The Smart Executive

Smart Executives

The ‘big’ LSPs are increasingly similar to those companies whose executives are driven only by personal greed and do not know the product or service that their companies deliver and base their decisions exclusively on a spreadsheet.

How do these executives satisfy their craving for money? By implementing all the measures needed to increase the value in the profit column of the balance sheet and, eventually, the value of shares and of their stock options.

Despite the narrative told by the industry’s ‘analysis firms,’ revenues in the translation industry do not grow to the same extent as volumes, and compensations have been decreasing for years; hence, profits cannot grow. Indeed, in all likelihood, they have been decreasing too.

From the analysis of flows and of financial KPIs, these executives realize that the companies in their hands earn less than in the past and less than what they themselves had foreseen, perhaps also on the basis of the optimistic projections provided by the analysis firms above.

To avoid annoying owners and shareholders, these executives review their spreadsheet and notice a very substantial expense item. They therefore decide to halve it, and the sign before the number at the end of the column immediately becomes positive.

Super: ownership and shareholders will be satisfied, and the value of shares will grow.

The executives then lay off half of their vendors, starting with the most expensive linguists.

With the annual report, they present the results to the board and at the shareholders’ meeting, proudly boasting their feat of reducing expenses and increasing profits. Owners and shareholders congratulate them, and the analysis firms praise them and the company with flattering articles highlighting the excellent results.

However, if those executive are no idiots, and this is especially true for those coming from other industries, they know that staff cuts will not allow the demand to be met, in every respect, and will therefore try to contain the productivity and quality decrease in so as to prevent them from being charged with it and, as soon as possible, they will try to collect their bonuses and sneak away to go and grow another company. Meanwhile, the one they led to success will close or struggle badly.

The sad thing is that the narrative of the analysis firms has led venture capitalists to get heavily involved in the industry, thus dramatically raising the risk of behaviors such as those described above.

In those rare cases when a translation business makes its financial statements available and transparent, it becomes clear how the narrative of the steady and never-ending growth of the translation industry is good only for the gullible.

The industry is still pulverized and consolidation among LSPs has been taking place only where cash-flow allowed for a convenient access to credit or after substantial injections of venture capitals.

In fact, the fork between growths in revenues and profits is masqueraded with EBITDA. The two-digit increase of revenues is always matched to meager gross profits, generally below 3% of revenues.

Also, in any case, growth is most often largely helped by consolidation.

In markets where pulverization is very high, and economy is deeply export-oriented and either very strong (e.g. Germany) or large but fragile (e.g. Italy), although desirable anyway, consolidation is trifling. In such markets, translation companies prefer partnering, possibly to participate in large tenders, rather than merging and then dealing with integration of staff, processes and technology.

Another trend that should at least seem worrying is that of delaying payments beyond any reasonable—and legitimate—limit when growing or expanding. After launching an IPO and collecting money, do these brilliant executives really need to ask their vendors to finance the companies they run? Is this really leveraging buying power or rather exploring even the most wretched financing scenarios like using vendors as LOLR? If this way of doing business looks really squalid and petty even for a tiny, family-run translation agency in a small town in the middle of nowhere, it is ridiculous when practiced by businesses boasting of being champions, of ethics, innovation and management.

Anyway, more than one of these fast-growing companies is ostensibly looking for creative solutions to generates business from the “long tail” of translation demand (i.e. SERPs) however hard they may convert into recurring business, especially with profitable customers or by using different models for pricing and compensations.

Incidentally, to customers translation is a product, not a service, and they are willing to pay a fair price for the total amount due, not on a per-unit basis. They would possibly be willing to quantitatively measure the quality of what they buy to test it against requirements and check whether the price paid is fair.

Unfortunately, no such thing is possible yet, despite the fantabulous technologies all major translation businesses are making largely use of.

Finally, the next time you read of some VC willing to invest in some translation business, don’t forget to ask yourselves whether they are champions in ethics. With the many scandals we have been hearing of lately, raising an eyebrow, or even two, is frankly far more than logical and legit. Especially if the news comes from the usual suspects.

Author: Luigi Muzii

Luigi Muzii