SIR CRISPIN DAVIS is a bit of a smoothie. Appropriate, then, that Reed
Elsevier, the publishing group he has run for the past seven years, has made
a suitably smooth transition to an online world.
The company has mostly avoided the digital storms that have battered media
companies as varied as ITV, EMI and Trinity Mirror. Reed’s leading positions
in science, legal and business publishing — it owns The Lancet, Lexis Nexis
and Estates Gazette — have enabled it to secure a steady increase in online
revenues from its sophisticated professional and academic customers.
Electronic sales have grown from $1.1 billion (£600m) in 1999, when Davis took
over as chief executive, to an estimated $3.7 billion last year.
The only real blots on Davis’s copybook have been the problems at Harcourt,
the group’s textbook and testing business. The education division was put up
for sale after it failed to seize opportunities in a strong US market, not
helped by the mess it made of delivering exam papers to schools in Illinois.
Even here, Davis has been fortunate. Education is the group’s smallest
business; the damage to profits was relatively modest; and Harcourt is being
sold at a time when private-equity firms are prepared to pay generous prices
for such businesses.
“We expect to sell this business at a decent profit,” said Davis last week.
While many traditional publishers are still trying to generate meaningful
online revenues, Reed Elsevier has already moved on to a second phase of
development. Having provided online access to its medical journals and legal
databases, the company is seeking to create software tools that are intended
to make its products a constant companion for many doctors and lawyers. The
unlovely jargon for this is “workflow solutions”.
Davis explained: “Seven years ago Reed Elsevier was essentially a print-based
publisher, providing proprietary, must-have content through books, journals
and magazines. Three years ago we had moved, to an important degree, to
provide that content online, with the advantages of speed, accessibility and
[more] linkages.
“Today, if you visit a doctor in Florida, he will access your patient records
online through our EmpoweRx platform. Through our MD Consult, he has access
to the largest database of clinical and diagnostic data in the US. He types
in your symptoms and instantaneously on screen will come relevant diagnostic
information, often with visuals.
“The doctor then links back to EmpoweRx, which accesses the largest database
of drugs, to help him make the prescription. He then goes on to First
Consult, which sends your prescription to your local pharmacy.”
The goal of this approach is that Reed Elsevier becomes much more than an
information provider. The reward for the company is that its customers
should become more loyal (or dependent), extending the length of contracts
and improving profit margins.
“That puts us in a much stronger position,” said Davis. “The more embedded we
become, the more important a provider we will be for our users. As our
customers’ productivity improves, we are a more valued partner, and that has
value for us in terms of additional revenue streams.”
Davis admits that it is still early days. Even in healthcare, where the
workflow approach is most advanced, only about 10% of US medical practices
have so far embraced it.
Nonetheless, Reed Elsevier believes the potential is huge. “We are giving
significant added-value to our customers,” said Davis. “We are talking to
the state of Florida about a state-wide contract on our drug database which
will save them tens of millions of dollars through cutting out waste,
cutting out inefficiency, cutting out poor prescribing.”
The company claims that First Consult can help prevent doctors from
prescribing the wrong medicine, or overlooking a cheap alternative. The
system will flag issues such as a drug not being suitable for pregnant
women, and highlight the availability of less expensive off-patent
treatments.
These developments are changing the nature of Reed Elsevier as a company. Six
years ago the group employed 400 technologists; now it employs 4,000.
This has produced a challenge for its 3,000 or so salespeople. “These
salesforces were used to selling books and magazines and journals,” said
Davis. “The challenge of transforming that salesforce to sell quite
complicated software and online products is massive. We’ve had to go through
all of that.”
Davis sees the bulk — perhaps 75% — of Reed Elsevier’s business moving online
in the next decade. The group’s strategy projects steadily increasing
margins.
This is a simple story, and one well understood by the City. Some analysts,
however, have complained that it is difficult to see the catalyst that will
light a fire under Reed’s share price. Over the past three or four years,
the shares have badly underperformed both the FTSE 100 index, and rivals
such as Pear-son, now dominated by a large education business, and United
Business Media, which competes in business magazines and exhibitions.
Although Reed’s record has improved, its shares have yet to enjoy a rerating
on the back of the proposed sale of Harcourt. The disposal is forecast to
dilute next year’s earnings by 5% or more, although the damage will be less
if the business fetches £2 billion.
The group feels it deserves better for its earnings record. Aside from
currency, earnings have grown by at least 10% in five of the past six years.
Reed’s lowly standing in the City can largely be blamed on the troubles at
Harcourt. Like scientific, medical and legal publishing, the education
business should eventually move online as teachers use technology to improve
tuition and assessment.
However, this transition has progressed more slowly than Davis might have
hoped.
In scientific publishing, he pointed out, over the past seven years electronic
revenues have grown from nothing to three-quarters of the total. It’s a
similar story in legal, which now makes two-thirds of its money from digital
products.
But in education, Davis said only 10%-15% of the revenues come from online
sales. Worse, it’s hard to be confident about how quickly the school sector
might catch up.
“Whereas we can see with science, legal and medical a very clear digital path
that’s attractive — for our customer and for us — in school education, it’s
not that clear.”
Davis spent several weeks last year travelling around America talking to state
heads of education about their digital strategy. “You get a very, very
confused picture,” he said.
In contrast, scientists, healthcare practitioners and lawyers “will give you a
crystal-clear picture of where it’s going and what they want from us. It was
clear where the more active opportunities were and where we were going to
get better returns”.
In truth, Harcourt has not helped itself. President George W Bush initiated a
big investment in education through his No Child Left Behind law in 2002,
unleashinga frenzy of testing in the US school system.
Harcourt’s assessment business struggled to cope with the demands. Besides
producing exam papers with missing pages and other flaws, Harcourt was
repeatedly found to have given hundreds of students the wrong scores.
Its rivals also made mistakes, but not on the same scale. Illinois has only
recently published its 2006 test scores, more than four months late. The
debacle cost Harcourt most of a $44.5m contract.
It has also been fined or found to be at fault in Nevada, Georgia,
Massachu-setts, Connecticut, Virginia and Hawaii.
The sale of Harcourt, which is still in its early stages, will leave the group
with three similarly-sized divisions in Elsevier (scientific and medical),
Lexis Nexis (legal and risk) and Reed Business (trade magazines and
exhibitions).
It will also increase the proportion of online revenues to close to half of
the group total. “That’s a real achievement in six or seven years,” said
Davis.
Much of that growth should come from Asia, where Reed already has a $1 billion
business. It is doing well in Japan and India, and is establishing itself as
a leading online legal provider in China.
At 58, Davis says he has no plans to retire. “Why does everybody want to get
rid of me?” he asked. “I love it here. I think this is a very good company
in a fascinating market going through a real period of change. I have no
interest or plans to go anywhere else.”
The workflow revolution is set to turn Reed Elsevier into more of a software
and services company, and Davis admits the culture of the group is changing.
However, he insisted: “The heart of Reed Elsevier has not changed. It’s still
about authoritative leadership brands and must-have proprietary content. At
the end of the day, that’s what our customers are buying.”
