Newport Beach 1996

The core of my presentation in Newport was a comparison with the software manufacturing industry, in which I had spent some ten years from 1983 to 1993. I wanted to draw a parallel between the structure and lifecycle of the software manufacturing industry and the software localization industry. The similarities between these two businesses were and are remarkable. In the course of my presentation, I used Michael Porter's "Five Forces Model" for industry profitability /attractiveness as the basis for comparing these businesses.

Porter's Model

Michael Porter is probably the best-known writer on business strategy. Although he is more famous for his original insights into the "value chain", his earlier work on industry attractiveness gives some very useful insights into industry structures.

Figure 1: Porter's Five Forces Model

In very basic terms, Porter's model identifies five forces that shape the attractiveness or opportunity for profitability in an industry. These forces are:

• Customer strength,
• Supplier strength,
• The potential for substitution,
• Barriers to entry, and
• Industry rivalry.

The scope of this article is such that only a very brief and simplistic application of this model is possible, as follows:

Customer Strength

The customer base in both the software manufacturing and the localization industries is almost identical. It consists of a small number (hundreds) of large companies (in comparison to the vendor base). The profiles of the software manufacturing and localization competitor bases are also very similar - companies are small (most have sales of less than $10m), owner-managed, undercapitalized and low in profitability.

Supplier Strength

The resource base in both industries is powerful, but for different reasons. The main inputs to software manufacturing are print and media. The suppliers of these inputs are typically large companies which have the ability to deal directly with the customer, or to move into the software manufacturing business. In localization, the main inputs are qualified people (staff and freelancers). However, these resources are relatively scarce, and again they have the opportunity to work directly with or for the customer.

Potential for Substitution

The main threat of substitution in the software manufacturing business has been the move away from documentation and media to on-line publishing. The localization industry's main threat in this area is the continuing availability of better and better MAT tools.

Barriers to Entry

The barriers to entry in localization are relatively low. The main ones are the investment in internal systems and processes to manage the business, and the depth of experience gained over the years in business. A strong customer base and a reputation for quality and reliability are a localization company's biggest asset. These same strengths are also relatively mobile, as they reside mainly in the key staff members.

Industry Rivalry

The degree to which companies compete aggressively against each other for business is one of the key determinants of industry profitability. A main contributor to this rivalry is the balance between supply and demand. In localization, as with software manufacturing, the supply and demand curve is skewed by the fact that customers are also competitors to the extent that they provide their own service internally.

Unfortunately for localization vendors, software customers do not generally have the ability to track internal costs in any kind of meaningful way. Therefore make/buy calculations are usually made without the full internal cost being taken into account. Consequently, there is a misleadingly low price that customers are not prepared to go beyond, due to this perceived ease and low cost of providing the service internally.

Implications

However, the implications of the comparison, if correct, are that the localization industry can learn from the software manufacturing industry in terms of its success and failures.

Lifecycle comparison

The software manufacturing industry is running about 4 years ahead of localization in lifecycle terms. Consequently, it can offer a preview of the localization industry's future. If this is the case, then we need to look at where the software manufacturing industry is now and examine the possible impact on the localization industry should it follow a similar path.

Software Manufacturing

As suggested above, the profile of the localization industry when viewed at the same stage in its lifecycle is very similar to that of the software manufacturing industry. The early software manufacturing industry (1983-1988) grew mainly out of the media duplication industry. Companies were owner-managed and succeeded on their niche technical expertise. Few of them got beyond $10m in revenues before being acquired by larger companies, coming mainly from their supply base. Today, the main players in this area are large printing and media companies such as Donnelley, Banta and Kao.

Software Manufacturing Customers

Like the localization industry, the major customers of the software manufacturers were and are the major software and hardware companies.

Hardware Customers

Unlike software manufacturing, the interface with hardware companies was through the latters' traditional manufacturing and procurement sections, and the business relationship was consequently a traditional outsourcing model. For localization suppliers, however, the interface with hardware vendors is usually directly with the software development group within the latter. Consequently, while the hardware companies have the expertise to manage a traditional outsourcing model, little of this expertise is usually applied to localization.

Software Customers

Initially, software companies invested little in terms of resources to manage external software manufacturing vendors. With the advent of the IBM PC and subsequent clones, the volume of software product produced increased dramatically. In addition, the increased complexity of the manufactured product resulted in the establishment of dedicated internal resources to manage this business. Customers such as Microsoft developed manufacturing facilities that came to be recognized as among leading "world-class manufacturing" operations. This internal expertise was subsequently used to develop an extensive outsourcing capability once the manufacturing vendor base came up to the required scale and expertise.

Industry Structure

The software manufacturing industry was unprepared for the explosive growth in the volume of business. Consequently, no credible outsourcing option existed for the Microsofts, Lotuses and Ashton-Tates of the world. This lack, along with the Irish government's tax incentives (most of the companies are based in Ireland), encouraged them to invest in extensive internal resources. The very significant growth in sales and margins of the software companies did nothing to put them off the idea. However, a positive outcome was the investment by software companies in world-class outsourcing and supply chain management skills that would ultimately facilitate large-scale outsourcing.

Outcome

The consolidation of the software manufacturing industry coincided with increased pressure on margins in the hardware and software market. The scale of operation then offered by companies such as Donnelley and Kao made it possible for customers to explore the possibility of outsourcing their software manufacturing requirements substantially or entirely. The best example of this was the recent decision by Microsoft to sell their manufacturing facility in Seattle to Kao in return for a long-term outsourcing agreement.

Deductions

From the above we can deduce the following:

• The localization supply base will follow the software manufacturing industry and consolidate to a few major players, although there will continue to be places for niche suppliers.
• The continued competitive pressures on software companies will push them to outsource more. This will become easier with the advent of the larger vendors.
• Some large software companies will outsource their localization entirely, in a fashion similar to the Microsoft/Kao partnership.
• Software companies will invest in resources to manage strategic outsourcing.

Additional Threats

In addition to these lifecycle developments, the relative influence of "language" as the major added-value component is diminishing. The majority of current localization vendors have their roots in language, and continue to emphasize this aspect of the business.

At the LISA Conference in Shannon, Ireland, I made a presentation in which I suggested that we should move away from the term localization, and use "implementation" instead. My reason for suggesting this is that localization (insofar as it is inextricably linked with translation) tends to establish translation as an end rather than simply one means (although an important one) of successfully implementing an international product in a local market. By "implementation", I mean the adaptation of the product such that the potential for profit is maximized in the local market.

Profit maximization is obtained through the effective and efficient implementation of the product in that market. This can only be achieved if all those involved - from design through to manufacture - are focused on this profit goal. When viewed like this, options such as content substitution (acquiring already-localized content), content reusability, leveragability and parallel authoring (starting to write the product content in multiple languages simultaneously from a high-level authoring system such as a storyboard) become increasingly attractive.

Customer Push

At the Lisa Forum in Newport Beach, David Brooks, Microsoft's Vice President of International Product Strategy, stated in his presentation that the translation element currently accounts for significantly less than 50% of Microsoft's localization costs. Consequently Microsoft plans to focus both itself and its vendors on the efficiency (having achieved a high success in effectiveness) of the localization process in the future. Anybody who heard David's presentation, or obtained a copy of the published version, can be in no doubt that the industry will be driven to significant change in the coming months and years.

Skills Shortage

However, even if all parties involved were to focus their attention on these issues tomorrow, there are significant shortcomings on both the vendor and client side at present. Many of the processes and skills necessary to be able to deliver on this are alien to both sides. Ironically, many of these skills exist in other parts of the customers' extended organizations. Across the halls of many large software companies there exist world-class manufacturing systems with experienced people. Hardware companies also have an abundance of these resources.

The Era of the Production Process

Our current reluctance to view the localization "production process" as that, a production process, will end soon. It will end not because we have decided that it's a better methodology but simply because time will run out. The pressure on the computer industry to manage its cost base and the ever-decreasing product lifecycle leaves us with no options - and no time to develop anything more suitable to our industry, at least in the short term.

Publishing as an Example

An analogy I have used many times is that of the magazine or newspaper process. Here journalists (the content authors) are not allowed to write unlimited-length articles. Parameters are set (3,000 words, a 2 x 4 photograph) and copy editors are only too eager to reduce the errant journalist to the required allocation. Here we have a well-defined "publishing" process, where time to market is measured in hours and cost control is a top priority.

Content is King

Nobody can be unaware of the influence that content is having on the software industry. At the extreme it could be argued that code is losing its status as the value component. If this is the case, then it seems likely that those companies (or their outsourcing vendors) involved in electronic publishing will become experts in the implementation process.

The challenge facing the existing localization vendor base is whether they can make this leap, or whether they will simply become absorbed into the emerging electronic publishing and content service providers. Either way, the localization industry as we know it will change significantly over the coming years.