One of the eye-opening lessons of the downturn is just how few industries are truly recession-proof. Textbook publishing, long seen as a dependable cash cow of a business, is not among them, as many in the industry have learned to their dismay. At Houghton Mifflin Harcourt (HMH), the nearly 200-year-old publishing conglomerate, the degree to which the recession affected the company came as a shock — but it was a shock that galvanized the finance team to better understand the numbers driving the business. That, in turn, spurred the company to change its approach to forecasting, budgeting, and, ultimately, sales.
“In the beginning of 2009, we were almost still in denial about the depth of the impact [of the recession],” says Hazel Hughes, senior vice president of finance and business control at the company’s K-12 division. “But we realized that our current tools weren’t what we needed to help us understand how bad it could get.”
While HMH’s employees and managers certainly monitored the financial crisis and the recession, “we were focused too inwardly,” admits Hughes. The finance department still relied on historical data, published textbook adoption calendars, and pipeline information from the sales force to construct its budgets. “We were trying to get our intelligence from the normal sources, but this wasn’t a normal time,” she says. “We needed to find out more about how our customers were being impacted. They were missing billions of dollars in tax receipts and they were still trying to educate kids.”
This realization led to a broader approach to collecting data. The finance and strategy teams began scouring news reports for information about states’ budget woes. Finance staffers studied a variety of macroeconomic data, including GDP data and state and local tax data, and compared them with historical textbook-sales information to help forecast sales. “Once we saw how bad it could be, it forced action very quickly,” says Hughes.
As a result of its analysis, HMH reorganized its sales force to adopt a more customercentric approach. “Instead of trying to sell x or y product, we started asking mayors and superintendents what was keeping them up at night,” says Hughes. “What tools did they need? Before, we were just selling a book.”
The company also dedicated a group of employees to studying federal funding and grants to determine where states would — or wouldn’t — be getting their funding. One finding: much federal education spending is focused on technology rather than on such materials as books. “A lot of times we were leading with the book, but we also have e-books,” says Hughes. “Now we can tell schools that they could qualify for grant funding if they license some of our online products.” Also, where formerly the company sold its books and often threw in companion technology products for free, the sales team is now trying the reverse approach in some situations.
The new strategy led to an agreement with the city of Detroit, an area in deep economic distress, in which HMH offered a combination of technology, teacher training, and books rather than pushing a big investment in a whole array of new titles. The company also struck a deal with the fiscally strained state of California, in which customers that already used its reading products could purchase new workbooks to upgrade their classrooms this year, rather than having to purchase an entire suite of products. Schools could then apply the cost of a workbook purchase to the price of a more-complete package of materials in the future.
The company is also considering reducing the prices of some of its book product lines while offering far fewer free extras than in the past. “That’s a way we’re able to get customers exactly what they need and nothing more, at as low a price as we can,” says Hughes.
The recession taught HMH that it needed to move to “an entirely new level of scenario analysis,” says Hughes. “Now, we think about whether certain states may just decide not to buy social studies books this year. If they have to choose between a teacher and a book, most schools will make the book last a bit longer. But if we offer them a low-cost alternative, maybe they’ll be able to keep the teacher and get some updated product.”
The finance team is now working on streamlining its forecasting process, while it continues to scan the economic horizon for new data. By taking a broader view of the drivers of demand for its product, the company has been able to develop a variety of new scenarios for its five-year plan. “The beauty of the process is that it started with the need to develop better forecasts and ended up with us getting to a better place strategically,” says Hughes, “because we’re better aligned with what’s happening with our customer.” You could call it a textbook case study.