprints) and reprint more slowly even when there was demand.  When we instituted these new policies, we suddenly got our margins back.  We have bumbled into a wasteful accumulation of inventory such that our equity was dwindling out as wastefully as a leak in an oil pipeline.

3. Accounting

A. General Accounting Issues

Accounting is made up of accounts receivable (AR), accounts payable (AP), royalties (a part of AP), copublishing account management (a combination of royalties, AP, and AR), tax and audit preparation, data management, and statements and projections.  We are pretty much like any business in this regard.

The transformation of our accounting department has been the most dramatic of any module within the publishing between our 1992 out-of-the-house launch and the present (see Chapter Twelve).  Before we hired a staff, I did AP, AR, royalties, and taxes as an amateur.  In 1992 I turned over AP and AR to Dave along with our first payroll transactions plus, unfortunately, check-writing capacity too (how else was he to manage the business and carry out payroll?).

With the hiring of a regular accountant and the adoption of the MAS-90 program in 1993, I couldn’t be hands-on anymore—I didn’t have the computer skills and I didn’t know how to use the program, so I became a cheerleader, advisor, analyzer, and manager.

As our list has grown in the years since 2000, it has placed enormous strain on the accounting department, particularly royalty management.  In a book-publishing venture, there is a tendency to recognize the need for more editors and production people and even additional sales-and-marketing staff to handle the increased workload but oddly to assume that somehow the same accountants can handle almost a hundred new titles a year with all the complexities of additional copublishers and distributed books and special deals, to boot.  In 2008 we finally addressed the logjam of transactions and expanded our accounting department by hiring versatile jazz-musician Al Lazard to assist Allison and take over AR and copublishing charges.  Allison then became our audit point person and royalties/copublishing manager.

Our AR is generated primarily by sales of our books to distributors (domestic and foreign), wholesalers, individuals, stores, authors, copublishers, catalogues, and the like.  These days Random House represents 95% of our  activity and, if you our single remaining overseas representative, Publishers Group UK, the successor to Airlift Books in London, foreign and domestic distributors combined constitute something approaching 98% of our revenue.  This is fairly typical for a press our size in the contemporary market.  PGW never reached even 70% of our total revenue—in fact, all our distributors combined during the PGW era barely got to that threshold.

We also receive revenue from our sale of subsidiary rights to our books, mostly to foreign publishers but sometimes as permissions to use sections of our text and art in other publications and formats (see the next chapter).  Smaller AR items include copublisher reimbursements, donations, interest, sales of property (like old equipment), and rent (back when we had a warehouse and would collect payments on subleased space)

Our AP includes payroll (salaries plus benefits), rent, production bills, freelancer bills, printer bills with printer freight, other freight and postage, utilities, professional services, and numerous miscellaneous items.  Payroll and printing constitute considerably more than half of all AP

I list the management of royalties and copublishing accounts (above) as separate items because each is specialized enough to require its own category and delegation of work.

Tom Andres was our CPA for most of the years through the nineties and beyond, and he wrestled taxes out of the heaps of data that we dumped on him after year’s end.  Yearly audits are now required by the State of California for all nonprofits making over $2 million a year, so making our records auditable and audit-worthy is a significant new activity for our accounting department.  A self-audit of this sort, with a firm selected by us, is different from an IRS or State audit; we are not being examined in the context of violations and penalties but on the basis of verifying our accounting records and methods and improving our procedures.  Our auditor is Armanino McKenna LLP, a firm that works with other publishers and dates back to 1953.

The State-required audit is no small thing, costing us upwards of $50,000 per year when you take into account employee time and auditor fees.  For instance, we have to pay every year to spot-audit Random House’s inventory to make sure the books are actually there and not just computer figments.  Some has to touch and open real cartons.  This means not only paying Random House for employee time at their corporate rates but flying Armanino McKenna personnel to Maryland and back and putting them up at a motel.  It makes you realize how remarkably rigid and stuck our business and legal culture is in the United States.  Just as checking everyone through airlines and having them take off their shoes makes little sense as either a checkpoint or a deterrent, so does flying someone to Maryland to make sure that we or Random House aren’t inventing inventories of unreal books is of little real functional use.  We have reached the point in our failing culture where not only is the unreal equal to the real, but the law and its systems have lost any way of telling the difference or, to the degree that they have not lost the way, to implementing their better judgments.

B. Accounting Programs

In 1998, when North Atlantic/Frog elected to move from MAS-90 to Acumen, it was because it was a more up-to-date and flexible program that was considered state-of-the-art then for publishing.  Data from our sales could flow right from PGW into our accounting modules, generating sums for balance sheets and royalties.  No one had to keyboard every PGW sale, a process that had been as labor-intensive as it was error-fraught.

The conversion itself was arduous.  It took eighteen months, three different outside consultants, and cost over $150,000.  It was complicated and pricey because we had to hire Acumen-trained personnel to salvage what portion of our old data they could and get it into a new system, retrieving and preserving files from MAS-90 or reconstructing them from old reports.  Even with the time and expense, the conversion did not come through as globally as promised.

Once in operation, Acumen continues to be pricey: it is set up as a cash cow for its creators.  Maybe all programs are—you basically lease modules and pay your rent monthly.  One may need fewer employees than in 1970, but software firms try to soak up most of that savings by not only their products but proprietary ownership of processes.  In addition, software systems are always getting updated so, unless you are on an ongoing fee basis with a company, no matter how plush your original investment, your purchase and system will become worthless without a leasing arrangement and new software.  Few things in human history have lost value as fast as computers and software.  They have put the old planned obsolescence of washing machines and autos to shame.

From the standpoint of record keeping, Acumen’s domain at North Atlantic represents only the period since it was installed and put in operation (January 1, 1999).  All our pre-1999 historical data was lodged solely in MAS-90.  In principle our sums and balances have been carried over into Acumen, and these, while usually landing on the correct author, have not always landed on the correct title, for the conversion process tended to take all of an author’s or copublisher’s prior balances for his or her books in MAS-90 and place them randomly in the record of a single title or edition in Acumen.

Since Acumen also separated copublishing revenue from royalty revenue in a way that MAS-90 did not, most copublishers found that they now had both a royalty record and a separate copublishing record and moreover that their total MAS-90 historical activity landed exclusively in one or the other.

Right from the beginning of Acumen’s installation our authors were confused by its royalty statements, which are formulaically accounting-based rather than user-friendly and make it nearly impossible for a recipient to tell how many books actually sold in a period, let alone when or where.  Credits, debits, and totals are Acumen’s forte.  It doesn’t show much about their sources, what they are, and how it arrived at them.   One reason for this problem is that our version of Acumen is cash-based in order to match our contracts, thus it works continuously off a full historical version of each royalty account, showing transactions from past royalty periods, as far back as a randomly selected cut-off horizon.  This disguises new earnings in old ones and makes it appear that we are crediting these earnings and/or making the charges anew.  There is no simple way to draw lines or present clear-cut slices of information progressively through sequential time frames.  Clarity of data-presentation is not Acumen’s focus or strength, though it has many others, including marketing tools that are unfortunately more or less useless for us because we use Random House at an individual-account level.

I have always been a great believer in the cash (as opposed to the accrual) concept because it means that we pay out what we get paid for.  By instinct rather than knowledge, I wrote our original contracts on a cash basis and carried that framework into all our new templates.  Whereas most publishers are required to pay a royalty per book at the time of sale (regardless of when or even if they collect the money), we are required to pay only at the time that we are paid.  Thus, if we are never paid, we are never obligated to pay.

On the other hand, if our distributors, who are on an accrual basis, make a sale, they are required, short of their own bankruptcy, to pay us for that sale, even if they are never paid.  That is what it means for them to guarantee our receivables.

If you can set things up in this manner, that’s ideal, especially for a small business squeezed between two giants (giant distributors and a huge list of authors and copublishers).  Accrual contracts on the author/copublisher side or cash contracts on the distributor side leave an independent publisher in a position to be crushed by bankruptcies or other industry failures.  Our cash-based contracts with authors and copublishers would have saved us in the PGW bankruptcy if things had turned out far worse than they did.  In the most cataclysmic scenario, we would have gone bankrupt too because we would have had to pay everyone off, even if we were not paid ourselves.

This is a risk few people realize about business.  When links in the chain of cashflow are broken, that stops the flow of cash but not of liability.  See Chapter Twenty for the disposal of liability in bankruptcy proceedings.

Choosing the right accounting program is a crucial aspect of publishing.  While I do not regret Acumen to the degree that I did MAS90, I do nonetheless regret it and wish that programs were not so logistically difficult and costly to change.  It would be a massive upheaval to convert from Acumen now.  In that sense accounting programs are almost like marriages.  They are pretty much “till death do us part,” with divorces serving as financial and operational black holes.  PGW-friendly Acumen turned out not to be Random House-friendly, and it cost us months of lost work and thousands of dollars to get it to be able to receive and handle RH’s data-stream.  And new, expensive glitches, especially in the inventory module, continue to pop up.

Before purchasing an accounting program, it is worth looking ahead and imagining what might arise in the future and whether the program will be flexible enough to handle it.  It is also good to have one that will generate readable, author-friendly statements so that an in-house accountant does not have to waste weeks, even months, constantly explaining and translating newly-arriving statements for recipients.

C. Managing Cash and Budgetting

Until Mark Ouimet came on board in 2004 our relationship to accounting was essentially chronological and linear.  We deposited checks and paid bills as they came in.  We stayed within cashflow without much travail and, when we didn’t, we borrowed from our savings account at Seymour Zises’ Family Management firm where our money was managed.

Mark started a process of creating monthly balance sheets, profit-and-loss statements, job-costing and budgets with a modicum of success, and Doug Reil has picked up and improved this project.  But it was not something endemic to our business, so it has been a long journey to the present esprit.  The annual audit pretty much makes it essential, so we have come in entirely from the cold.

Payroll and payroll/benefits accounting and associated tax accounting have been handled for years by an outside firm, Paychex.  They are specialists and, in today’s complex world of benefits and taxes, it is not only impractical but suicidal to have anyone but a specialist carry out and book-keep such tasks.  Paychex has developed global templates, and they run everyone’s activity through their software such that the entire range of activity under payroll is standardized and legal.  The brilliance of such a business is that, once the very complicated template is created, no doubt at huge expense to investors, the formula can handle pretty much any business cost-effectively.

Payroll is like a utility.  You can’t make your own phone service or electricity; likewise you can’t cost-effectively do your own payroll, though it might seem more plausible initially than water or gas.

Our biggest complications historically involved NAB/Frog cross-accounting, benefits, and royalty reconciliation.

From the moment Frog was instituted, we had a legal and ethical responsibility to log all company expenses (and some revenues) in a way that could be allocated, more rather than less accurately, between the two very differently structured companies, a nonprofit and an S-corp.  The largest allocatable item was payroll, as employees necessarily divided their hours between Frog and NAB.  But rent, utilities, insurance, and office supplies were among many other items that needed allocation.  Production and printing expenses, on the other hand, were incurred book by book, hence by the separate presses separately from the beginning, so they did not need allocation.

In the early years of Frog, I made gross allocation generalizations that would not have come close to passing muster with any taxing or auditing agency, especially in the dicey situation where Lindy and I owned fifty-five percent of the for-profit that was sharing staff and facilities with a nonprofit of which we were Board members.  But we didn’t have the resources or capacity to log hours and expenses on the sort of quarter-hourly basis required.

Ultimately the beginnings of that capacity and organization developed with new accountants.  Ed Angel and Tom Andres built logging systems into payroll and then devised formulas for the smaller overhead items.  Percentages, depending on the item, were based on either overall sales volume or number of new titles published per press.  The applicable NAB and Frog percentages for the selected category were then multiplied, respectively, by the total cost of the item, and the shares were distributed into the balance sheets.

Because the Frog-NAB allocation was one of the more time-consuming and complex book-keeping items that we had to deal with after the founding of Frog in 1993, getting rid of its immense burden of extra labor and cost was a huge incentive when we finally folded Frog into the nonprofit during the PGW bankruptcy, as you will see if you read Chapter Twenty.

In addition, under the allocation system, Frog’s ostensible equity value was fictive—it didn’t exist on its own.  From the beginning it was parasitic on NAB, a fact that Seymour, as the owner of thirty-five percent of the shares, came to realize to his dismay.  He acceded to our dissolving Frog gracefully because he understood (and regretted) that it would be hard for our S-corp ever to be valued and sold as an entity itself insofar as it used NAB staff and operations for everything.

D. Benefits

Nothing so much tagged our transformation from a small literary press to a trade publishing business as employee benefits.  It took a series of medium-sized steps to get from interns to part-timers to full-time employees and then to a payroll with withholding, unemployment, Medicare, etc., through Paychex.  It was then another big step conceptually to institute a healthcare and dental plan for employees.  And it was still another step to add pension benefits and a 401k option.

These days it is almost a necessity to offer benefits to employees, but we didn’t just jump in with the rest of the business world.  We first had to learn to think of ourselves as a human culture and a three-dimensional habitat rather than a successor to Io and its subscription list.  The transition took place by degrees during the mid-nineties and then was consummated as a direct outcome of Lindy’s and Ed’s comparative analysis of benefit plans.  Ed brought prior understanding from other workplaces, and Lindy collaborated with him on vetting individual plans, bringing salespeople in to present their products and then choosing which ones would really be instituted at North Atlantic and enrolling us.

Ed and Lindy collaborated for years on taking care of insurance, with Lindy focusing on health, office, and directors’ insurance and Ed on Workman’s Comp and the pension.

First we created a benefit concept and then gradually refined it to suit our circumstances.  We decided how much the publishing company would contribute and correspondingly what the employees should chip in, modifying as necessary as we went along.  For instance, we paid full health benefits initially and then, when that became prohibitively expensive as well as rare among businesses, rather than cut back benefits, we split the costs thenceforth 50/50.

We heavily biased all our benefit programs in favor of longevity, as this not only helped keep staff but also reduced the payout cost for short-time employees.  Our slowly-vesting pension was unusual for a company of our size, but it did encourage staying put if one actually liked the job.  Employees could retire with a livable wage, presuming the world economic system itself held up that long.

2011 update: it didn’t exactly (hold up, that is).  The pension began to gather steam at a shocking rate and, within a few years, would have absorbed all the revenue of the company.  No big surprise.  The states of New Jersey, Indiana, etc., have discovered that too.  Defined-benefit pension plans only work if revenue and markets keep expanding because what is defined is what you promise (the benefit) not what is actually accrued in the plan.  When Lindy and I created the plan with the help of my uncle in the late 1990s, we did not understand key things and Lindy got a rude surprise at her own retirement ages: the supposedly guaranteed benefit was based on a promised, yes, but there was a range.  What we had been told would be in all staff pensions at retirement turned out to be a third of that amount because interest rates and earnings had dropped (the so-called boogie on which the plan was based was unsustainable) and because we only paid the minimum required into the plan.  In order to maintain the underlying value of the pensions, we would have had to increase our payments dramatically every year.  But then we would have dropped the plan much sooner than we did.  As it was, we got out just in time, just before it swallowed us.  We have since switched to an employee-contribution 401K, just like most other businesses at our scale.

Yes, Lindy and I got into this to publish esoteric and literary manuscripts, but America and its capitalist recruitment is unrelenting and well disguised.

E. Royalties

In a publishing company like ours (lots of distribution and copublishing contracts), about one-third of all revenue from sales is converted automatically into royalties.  In a more normal publishing venture without such agreements, the amount is half that or less.  Our deals mean that a lot of money goes out in royalties, $200,000 twice a year during early aughts and approaching double that now.

We pay royalties at the end of June and the end of December, but most of our contracts specify that June statements and payments only have to go out to people whom we owe at least a base-level sum.  We can always send an extra payment to someone who asks for it, but we don’t want to be legally bound to generate and process too many three-dollar checks twice a year.  A dollar cut-off point for June payments is unusual for publishing, but it serves us well from a human-resources standpoint.  2011 update: it has become more efficient to run all the statements twice a year.  Above a certain size, you waste more time figuring out which ones to run than just to drain the whole system.

Some of our larger accounts, especially whole publishing lines that we distribute, are paid quarterly or even monthly.

We get out our checks promptly—no reason to hold the money if we have it, as delays generate more distraction than interest, especially at today’s low rates.  Most large publishers, however, dawdle the accounting and payment of end-of-the-year royalties well into March (the legal ninety days limit) and even longer.  Likewise, their June royalties may show up in September.

Although not generally considered that way, royalties represent a continuous float, a loan from the authors and copublishers to the publisher.  Even when we pay our June and December royalties, respectively, we already owe three to four months more royalties insofar as the royalty period ends three months before the payment date, plus add another few weeks for payment time.  When the next royalty checks are paid, the float has graduated to nine or ten months; then that is disgorged.  In fact, much of the world runs on float, so it is lucky that time never stops.  If it did, there’re be quite a train wreck.  In fact, there sort of was in 2008-2009.

You should always remember what you owe in royalties and take it into account when considering the solvency of your business.  If we hypothetically stopped our business tomorrow, we would still need money on hand to pay existing royalties—and this does not even broach the issue of continued sales of backlist.  The moral is: we always seem more solvent than we are because we are holding unpaid royalties.  If they transferred daily into author and copublisher bank accounts, we would have quite a bit less margin.  Yet, as long as we keep publishing, this “loan” will continue.

As a related issue, I will mention a curious mathematical feature of our recent distribution relationships.  Random House pays us thirty days quicker than PGW did for sales, but it also withholds a working percentage of revenues from those sales against future possible returns.  Because it simultaneously deducts current returns, Mark considered the returns reserve, roughly equal to one month’s payment, an odious and somewhat inequitable deduction.  I, on the other hand, was strangely cheerful on this matter because I considered it a wash when taken into account with the earlier payment.  He and I never could agree, so I finally sat down and calculated one full year of earlier payments with returns withholding and found that it was true that we were always approximately where we would have been with PGW.  The accounting was different and based on a different logic, but the fiscal result was the same.  In a sense, we were paid for different sales but at the same time and in the same rough percentage as at PGW.  The way I phrased it for Mark then was: “It is like Zeno’s paradox in reverse; they keep trying to take a returns reserve but then every time they pay us thirty days early they never quite get it, so the arrow never reaches its target.”

Well, it is the same with a publishing company and its royalties—we keep trying to pay our collective authors and copublishers but we are always still holding one full cumulative royalty period or more in the bank—not a lot for any one recipient but approaching half a million dollars.  Imagine what the amount is for a very large publishing company that also always true to build in another three-months royalty lag-time.  The arrow never quite gets there.

When Mark Ouimet arrived, Jess O’Brien was still doing the royalty and copublishing accounts, from entry to calculation to payout, because he had volunteered five years earlier, and no better idea had sauntered along in the meantime.  When Jess departed, Mark commented wryly, “I have no idea why the martial-arts editor was doing royalties here.  An accountant should have that job.”  The royalties were then transferred into Allison’s domain, and she gradually mastered them at a level that Jess couldn’t attain without accounting knowledge.  For Allison they were at least real.  For Jess they were half a game, half a bother—chores to get of the way for the good Taoist and esoteric stuff.

I used to check Jess’s statements carefully over many weeks as he prepared them, double-checking his and Acumen’s calculations against, for instance, PGW reports and discount rates.  I found at least $3000 worth of mistakes every time and more than $10,000 three times during his tenure.  That more than paid for my labor.  These days when I check, I find a few hundred dollars at most.

Jess did spectacular royalties for an amateur, and the mistakes I uncovered were not the result of his oversights or miscalculations but the inevitable outcome of having a second eye on things.  They represented things like a copublished book on which there were wrongly no production chargebacks or a failure to input a parameter in a royalty record such that an author then mistakenly received payments for books that he himself bought or got paid for review copies or remainders.  The software didn’t err, nor did Jess, but mis-inputting of parameters along the way introduced wrong pathways of dataflow.

Jess’s idiosyncratic royalties were by almost any conventional standard, epic works of abstract mathematical sculpture and informal narrative as he massaged them, handcrafting and fine-tuning details at several stages before the parade of statements went out.  By accounting standards they were a lot of journal entries in number form, as he struggled to balance commonsense resolutions, his own peculiar sense of ethics, and irresolvable anomalies.

I could not read and recalculate every one of Jess’s royalties, so I went by the formula of: if something doesn’t look right, check it.  It doesn’t matter that a computer generated it.  Go back to the source of the data.  Among the kinds of clues that got my attention were: average revenue to the author too high for the book price; too many (or sometimes too few) sales for what should be expected from that title; a very large monthly sale or return that could not be explained by the corresponding number on our PGW statements; or, as noted, a very spare copublishing column.

Errors underlying these anomalies included missed expenses and charges, overpayments for books essentially on consignment, external data-flow errors, and internal inputting errors.

I think of programs generating royalties as pinball machines.  The sales are the metal balls, and they have to go through the right slots in the right order, with percentages siphoned off to the appropriate parties.  When money is drained out at each port by percentage, the number from which the percentage is taken has to be at the right stage of incremental decrease.  The wrong size or shape ball or the wrong slots or, more deceptively, the right slots in a misaligned order, each will lead to drastic miscalculations.

On two occasions after Jess left, I investigated an anomaly that appeared flukey and minor and then found it to be the tip of a gigantic iceberg.  Just one wrong-seeming number can indicate a vast global mistake.

For instance, I found an error one year that was the result of an incorrect parameter for translating PGW reports into royalties, and it led to our being about to overpay $150,000.  Another year I found an anomaly of a similar sort that had us underpaying by $250,000.  These both were generic in the data entry, hence dataflow through the system, so they had to be corrected painstakingly by hand.  With the assistance of temps, Allison had to fix these records on an account-by-account basis.  In fact, they were a major reason why we parted ways with our Acumen consultant; they both involved either loosely spoken advice that he threw out without digging deeply enough into what he was being asked, e.g. the implications of misunderstanding a casual comment—or his actual incorrect setting up of the data streams.

Until one knows that software is performing right, spot checks are necessary because there are potential icebergs anywhere.  Only their tiniest tips may show as anomalies, much as eccentricities in the orbit of Uranus eventually led to the discovery of Neptune and so on through the Plutonian planets.

Once, Jess slipped a decimal point such that we paid a homeopathy author approximately $10,000 too much.  That author spent years serving up reasons why he should not refund the money: “Prove to me it’s an error” followed by “I’m nonprofit, and it’s illegal for me to return money” followed by “I put it into a fund, and my board won’t let me get at it” followed by other, irrelevant complaints about his account used as tit for the present tat.

Since the book was copublished with HES and Dana Ullman is a high moralist, he went at it with this guy for years, leading to escalating back-and-forth accusations between the two of them such that we were soon embroiled in a flood of red herrings regarding stuff that happened, for instance, years earlier with his Dutch and Russian rights.  The author had conveniently changed the subject by blaming us for old activities from the distant past, refusing anew to return the overpayment because of supposed unfixed malfeasances on our part.  He just didn’t want to write that check.

Luckily his book was an earner, so we charged him high interest on the money and took that plus the principle out of his royalties.  Yet it was still seven years before we came even again.

The following have been ongoing additional royalty issues: What to do when the sales numbers do not match the royalties in the AR module?  How do we deal with authors’ and copublishers’ unpaid bills for books and production?  How much do we withhold, account by account, from royalties for books that are “sold” to wholesalers and stores but are still in stock and unsold?  Where do we send payments for an author who has disappeared with no forwarding?  How do we reconcile final debits or credits and ongoing liabilities (say for unauthorized returns) on essentially out-of-print books?  When do we charge overhead or warehousing to copublishers and publishers that we distribute and how much percentagewise?  What is too small an inventory or overstock item to merit a warehouse/overstock charge?  Is the warehousing charge an activity/facility fee or a matter of pure square footage?  How do we pro-rate and allocate freight-pass-through, microfiche, and statistical-shortage charges passed on to us by PGW?

Many of these issues no longer exist, as we have simplified our system and also insofar as Random House does not distribute expenses in the same way.  There are new issues of cost distribution, but they are broad and conceptual more than nit-picky.  For instance, we have had to figure out how to calculate overhead with copublishing partners in a Random House situation in which charges that used to be included in the PGW discount rate have been transferred to actual billings.  Because the costs are no longer embedded in the discount rate, we can no longer retrieve our costs simply from a percentage of sales.  Here is a draft of part of a letter prepared in 2010 to send out to partners as part of the beginning of a discussion to deal with some of these issues:

In many ways North Atlantic is doing remarkably well.  We are a rare press these days that is growing, if slowly, in a bad economy. With a flourishing cadre of authors and topics, we are on the cutting edge of ideas, presenting new paradigms for global transformation as well as a series of radical visions for humanity and the planet.  We continue to add authentic primary-source authors and texts seasonally.  In addition, we have started a new imprint, Evolver Editions, in collaboration with Daniel Pinchbeck’s Reality Sandwich and Evolver.net, which will lead to more visibility and better marketing for many of our titles.  We are aggressively exploring new audio and digital markets to replace dwindling print ones.

All of this activity is synergizing with our outreach on your own books, as we build a unique library and service bureau of meanings, meditations, and practices.

The problem is, despite all these positives and an optimistic outlook on many fronts, we have been struggling to break even, and actually have lost money in many recent months. This is not a healthy situation for us, or our partners, and it is also not sustainable in the long run.   Our stability and viability as an organization are at stake, so it is crucial that you understand the full context and implications of our situation.  You are at the core of our business, and without your trust and cooperation we cannot begin to resolve our dilemmas.   We are reliant on you, our partners, to help us move forward and remain sustainable, before our situation becomes critical.

We are in the process of reviewing many aspects of our business practices and agreements, with the goal of increasing operating efficiency while assuring that we are able to function in a financially sustainable way for the long term. Having identified specific factors that have increased our overhead costs and put us in the red, we have made the decision to raise the overhead percentage that is passed through to our co-publishers to 18% in order to split the costs equally.

There are a number of discrete events driving this shift.  The most significant is the change in our distribution from Publishers Group West to Random House Publisher Services in 2007.  While RHPS gives us new services, stronger market penetration, and increased sales, there have also been some financial impacts that are less obvious.  With RHPS, many costs that were previously rolled into the PGW discount rate are borne by NAB as separate fees and additional overhead costs.  We have attempted to cover these costs since 2007 when we switched to RHPS, but it is clear to us after this analysis that we need to share these with our publishing partners, as they were formerly shared automatically within our discount.

Additionally we have been calculating overhead inaccurately for many years, applying it only to your royalty portion and not to the overall net receipts.  Thus, most copublishers have only been charged half of their portion of the overhead.  The past errors are water under the bridge, and we have no intention of trying to recoup this revenue, but the longstanding mistake has accelerated our difficulties.  And in our ongoing effort to minimize manual calculations, we will no longer apply overhead separately on your royalty statement.  Instead, the new overhead rate will be rolled into your royalty percentage.  (example: Your old royalty rate is 50% of net, we will apply the 18% overhead percentage, creating a new royalty rate of 32%)

F. Statistical Short, Microfiche, Freight-Pass-Through, and Return Reserve

The following descriptions, modified here so as not to be entirely outdated, were written up originally to help baffled (and outraged) authors during our PGW years.  They are worth preserving, at least in principle, because they show certain things about the book business, things that have correlates in almost any business.

Statistical Shortage

Explanation: Chainstores assume that they do not receive all the copies of books that are shipped to them.  It is an outrageous claim, but they enforce it by means of chargebacks to Publishers Group West which then charges them back to us on a statistical percentage basis.  Thus, any books that are heavily purchased by chainstores have a shortage percentage automatically deducted from their sales.  In essence, chainstores are claiming that a certain percentage of books, something like half a percent, that they surely received and sold were in fact never received, and they do that not on a concrete, quantitative basis but by making a statistical claim against all books.  This is a dishonest business practice, but there is nothing we can do about it.

Many large publishers absorb the charges in full and do not apply to royalties, but they are too hefty for us to bear, approaching $60,000 a year with so many copublished and distributed books.  Like PGW we need to pass the percentage expense on to those who share in its obligation.  Some publishers may actually book-keep these charges as returns, which technically they are—they are returns of phantom books.  We break them out separately as “statistical-shortage fees,” charging them back at rates corresponding to the account’s share of the profits or losses.  Very tiny for most accounts, stat shortage adds up, so must be recouped in part.  Of course, you can imagine how dramatic the positive bottom-line effect is in the chainstores themselves.

Statistical shortage is a boondoggle.  When PGW did its own in-house analysis, warehouse employees found that they were as likely to over- as under-ship and the statistical deviance either way was fractional enough to be irrelevant, especially as it tended to balance out.  Chainstores not only assumed a one-way street but then multiplied that deviation by five to ten times to get their stat-shortage numbers.  Quite probably they intentionally selected a few bad eggs and conveniently applied them to the whole batch.

Stat shortage is represented by the chains as a cost-effective way to average undershipments and save everyone a lot of nit-picky labor and accounting work, but it is actually is the sort of aggressive financial technique that business-school graduates in managerial positions at corporations spend their days between coffee and pot breaks dreaming up.  It is making money by juggling categories.  There is no new product and no new value, but the corporation reaps a bonanza on stat shortage each quarter—pennies per incident but millions of dollars per year for the concept, as it gets multiplied over the entire territory.  Like the prime-mortgage crisis, it represents an accumulation of individually insignificant anomalies scammed into a tidal wave.

I believe that the reason that chainstores imposed statistical shortage rather than simply played hardball for an extra half point of discount was that they surveyed the landscape and figured that they could effectively do both and squeeze out the maximum—plus those few bad eggs (undershipments) gave them a scintilla of legitimization.  It is once again the game of turning pennies into fortunes—an eye for an eyelash.

I’m afraid that much of American business is based not on operating and industrial capital (as per Marx) but in shifting around dollars of speculative capital, which is a bird of an entirely different genus: playing financial games in place of creating real value.  It is a vast Ponzi-like scheme sponsoring the parasitic theft of value by companies that are nothing but middlemen in others’ economic activity.  Yes, it is doomed ultimately to collapse under its own weight, but by then they hope all to be retired millionaires with security forces around their mansions.  In China they would be executed.

In the long run a company or a country cannot have mere financial services and rate manipulations as its major money-making, value-creating modality.  Remember Walsworth and its discounts from shipping companies that were not passed on to customers.  They were making more money off freight theft than printing!

The only way to avoid statistical shortage is not to allow books to be sold to the chainstores, which in the PGW era meant pulling them out of distribution, e.g. putting the book out of print.  There was no way out of the charge back then.

RH either does not get charged stat shortage or does not pass the charge on to distributed publishers.  In fact, distributors should not pass the charge on, as the issue of short shipments is more truly a freight matter to be resolved between the distributor and its account.  PGW instead treated it as something indefinable and ugly that was imposed on them and not their fault, so they construed a way to pass it on.  Since it was basically a fraud, they deemed that it wasn’t a freight issue and its pain should be spread around.

Microfiche

Explanation:  This was primarily an advertising charge—a requirement for carrying books placed by PGW at various chains and wholesalers.  Interestingly, library wholesalers Baker and Taylor and BroDart used to send microfiche bills straight to the publisher but made payment of them optional, so we always took them up on the “optional” side.  Once PGW began getting them, they routinely paid them and charged them back to the publishers.  There was nothing we could do about it.

One notorious New York area wholesaler used to pad his microfiche list; he infallibly beefed it up with double entries of the same book under slightly different titles, revised and original editions of the same book, books long out of print, and books that were not even published by us.  Only by scouring its monthly lists could one find erroneous entries.  They were probably counting on the fact that, at only $3.50 an entry, it was not worth the trouble for most publishers to check.  Even when we did prepare a list of bogus entries and it back through PGW, it was difficult to near impossible to get them to remove the items.  The wholesaler felt that they had a divine right, once a title made its way onto the list, to continue to charge it each month, whether it was real or not, and there was nothing we could do about recouping it or even refusing to pay it because PGW just paid and passed the charge on.

This reminds me of a different problem that PGW used to confront with chainstores.  The chain would ship back tot hem pallets of books that were not PGW’s and then deduct the returns from the money they owed.  An executive at PGW would of course routinely object, challenging the charge, and then the chain would offer to negotiate and compromise—charge only 50%.

“But if they weren’t your books anyway, why should they get anything?” I asked.  “Shouldn’t you get your money restored and also have them pay the freight of sending the books back?”

“Forget the freight,” a PGW manager once told me.  “You’ll never recover that.  They make everything a negotiation, even their own mistakes.  It’s always, let’s deal.  That way, they get something, even if they don’t deserve it.  It’s not about fairness.  It’s a ruse for racketeering.  They’re the six-hundred-pound gorilla; that’s how.”

The modern computer era has done away with microfiche charges so far as I know.  Who needs microfiche when you’ve got laptops and iPads?

Freight Pass-Through (FPT)

Explanation: A once-commonly-used practice in the book trade, FPT was originally a creative attempt to spread the cost associated with trying out titles by literally “passing it through,” back from the stores to the distributors, publishers, and authors.  It has been invoked over the years in a variety of contexts, usually with the publisher lowering the price of a book in accordance with its shipping cost.

When Publishers Group West transferred books to large accounts like Ingram, Bookpeople, and New Leaf, one of the two parties obviously had to pay the hefty freight bill.  For years PGW grabbed the check in order to make their products more attractive.  In 1996 they decided that the cost of this freight was equal to their entire annual profit margin, so they adopted freight pass-through.  Instead of paying for the freight to wholesalers, PGW charged it to them, but to replace the gratis freight, they lowered the cover price of the book by 1%.  Thus, a $16.95 book became a $16.78 book, and this new cover price was maintained in all systems affecting this transaction, including the computation of royalties.

Books sold to FPT accounts had a lower cover-price basis, and in that manner the publisher and author were forced, in effect, to pay a fraction of the cost of moving their books—only it wasn’t called freight; it was called freight pass-through: passed through into the cover price as a scaled reduction.  In the case of author royalties, it would then register as the number against which the percentage was taken.

This practice was used in some form by virtually all mainstream publishers to make books more attractive to certain accounts, and it was approved by various authors’ guilds and trade alliances as a cooperative sales inducement beneficial to all insofar as everyone was charged and benefited incrementally.  I think that distributors and publishers liked it better than other wholesale maneuvers because some of the burden was transferred imperceptibly by an algebraic trick to authors.  It was a creative to load the cost of freight into a rubric that dinged the author and made freight commutative with cover price.

Return Reserve:

Explanation: Large presales to other wholesalers (Ingram, Baker and Taylor, BroDart, New Leaf, etc.) may later get returned in large numbers.  Yet these initially show up in a royalty report as “sales,” perhaps giving a falsely optimistic picture of how a book is faring.

In fact, presales to wholesalers are little more than stock transfers by the distributor to regional middlemen.  These books may never even leave the wholesalers’ warehouses, especially if there is insufficient bookstore demand for them. They will eventually be returned to the distributor and deducted from our account.

The sole reason we reserve the right to withhold some of an author’s earnings against potential future returns is to protect ourselves against large stock transfers, books that are technically “sold” but not sitting on store shelves (or in the case of chainstores, sitting on the shelves but not selling as per online-accessible rate-of-movement numbers).   They are headed back to us, if not already packed up for shipment.

We do not withhold earnings unless the books at wholesalers exceed likely future sales.

Even with great care over the years, we have overpaid royalties in the range of $100,000 total, and no author has yet reimbursed us for overpayment in accordance with our contract.  But that is a pittance compared to what must large publishers must overpay in royalties year after year.

Chapter 15: Departments 3: Operations, Rights, and Contracts | Table of Contents

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