According to the saying, there are three types of people in the world:

• those who make things happen
• those who watch things happen
• those who never knew what hit them.

For those of us who want to make things happen, we will try to analyze some of the issues that we must face.

Where did we come from? Where are we going?

These philosophical considerations seem to have acquired a new life in the current wave of consolidation sweeping our industry, and many fascinating conversations are being generated. To add to the debate, here are a few observations based on our analysis and on the strategic questions we have been asking ourselves. For a fairly large, unconsolidated vendor, "to consolidate or not to consolidate" could ultimately be a question worthy of Shakespeare.

The generally accepted commonsense definition of the localization industry is that it was born in the mid-eighties, and that its parents were the computer and translation industries. The computer industry itself came of age in the late seventies and early eighties, and eventually understood that to increase its presence worldwide, it would have to "translate" and "localize" its products. During this period, a large number of entrepreneur/founders simultaneously gave birth to "localization companies".

Some of the initial localizers came from the computer industry and acquired or developed product internationalization and language experience. Others were already in the language industry and gained the technical savvy required to be players.

This intersection of language and high technology has grown in size, and more players have entered, all of whom have different professional backgrounds, agendas and areas of interest and specialization. The very definition of localization has also kept expanding. Today, we can certainly ask ourselves whether a single definition is possible and even whether the word "localization" makes sense, or whether it has become outdated.

In addition, an increasing variety of opinions is being expressed as to what business model is most appropriate to this fledgling industry: is localization a commodity business ancillary to the IT industry, similar to software manufacturing? Is it a business services industry for which the "outsourcing" industry model is best? Or is it more of an intellectual property service similar to accounting or legal services?

All these questions and opinions become especially important when we try to gaze into the crystal ball and determine where this industry is going, and what its definition, its "look-and-feel" will be even four years from now. Will localization R.I.P., undergo total transformation, or simply achieve plain vanilla business growth and typical consolidation? Like a teenager going through puberty, will it still retain some of the characteristics of its childhood form?

Besides hormones, the key factors causing "discontinuities" in the localization industry can be summarized as follows:

• A significant number of "leading" localization companies have crossed the $10 million or so run-rate, and have become medium-sized businesses rather than "small" ones. They are therefore also starting to exhibit adult traits in their management structures, growth strategies, and appetite for financing other than simple bank credit or private capital. A prior wave of such size-related growth and consolidation occurred in the early 90s when Alpnet, Berlitz and Stream International all went through similar consolidation stages, although the remaining factors listed below were not as strong at that time.
• A significant number of entrepreneur/ founders who individually contributed to the birth of the industry are reaching more mature ages, and putting more emphasis on their "owner" hat than their "CEO or Managing Director" hat. In a predictable transformation, they are choosing to liquidate a portion of the value that has been created inside the industry.
• The largest customers, who have driven the industry, have become somewhat exhausted in their management of dozens or literally hundreds of vendors. They are now looking for improved scale or more efficient models in their outsourcing of localization activities. As pointed out very clearly by Alex McDonnell at the LISA Forum in Mainz, some of them still haven't decided whether they are in the localization business or not (they are choosing whether to move up or down the value chain in the product development/ internationalization/ localization continuum).
• The advent of the Internet has lent tremendous force to the trend towards globalization, and not just in the IT industry. The issues of prime importance in localization are causing concern across many more industries.
• The strength of the stock markets and the prevalence of "consolidation" over "divestiture" trends in financial business management have also dramatically moved the localization industry onto the "radar screen" of the financial community, particularly in the United States. This interest of public and private investors in an industry emerging from obscurity is a significant leavening agent or catalyst. It is radically increasing the speed and intensity of the discontinuities in the growth of the industry.

A broader definition of localization?

LISA membership once primarily included large software publishers, large hardware producers, and localization vendors. Today, LISA membership also includes a large contingent of tool developers (MT, TM and others), Internet companies (content, delivery and applications), consultants, government bodies, and producers of hardware or software-enhanced products that are outside the IT industry (telecommunications, medical and scientific instrumentation, etc.).

Clearly, the boundaries of localization are encroaching into new areas. In particular, the Internet and increased globalization is bringing the world closer and making the flow of information faster and less tied to location or physical medium. However, the remaining language barrier has increased its visibility. Business growth tends to occur most notably where there is a strong imbalance between supply and demand, or where there is a difficulty in availability. Localization is right at the confluence of the language barrier in the increasingly large stream of the global information flow. Localization is being enhanced by the same disruptive technologies that are making other businesses obsolete.

We could thus propose a new definition of localization as the "provision of services and technologies for the management of multilinguality across the global information flow." Somewhat pompous, but fairly encompassing.

The following three-dimensional representation illustrates the principal vectors of expansion present in the localization industry today, and subsequently illustrates the directions along which industry consolidation is most likely to occur.

Figure 1: Localization industry expansion vectors

Will consolidation be successful?

It is naturally too early to tell whether consolidation can alter the quantity and quality of the flow of business between the demand and supply side of the localization industry, but clearly many are betting that quantity and/or quality will change.

The key factors for success are summarized on the next page:

1. Improved relationships with clients through better, faster, less expensive services.
2. Localization expertise and know-how, tools and automation of execution.
3. Innovation in execution models and sales and marketing.
4. Good business management.
5. Adequate financing and capitalization.

Each factor is necessary but not sufficient. Absence of one of the factors can be detrimental to any localization company, whether it has $5 or $50 million in revenues. Clearly, consolidation tends to improve financing and capitalization, but does not necessarily produce improvements in other areas. On the other hand, not consolidating will also not guarantee ease in strengthening these areas.

Consolidating companies will be successful to the extent they can improve all 5 of these factors. In the late 90s, size is no longer an insulator against dramatic changes in the health of companies. Disruptive leaps in technology (Netscape), dramatic innovation in business models or other earth-shattering changes can completely transform the business landscape in a particular industry in a couple of years. In our own industry, Stream is a good example of how integration and size do not always lead to unqualified success.

Consolidation is enhanced when barriers to entry are strengthened by size. In localization, the barriers to entry have always been low, but one could argue that consolidation and size could raise the barriers of capacity, automation, or sales and marketing clout.

Increased raw capacity is an argument in favor of consolidation. The ability to handle large volumes and exercise control over the talent supplying the basic skills needed could be strategically advantageous. However, there are numerous counter-arguments. Is it certain that, in the evolution of the worldwide information flow, the volumes of information will continue to be large monolithic blocs, rather than constantly updated small packets, much more conducive to being localized in a more decentralized model and less dependent on large, concentrated pools of talent? Is the raw talent for localization in short supply, or is it mostly a question of finding and training the talent from a large pool? In our opinion, the management of capacity can be a double-edged sword: it can cause shortages for the smaller players, but can generate vastly increased overheads for the consolidators if not managed properly.

In other industries, consolidation typically enhances the barriers to entry associated with large capital expenditures, such as state-of-the-art equipment, automation, large factories, and distribution networks. In our industry, most of the advanced automation tools and technologies are readily available. Does consolidation truly enhance the ability to gain productivity efficiencies through automation or capital investments? Once again, in our opinion the consolidators may not find a clear-cut competitive advantage in this area.

Thus, perhaps, the remaining boon for consolidators will be the economies of scale and increased visibility available when scaling up coordinated sales and marketing effort. It is probably the increased visibility, the access to media, and the efficiencies and scope in sales that will be most nourished in a consolidated environment. This was clearly in evidence when the full impact of the Stream and Berlitz marketing campaigns hit the industry in the early 90s, and one could find advertisements for software localization in many airline magazines and full-color ads in international publications. However, did this marketing blitz really produce the kind of revenue growth and profitability increases that transforms an industry? Aren't clients really more interested in the personalized attention given to their projects by experienced vendors than in the promises of an advertising campaign? Again, it seems that high-level sales and marketing is very beneficial, but not sufficient.

In viewing the consolidation trend, we believe that we cannot expect the localization industry to become as concentrated as Coke and Pepsi in the beverage industry, or Home Depot, HQ and TrueValue in US hardware retail. If one looks at global accounting services, which are an intellectual business service with high labor content, there is some concentration in the "big six" accounting firms, but there are hundreds of extremely viable and profitable companies all over the world. If one looks at legal services, financial services and banking, the concentration is even less obvious, with less dominance of primarily Anglo-Saxon firms, and more global distribution. Localization could easily grow into one of these much less concentrated industry models.

The consolidators will have many of the same battles to wage as the smaller players, and some of their own as well.

Shared battles are the effects of disruptive technologies and the changing requirements and service perceptions of the clients, some of whom wield incredible power over the totality of the localization industry. All players will need to contend with the requirements and perceptions of the employees who provide so much of the raw talent for the execution of localization services - what are the pros and cons of working for large conglomerates versus small, focused firms? Where is the control over work that is so dependent on motivation, intellectual concentration and specialized talent?

Specific battles to be waged by larger players include: ebbs and flows in the requirements of the capital markets, and how much short- or long-term profitability and revenue growth are expected by investors, who can suddenly start squeezing the same consolidators they are now so eagerly investing in.

Our position

In our opinion, localization, defined in the broader terms above, is a growth industry that is just emerging from a pioneering entrepreneurial/founder stage. Positioned at the intersection of language and technology, it is just forming its own business models that are neither pure technology or associated services, nor the traditional translation industry model.

We think there is tremendous intellectual capital in the industry, and a vast skills bank. We therefore hope that, as far as possible, the bulk of equity/value creation should happen within the industry itself, rather than being dissipated by being leveraged or captured by outside industries or purely financial players. Financial sources can provide very valuable leavening, but the goal should be investment in the people and technologies within the industry, not speculation. All the players should aim to grow as rapidly and optimally as possible.

Large-scale consolidations tend to occur in waves, but the real growth happens steadily. Consolidation that is not anchored tends to fragment later. Growth strategies must be based on firm ground and, above all, enhance the value proposition to the clients and customers. Otherwise, the best-planned financial and business strategies do not come to fruition. Investment must produce a return sooner or later. We think some of the current consolidation will pass the test of time, and some will not.