The Disintermediation Myth: Bogy or Opportunity?

The real difficulty in changing any enterprise lies not in developing new ideas, but in escaping from the old ones.
John Maynard Keynes

ATM Today, technology is an integral part of our daily lives, and this makes it increasingly unlikely to do without, even if the number of neoluddites is far from diminishing. In fact, those who have chosen to use only ‘essential’ technology do not seem to be necessarily condemned to poverty.

What is now considered ‘essential’ (a computer with fast Internet connection and email) was a real treat just twenty-five years ago. Five years later the computer began to be truly ‘essential’ for any professional, but data was still exchanged via diskettes. Some twelve years ago email started to spread and the Web became an everyday object.

In reality, in 2000, the outbreak of the dot.com bubble and the New Economy seemed to side with neoluddites and reinforce their ranks.

In the exciting years of the New Economy, on the wave of the first dot.coms, the concept of ‘disintermediation’ began to spread too.

The new technologies were expected to lead to the removal of intermediaries from the distribution chains. Traditional distribution chains, in fact, require the participation of one or more actors, who usually do not add value to the product:

  1. supplier
  2. manufacturer
  3. wholesaler
  4. retailer
  5. buyer

When the purchaser can interact directly with the manufacturer, or when the number of actors in a transaction can be reduced, the mark-up applied by each actor can be removed to achieve a drop of costs.

The banking industry was the first arena where the term ‘disintermediation’ has been applied, not only for financial matters, with investors being given the chance to trade directly, but also for services, with the same banks spreading automated teller machines. The first ATM was implemented in 1967, preceding by far the advent of the Internet.

Disintermediation is often a dynamic phenomenon: when it doesn’t produce the desired effects, new intermediaries enter the distribution chains, rarely replicating those removed in the first disintermediation. Bypassing the traditional distribution/sale channels of a product or service always leads to a point of no return; hence the innovative effects of disintermediation.

Usually, intermediaries are necessary to help exchanging information and shipping goods. Nowadays, however, in most cases, the end user is able to reach directly the manufacturer, who, in turn, is able to meet the demand. In the case of intangible goods and services, the intermediary plays a purely organizational role, and process rationalization may foster disintermediation.

The main risk of disintermediation is the loss of some services that intermediaries can provide, such as counseling for buyers and promotion for manufacturers. For this reason, the choice between disintermediation and intermediation is essentially cost-based.

When disintermediation is buyer-driven, it comes from a need for transparency, in an effort to overcome information asymmetry, which generally concerns the pricing of a good or service.

In some cases, for example for Wal-Mart, disintermediation was part of a complex marketing strategy, where the price cuts passed through cutting intermediaries, upstream and downstream the distribution chain.

The Internet is still a tool, largely unexplored, for disintermediation and operating cost reduction. Where disintermediation does not lead to the expected results, the cause can be found in side functions, often financial, carried out implicitly by intermediaries. Recently, some actors reacted to the failure by combining a physical and virtual presence, traditional and online marketing strategies, etc.

The main element in a disintermediation process is transparency in supply and transactions. This is the case of the real estate market, which, on the one hand, has further expanded by offering easier access to offering, but, on the other hand, requires new tools and services to attract buyers. Buyers, in fact, are much more reluctant to grant economic benefits to intermediaries, who are expected to show much more expertise and reliability.

ATMs and Internet banking have certainly not depleted banks or removed financial intermediaries.

Moreover, Internet banking has allowed the creation of virtual banks ‘slaughtering’ operating costs (labor and infrastructure) to offer better terms.

Disintermediation in the banking sector was possible and effective thanks to the industry’s process maturity and to the wide margins for efficiency recovery, through equally mature technologies.

The current crisis, however, is financial in origin and due to market distortions produced by both financial institutions and customers. Customers have succumbed to the illusion of being able to buy something they could not afford and rely on intermediaries for advice, the main service that they would guarantee. Financial institutions did not fail in providing advice: brokers simply took advantage of the information asymmetry and of the market’s lack of transparency.

At a closer look, it is not possible to achieve full disintermediation for certain goods and services, due to the added value they require before being sold, bought and used, that is exactly what is expected of each actor in a distribution chain.

What value can a reseller add when purchasing a product from the manufacturer to resell it to the buyer? None. It only adds a mark-up to cover his/her operating costs and ensure a profit margin from the transaction. For some products and services, the buyer is barely aware of paying the intermediary a premium, and is unable to assess its value, because s/he is not able to evaluate the service provided. This is what information asymmetry is all about, especially in the translation industry.

Many MLVs and SLVs rely on the lack of market transparency, which makes the buyer consider the need for intermediation, at least where s/he is not able to directly conduct a transaction.

Disintermediation in the translation industry could only be technology-driven and produce or be produced by a radical change in pricing models. Machine translation could be the main engine of this change.

Technology, in fact, still allows for a shorter distribution chain. The translation industry players fear this this effect. Entrepreneurs and professionals are both scared by disintermediation spreading among their clients. This is the reason for the blind hostility to machine translation and crowdsourcing, although most players repeatedly show they don’t know much of either one or the other.

Question: A prospect customer is requesting a translation from Italian into Norwegian. Where do you go to find the translator? Norway? or Canada? What can drive a LSP to look for an Italian-Norwegian translator in Canada? Any experience of previous successfully completed assignments? Or maybe the LSP in question cannot browse the global market and have to resign to a very limited choice? Or, perhaps, the LSP bitterly finds that a professional with the expected skills in Norway costs much more than the misery s/he’s used to pay his/her staff, demands for strict payment terms (maybe abiding to EU Directives) and this “breaks the bank”, i.e. the offer s/he foolishly made to the perspective customer?

Another question: How do you respond to this statement:  “A dentist is a professional, but since I have little money I’m going to make my denture myself in my garage with a rasp.” Maybe you can reply:  “Anyone can make him/herself understood by gestures, but cannot necessarily devitalize a molar.” Does it make any sense to say that  “When it comes to understand gestures, I become capable of devitalizing a molar, as barbers have always done until a few decades ago?” No, it’s non-sense, at least because this kind of barbers disappeared centuries ago.

Similarly, a rather complex financial text sampled from The Wall Street Journal should not be input in any generic machine translation engine, however advanced, for a qualitative comparison with the work of an experienced financial translator. It is not only a bad-faith approach, it shows blatant ignorance, especially if the text is made up of a few lines, as it took only twenty minutes to the professional to translate it.

After his presentation at the TAUS European Summit, with the last slide, Jack Boyce of Google described an imaginary ‘TransDirect Inc.’

  • New MLV exclusively working with freelance translators (no SLVs);
  • Built on a proprietary set of tools to connect creators directly to translators, and ensure reliability;
  • Pay translators more, charge client less;
  • Radical transparency from the client’s perspective;
  • Vision: the eBay/Amazon marketplace of translation. The best place to work for a freelance translator.

This is the meaning of disintermediation: innovating an obsolete and unnecessarily costly distribution chain, stubbornly held in life for the sole purpose of avoiding any change.

The translation industry is almost entirely outsourced, with each task passing through at least four suppliers. Fragmentation is the industry’s real essence, not just a deprecated effect. Fragmentation makes disintermediation extremely hard and facilitates key players only (the largest ones, those with the highest economic capacity). And this trend will continue, at least in the mid-term.

On the other hand, disintermediation may help streamline processes and reduce costs, but it cannot overturn any well-established bad practices.

Intermediaries in the translation industry have always played a purely organizational role, and organization and rationalization of production processes is the key to disintermediation. For companies that have built their business models on brokering, cutting operating costs should be a primary goal, but disintermediation would require a drastic reduction in profit margins and starting a cycle of constant refinement of operating processes.

Disintermediation, therefore, could be effective only if applied to basic services, which would require a further reduction in fees to suppliers to sustain profits and quick return on investments. Moreover, disintermediation alone could not solve any problems with cash flow, which may in fact be even more serious given the investments; and the bad practice of late payments will continue.

The only effect of this unnecessary futile medical care is due to Gresham’s Law .

Some predict that disintermediation in the translation industry will occur through collaborative platforms, in a SaaS model, because of the lower costs that professionals will face, the certainty of safe and continuous updates, and the ability to monitor their assets.

Collaboration could reduce intermediation, but will hardly lead to disintermediation.

Disintermediation in the translation supply chain will occur only when the translation market is going to be fully transparent so that customers can really understand the terms and conditions of supply (including pricing) and find a valid alternative to traditional channels.

In a technology-driven disintermediation, customers could simply buy from wholesalers that would appeal to individual translators instead of using SLVs as intermediaries, but would pay them even less than today.

In the end, as it has already happened in the past, other factors will force the translation industry to change, to the detriment of the whole industry. The century-old industry will become a distribution community, where business groups and professionals will team up to create value for their customers. There will be room for many, provided they are ready to rethink their role and to provide real value to their customers.