In the second of our strategy series, Katerina Forstingerova (CEO and General Manager of Moravia Worldwide) and Günther Höser (Co-founder and Managing Director of WHP) speak out. As in our first installment, The Big 3 Speak Out, both CEOs candidly share their views on the important issues facing the localization industry today: strategies to deal with pricing pressures, standards, new growth opportunities and offshore outsourcing. And, as a bonus for our readers, both CEOs were asked to express their opinions regarding “The Big 3”… again, we let the words speak for themselves.

INSIDER: What are the two most critical issues facing the localization industry today?

KATERINA: The two most critical issues are:

1. multilingual language vendors (MLVs) versus single-language vendors (SLVs) and
2. the decreasing total costs of localization

While the scales have tipped towards the MLV model as the stronger and economically more attractive set-up for the majority of publishers, the SLVs do have a place now and in the future. Two types of MLVs are unfolding: those following acquisition strategies versus those preferring a gradual, but more focused, organic growth. It will be interesting to see what additional consolidation will happen, or alliances that will be forged, as there is a strong case for partnerships in the industry.

The total costs of localization have been decreasing steadily, and the efforts on the side of publishers and providers alike are to work together to continue this trend. This is achievable - through true partnerships, close team integration, smart use of technologies and appropriate configuration of operations throughout the entire value-adding chain.

GÜNTHER: There are several issues, all in some way related to the increasing price pressure. Until about five years ago, the pressure was more on time-to-market, and companies like WHP could position themselves in the market by optimizing processes and raising service quality levels. It was a widely held belief at that time that localization was special, so price negotiations couldn’t be handled by purchasing departments. However, after some fore03_astroners tried it out, most large corporations then changed their attitude toward localization and finally entrusted price negotiations to their buyers of hardware and e-procurement services.

Some companies, mainly SMEs I must admit, thought their chance for take-off was in offering unbeatable prices, so cheap service became a USP. The result is that prices have dropped below the bottom line, and no one in the industry can now live on localization alone. If large enterprises have to use tortuous financial reports to make their shareholders believe that they make money, so must smaller companies like WHP invent new ways of working and automating tasks to maintain their profits.

I'm a liberal thinker, so I believe that up to a certain degree, pressure can be rather healthy because it stimulates creativity and competition. But at the end of the day, there must be something left to invest. No company can survive making losses for several years, unless it has large investors behind it that, for some reason, keep it alive. But if we continue to earn just enough to stay afloat from one year to the next, there will be no future for this industry.

The second issue is that the benefits of all technological improvements over the last decade have gone to the buyers. In terms of cost and time, we are today about three times more efficient than ten years ago, but globally, we are paid about three times less. In a way, it has become worse due to a recent trend we have noticed over the last two years: previously sizable projects now come in a constant flow of small bits and pieces. As a result, the related tasks (preparation, engineering, QA, project management, etc.) have increased enormously compared to translation itself.

There is less and less content translation with more and more additional tasks. We also continue to receive new file formats, e.g., multimedia applications. And as is usually the case with innovations, some authors don't implement the new formats properly with localization in mind, which in turn increases our workload again. Here as well, however, there are positive aspects. WHP works mainly for large corporations, so the distribution throughout the year is more balanced. However, if your prices are defined per translated word, your margins will drop dramatically.

INSIDER: What, if anything, is changing in the industry?

KATERINA: The localization industry is following the path of IT in general (and many other service industries) in terms of the continuous separation of front-end and back-end activities. The latter, such as testing, engineering, QA and DTP, are being increasingly moved to more cost-effective locations in Europe or Asia Pacific, to achieve optimum scale, scope and cost advantage. In other words, “Follow the money,” or more exactly, “Follow the cost savings.” This is not a question of the future - this is happening already. Having a fully integrated, full-scale operations center in such countries is a competitive advantage today, but a must-have to compete for any major provider in the future.

GÜNTHER: The industry is changing completely. Just take a look at localization companies. How many companies last more than five years now, how many last ten? There are three big ones left, when just a few years ago there were ten. And, at least two of these may very well disappear in a couple of years. Our industry is still in erratic motion and far from reaching equilibrium. Tools are completely changing. The highly creative activities around XML are, like all innovations, a great chance for some, and a dark threat for others. The process is changing, automated workflows have become a must, and CMS (Content Management Systems) or other SSMA (Single Sourcing Multiple Authoring) environments, once broadly spread and used throughout the industry, will completely change the way the traditional actors are used to working. At WHP, we are not only following the trend, we are trying to create, to anticipate, to always stay a length ahead in the pool.

INSIDER: What technical or business process standards will drive the industry forward? Where do open standards fit in?

KATERINA: We believe that the standards with the biggest impact on the whole industry will be those which are the result of open cooperation of publishers and providers, notably XLIFF and Translation Web Services, both being developed under the auspices of OASIS. With version 1.1 currently in the approval phase, XLIFF has proven to be a viable standard, and we see it providing measurable benefits already. It’s still relatively early on in the development stage for Translation Web Services, so their impact will come further down the line. On the other hand, the impact is potentially more far-reaching than XLIFF’s, given the fact that this standard will affect the actual business processes employed within and between clients and service providers. We believe that the web interface for online communication and data transfer that this standard has set out to define has the potential to transform many of today’s routine operations. Moreover, this industry-specific application of web services will bring benefits to the whole translation and localization industry, as it has in other areas. For these reasons we will continue supporting the development of these two standards.

GÜNTHER: The lack of standards is sorely felt in our industry. If I had to put a figure on it, I would say that at least 30% of our problems that cost time and money are due to missing standards and incompatibilities. It's perhaps worth mentioning that open standards mean royalty-free, available to everyone. It doesn't mean that open standards are less restrictive or "open to interpretation." There is more to it than that: in the same way "open hardware" initiated the PC and software boom, and "open software" the fertile development of the software and services industry, likewise open standards are a jolt for the services industry.

Official standards like XML, TMX, soon XLIFF and e-business standards, as well as non-official but not less efficient standards such as TBX or perhaps OLIF one day, are already a fertile ground for the development of new tools, processes and services. That is one of the reasons why they are not yet fully or only half-heartedly supported: if your company is a leader in its field, an open standard is not in your best interest because it will allow others to get a piece of the business.

INSIDER: What are the new growth sectors for localization?

KATERINA: We see a growing need for localization services across the whole spectrum of sectors. A new wave of companies is developing and/or fine-tuning their international strategies, and thus becoming more aware of localization requirements. This goes hand-in-hand with the changes in the general approach in many industries, where some international companies in the past have adopted strategies too focused on the benefits of standardization. The emphasis internationally is now shifting from the global to the regional. At the same time, new languages for localization are arriving and gaining in importance. All these are general drivers for localization.

GÜNTHER: You have to ask for whom. For competitive, well-equipped, organized and flexible companies, growth sectors are basically everywhere, including the traditional IT sector. But as I said earlier on, localization has somehow lost its special status and has become just one more commodity. One of the consequences is that localization now depends much more on economic cycles. This can also have the opposite effect: during economically tense periods, some clients may increase their production, thus their localization requests, while others will restrict their localization budgets. That leaves the opportunity for competition, which basically means no growth but redistribution. Real new areas for growth are new geographical markets and the Internet. New markets mean new languages: East European, East Asian and Middle Eastern languages are more commonly requested now. And for the localization industry, the Internet boom is still ahead.

INSIDER: Where is the industry headed?

KATERINA: Simply put, it is doing more for less with fewer companies, fewer resources and more technology. These are exciting and crucial times for the industry.

GÜNTHER: If anyone knew, there would be a riot, or something similar to the Gold Rush. We know what we leave behind, and best case, we can distinguish the general direction of our path. We head toward an exceedingly structured process: highly automated workflows combined with CMS, where human actors are managed and controlled by machines. Regarding the traditional triangle of quality, time-to-market and cost, I have noticed recently and foresee, at least in the near future, a progressive drop in quality - at all levels - in favor of cost efficiency.

We hear more often now the request, "Drop quality if you can offer a better price." This is tough, especially for companies like WHP that fight ferociously to keep quality high. But we are convinced that sooner or later, quality will again become important, making the competitive difference on the leading edge.

INSIDER: What is your view of the "Big Three" (BGS, Lionbridge and SDL)?

KATERINA: It is interesting to watch the changes and developments the “Big Three” are undergoing, and how they are working to shape their future and that of the industry. While there are differences between them, they all essentially share a similar mind-set and managerial framework.

While we do compete, we do not see them as our heads-on competitors. Companies such as Moravia are benefiting from the “fall-outs,” as a number of customers of the “Big Three” increasingly believe they are not getting enough attention, feeling as if they are being treated only as “a number,” or feeling lost in the crowd. Instead, these customers are looking at the mid-size companies, such as Moravia, that can deliver the same level, scale and scope of services as the troika, but that possess a higher degree of flexibility, focus and customer attention, whatever the account size, without the excessive baggage of the high fixed costs that these conglomerated organizations necessarily carry.

That being said, there are a number of very smart and talented people working for the “Big Three,” and their business model works for many of their clients. The old adage that says, “There is enough business out there for all of us,” comes to mind.

GÜNTHER: A mixture of amusement and compassion, since times are even tougher for them. When I read the interview of their CEOs, I was amazed at how far they seem from reality. The laws for the localization market differ from others, since some laws of capitalism don't fully apply. The choice to "grow for the sake of size" seems contradictory to basic economic requirements, such as making a real profit. In our industry, a well-structured network of flexible partnerships between smaller units is far more competitive, and thus a better a choice. By the way, these three are big compared to the rest of us, but they are SME on an industrial scale, and basically, they work the same way as everyone else – they’re just more expensive.