"So, Just Whose Pocket Is It, Anyway?"

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Dear Globalization Insider,

In his recent article, From Mozart to Mumbai, MLVs on the Move, Rory Cowan, CEO of Lionbridge Technologies, states: “In 1992, the price of a polished translation from U.S.-based multi-language vendors (MLVs) was generally $0.22 to $0.27 per word for French, Italian, German and Spanish (FIGS). Today, U.S.-based MLVs are still charging US$ 0.22 to 0.27 per word for high-end FIGS, even though inflation has reduced the buying power of U.S. dollars by 30% during that time.” [NOTE: These dollar values convert to €0.17 to €0.21 at an Interbank median price of 0.7807 on 13 February, 2003.]

Mr. Cowan has only described part of a much larger, industry-wide picture.

However, Mr. Cowan has only described part of a much larger, industry-wide picture. We need to look behind his numbers to really understand how U.S.-based MLVs have actually maintained these prices and how it affects other players in the industry.

These larger companies, particularly public companies such as Lionbridge and Bowne, have been under enormous pressure to generate revenues in order to please their shareholders. In doing so, they have negotiated rates for a labor-intensive services industry of under $US 0.20 per word over the past three years to beat out the competition and to win the contracts. The annual reports of both companies indicate yearly losses and significant deficits of several million dollars, a condition that can only be legally sustained by U.S. public companies. By law, most companies in most European countries must declare the equivalent of a Chapter 11 bankruptcy in the U.S., if their losses exceed their capital. Few possess the ability to "hook" clients in with bargain basement prices.

When the dollar was high, the MLVs did not “pass the buck” to their SME partners; instead, they spent the money on massive consolidation efforts

While the value of the euro is currently stronger than that of the dollar, this was not the case three years ago. Hence, the large, U.S.-based multilingual suppliers profited to a significant degree from currency market conditions in 1999 and 2000, paying their providers less than they are paid today in real terms. In other words, when the dollar was high, the MLVs did not “pass the buck” to their small- and medium-sized enterprise (SME) partners; instead, they spent the money on massive consolidation efforts. With the U.S. dollar now at an all-time low, these large companies are forcing their SME suppliers to reduce their rates significantly, or are turning to less organized and less sophisticated solutions, such as freelancers, in order to maintain margins healthy enough to pay off their acquisitions and debts.

Even at 0.22 per word, the larger localization firms have a healthy profit on most work that they outsource

This is all in serious contradiction to inflation-related labor cost increases that are essential for the stability of any economy. Moreover, it has had a detrimental affect on the revenues and profits of the MLVs’ language service providers, particularly in Europe. We must remember that the 0.22 - 0.27 per word quoted by Mr. Cowan is for translation only, i.e. all collateral costs such as project management, technical review, linguistic review, engineering and file handling are charged in addition to translation. The revenues of such tasks remain with the larger company, despite the fact that many SMEs are required to include these services in their translation rates. In other words, even at 0.22 per word, the larger localization firms have a healthy profit on most work that they outsource.

Here’s just one example. A quality-oriented German language service provider that was awarded a documentation project of 100,000 words by a large multilingual enterprise in 1999 would have generated a project revenue for translation of €15,000. The cost of this revenue would have been approximately €11,500 to €12,000. Today, the very same project would generate revenues of between €10,000 and €11,200, and incur costs of approximately €10,500. Thus, the average cost per word for labor and overhead for a quality-driven language service provider in Germany is around €0.105 for a “polished translation.” The lower cost of revenue is directly related to reduced salaries and benefits as well as reduced overhead, such as administrative staff. Employing additional staff or investing in essential technology is currently impossible given the almost non-existent margins. Moreover, many SMEs are losing their trained and qualified employees and contractors to other industries because their skills now far outweigh the financial benefits they can achieve in this industry.

In Spain and Italy, rates have decreased from €0.14 to €0.15 per word in 1999/2000 to €0.10 to €0.12 in 2003. Spain, in particular, is suffering from intense competition from Argentine companies taking advantage of offshore outsourcing opportunities. The latter are currently enjoying an advantage because of the extremely low cost of labor and other overhead costs due to the country’s economic depression and the decoupling of the Argentine peso from the U.S. dollar.

It’s no coincidence that this decline is close to Mr. Cowan’s 30% figure, which he claims has been primarily absorbed by companies such as his

Therefore, the reduction in revenues during the past three years corresponds to an average overall Western European decline of 25% to 33%, while the average Harmonised Consumer Price Index for Europe (HICP - EU15), which indicates annual cumulative inflation percentages, was 113.7 (1996 = 100) at the end of 2003. It’s no coincidence that this decline is close to Mr. Cowan’s 30% figure, which he claims has been primarily absorbed by companies such as his.

Many companies are even encountering difficulties with being paid in a timely manner as MLVs and customers alike are now pushing out their payments from 60-90 days, a condition that could seriously break the backs of many smaller companies. Moreover, laws in Germany, for example, require companies to pay invoices for services within fourteen days. A new law now allows creditors to take civil action if payment has not been received after 30 days.

It will be difficult, if not impossible, for Eastern European companies to increase their rates

Eastern European companies are currently less expensive, with rates of between €0.05 and €0.10 per word, depending on the language. While the cost of living is currently lower than in Western Europe, this will change dramatically with their entry into the EU (European Union). However, it will be difficult, if not impossible, for these companies to increase their rates, as we have seen the same problem in Western Europe since the introduction of the euro.

Based on the unit rates indicated by Mr. Cowan in his article, providing SMEs with the ability to win large multilingual contracts without a middleman would, theoretically, represent an increase of €0.07 to €0.11 per unit rate, or 50% to 110% in revenues for Western European countries for translation alone. In Eastern Europe, it would allow language service providers to maintain and potentially increase prices as their indices rise with EU membership.

With MLVs pushing their SME suppliers out the door, the latter are now finding ways to win over clients on their own

Best of all, the result would stem the rising tide of translators leaving the profession who are finding it extremely difficult to earn a decent living. It would also (1) mean a significant increase in new translation-related and administrative jobs both in the translation and localization sectors, (2) provide the SMEs with the ability to offer better, more competitive salaries and benefits, and (3) consequently increase the buying power of their employees as consumers.

With the large localization corporations pushing their SME suppliers out the door in search of cheaper solutions and higher margins, it is not surprising that these smaller companies are turning their backs on their once loyal customers and finding ways to win over clients on their own.

What this may do to Mr. Cowan’s balance sheet is an entirely different issue…

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