Following is a transcript of the Independent Publishers Guild Podcast.

Hello and welcome to the IPG Podcast. I’m Tom Holman of the IPG, and this episode of the podcast is all about royalties: a really big aspect of publishing, not least because it’s so important to keep authors happy, but one that doesn’t always get the attention it deserves.

We’re talking about royalty management with David Marlin, President of MetaComet Systems. He’s telling us about the ways automation can make royalties easier and more cost-effective, and has got some thoughts on measuring the value of better royalty management, and on implementing new automation systems.

Tom Holman / Hi David, and thanks very much for joining us on the podcast; it’s great to have you with us. Can you give us a beginner’s guide to MetaComet for anyone who doesn’t know you yet?

David Marlin / Thanks for having us on the podcast Tom; I really appreciate the opportunity. MetaComet Systems specializes in automating royalties for publishers, helping make the process as efficient as possible and as risk-free as possible. We work with over 100 publishers now.

Tom Holman / Great. So let’s talk about royalties. I have to be honest: calculating royalties by hand on a massive spreadsheet isn’t my idea of fun—but there are plenty of publishers out there who are doing that. For those people listening, why would you choose to automate your royalties?

David Marlin / There are three reasons why people come to us and use our royalty management services, and we see these same three reasons over and over again. First, there’s a risk. This is a broad category. Whenever I hear people say royalties are a headache, or they don’t really know what’s going on behind the scenes, or they’re not sure if they trust their royalties, I put that all down under the risk category and the uncertainty of whether they’re doing it right. So that’s a big reason people come to us.

Another reason people work with us is efficiency. People who are doing royalties manually—or oftentimes people who are using other systems—are spending an inordinate amount of time doing royalties, and they want to spend a lot less time on it. Here’s a great example. We have a customer in Boston. The woman who was managing their royalties was a vice president-level person, and shouldn’t have been doing royalties at all. The company was producing monthly royalties, and she was spending 40 hours every single month doing royalties—but after working with us, we helped her get the process down to four hours a month. I have lots more stories like that.

So risk and efficiency are the two biggest reasons why people come to us. But we also see a lot of publishers come to us who are in what I would call growth mode. They’re growing rapidly, and they know that if they don’t get a handle on royalties it’s going to hinder their growth—and the last thing they want is to have a back-office operation slow them down. So those are the three main reasons people come to us for automation.

Tom Holman / So given all that, what holds people back from automating royalties in your experience? Is it a cost thing, or an implementation thing or something else?

David Marlin / It’s interesting. I think it mostly boils down to Return on Investment (ROI). How much do you get back for what you put into royalty automation? Our services cost money, and like so many things there’s a threshold at which it makes sense to spend.

We find that when publishers make this ROI assessment of whether it makes sense to spend this money, they often unconsciously undervalue both their time and their risk, and that’s a big reason why it’s not universal. We spoke with a prospective customer a few weeks ago—an entrepreneurial husband-and-wife team with a really interesting publishing operation who was growing at a nice clip. It’s a great story of a couple of entrepreneurial people, but the husband was doing all the royalties and spending an inordinate amount of time on them, while also handling operational parts of the business. He was spending a meaningful percentage of his overall time doing royalties, and it really just made so much sense for him to automate. It’s a small business and didn’t have the biggest revenues, but they were growing—and instead of putting this key person’s effort into the growth of the business, they somewhat subconsciously decided to save money on royalties. But I think most business theorists would say that a key person like that should be developing and growing the business, and freeing up those tens of hours a month to do that. That’s a pretty typical story.

Some publishers tend not to look at the big picture and automate their royalties because they underestimate risk. I can tell you from experience that virtually everybody who is doing royalties manually with Excel spreadsheets for more than 10 or 15 authors is making mistakes. Of the more than 100 publishers that we’ve implemented over the years, we will often go back and do what’s called a parallel run, where we take sales data from a period when they’ve done it manually, and run it through our software to compare the results—just to make sure that we’re getting the right results. In virtually every single case in my 20+ years of doing this, there are mistakes being made. I don’t think publishers fully appreciate how easy it is to make mistakes when you do it manually, and they don’t value their time as much as they should.

Tom Holman / Let’s talk a little bit more about that ROI element, which is sometimes quite a slippery concept and difficult to measure. How exactly do you measure ROI in something like royalty automation?

David Marlin / Again, you have to ask yourself if you’re really saving money. One thing people have to do is measure how much time they spend doing this. I think a lot of people just sit down to do it, and they know it takes them a couple weeks every quarter, or a couple of months every six months—it depends on how often they’re doing it. Often they’re not tracking how much time they’re spending doing it and worrying about it, and it’s easy to think that you’re not spending quite as much time as you actually are. I think it’s important to understand that.

When I’m in the shower or walking down the trail with my dog, I might think about a business problem. You don’t want to have to be thinking about royalty management—you want to be able to spend those mental cycles thinking strategically about how you can grow your business. If people are worrying about royalties for hours and hours in their off-time, it’s valuable time that could be spent thinking about other stuff that is more valuable to your business.

I think also people don’t fully appreciate how much time they spend responding to author issues. For instance, with very few exceptions when you send your royalty statements out, you’re going to get a percentage of calls from authors with questions. Answering those questions and responding to them is more time that you spend on the process. So, I think it’s important for publishers to measure just how much time their key people are spending on royalty management. When you see that, it will help with the ROI valuation.

Also, what if people leave? At smaller publishers especially, the publisher or a key person or editor might do the job themselves—but if that person was no longer with the company, what would the impact be? How can you value that person’s time? Some people might value their time at $50 an hour, and that’s probably a mistake: I think most publishers should value their time at much higher than that.

So that’s one aspect of the ROI. The other aspect is this idea of risk. In finance theory there’s a concept of the beta: the risk factor involved in any financial transactions or financial instruments. You take the actual cost of something and then factor in the beta and use that to simulate the financial costs of risks—and some of them are obvious. For example, if you make mistakes in your royalty statements, that’s going to impact your author relations. I can’t tell you how many times I’ve heard from publishers that the most important thing to them are their author relations. Publishers are in the business of creating great content for their customers, and they need those authors to do that.

Another risk is overpayment of royalties, which we see all the time. Publishers overpaying or underpaying royalties are relationship issues, but overpaying also affects your bottom line. Another cost that people don’t necessarily take into consideration on the risk side are the legal ramifications of making mistakes. If you’re audited and you find a mistake, what are the potential legal ramifications? Could somebody conceivably go after you for that money now? That doesn’t happen very much, but it’s certainly is a risk—especially if you’re making big mistakes.

Then there’s the reputational side of it. If you don’t pay royalties well, or if you make a few mistakes, you can easily develop a poor reputation, and we’ve been in situations where we’ve seen publishers struggle with that. It’s hard to gauge the financial impact directly, and that’s where that concept of the beta comes in. You know there’s a cost there, and you have to incorporate that.

The other aspect is the impact on growth. I told that story earlier on about that husband-and-wife team spending about 20 hours a month doing royalties. How does that impact their growth? This is a company that was growing, with strong demand for their products. Couldn’t he be spending that 20 hours a month on business development and increasing the bottom line? That’s another aspect to the ROI. So publishers need to properly value their time, think about the beta and the value of all these risks, and look at how it is impacting growth. If I wasn’t spending this time on royalties, could I grow the business substantially more?

Ultimately when you put all that together, does it outweigh the cost of a royalty management system? For the most part, if you’ve got about 25 titles or more the ROI tends to be there. And if you go up to hundreds of titles, then it’s obvious there’s a positive ROI—but people don’t always look at it. Royalties can be seen as a big morass that they have to wade through, without really thinking of the details. We all do it sometimes, but we really need to see the cost of doing it.

See Part II of this transcript on our site. You can listen to the full IPG Podcast with David Marlin here and you can learn more about royalty automation here.