If the Internet and globalization are the defining trends of our time, why is localization so undervalued? It may be good to be a translator, but not so when you are growing your business. To give just one example, VA Linux recently went public with a 700% increase in the stock price, but the same cannot be said of localization. This article looks at some of the underlying reasons for the present situation and what localization needs to do to be part of the Internet revolution. Also, it suggests what we should stop doing in order to maximize the return on our substantial investment.

The three degrees of touch

If we analyze and compare localization with other industries, some fundamental weaknesses emerge. In general business terms, the strategic imperative is to create shareholder value. This can be viewed in terms of three very general models: high-touch, low-touch and no-touch. The high-touch model is based on knowledge, customization and service. Internet consultants are a good example of this - they put together solutions for clients based on the belief that they know more and can therefore offer them this knowledge at a premium. They bill their work at high hourly rates or as a percentage of the improvements in performance brought about as a result of their solutions. These companies are valued at multiples of their revenue – in fact, their value has recently increased substantially.

The low-touch model is based on technology and reusability, with a relatively low level of customization. In other words, this model applies to products that already work but need to be adapted to the clients’ needs. The billing model is based on a customization fee plus a fee per transaction/click, with the company owning the intellectual property rights to the product and process providing the solution. Thus, the enterprise I now work for, Ask Jeeves, gets paid on the basis of the number of questions asked. These low-touch companies are also valued at high multiples of their revenue: Kana and Ariba are good examples of this model.

The no-touch model has existed in the software industry for a long time. It is based on a technology offering that can be installed out of the box, i.e., another person is responsible for implementation. The king of this paradigm is Microsoft, which has, until now, never been in the service business. The intellectual property issues are clear: Microsoft owns the product and resells it repeatedly. An Internet example is DoubleClick, a global network that allows clients to place ads around the world, with virtually everything else being done by the client. These companies are also valued at high multiples of their revenue, as the model is highly popular in this market.

The localization value trap

At the time this article was originally written, many of the players in the localization arena had not seen a significant rise in their valuations over the past year. These valuations have changed significantly in the past quarter, but the fundamentals have not. It is interesting to compare the high valuations of Internet companies with the stock prices of four companies involved in localization: Lernout & Hauspie, Alpnet, Berlitz and Bowne. These four companies should not be compared directly, as different components are involved in each case. Nevertheless, what becomes immediately apparent is that they all had flat or declining valuations at a time when the stock market was generally booming during most of 1999. The conclusion must be that localization was not viewed as a high value creation business, even where the companies concerned are making money.

Let us now compare the valuation characteristics of the models I mentioned above with those pertaining in the localization industry.

• In the high-touch model, specialized knowledge remains with the providers—this has to be the case as otherwise their high rates would not be justified. Localization rates, on the other hand, are typically under US$ 100 per hour, and only lower-level activities are typically outsourced. In other words, most localization firms have not been able to convince their clients that they have the necessary knowledge to take on higher value added activities.
• In the low-touch model the margins are higher, but localization, as currently performed, offers only a low level of reusability. In addition, any efficiency gains are usually claimed directly by the client and localization firms therefore lose value here as well.
• In the no-touch model, clients pay for the right to use companies’intellectual property, and this is subject to strict control and enforcement. In localization, however, no fees are paid for the use of intellectual property rights and in fact, localization providers regularly sign these away. They therefore do not share in the success of the product, nor in its reuse.

Change is in the air

I did not include Lionbridge among my four examples of localization companies because I consider it to be a new breed. While detractors might say that the company has done little more than add an “e” in front of every noun, I believe that they truly understand the fundamental changes that are shaping the localization market. Since I first presented the concepts in this article, Lionbridge has announced the acquisition of INTL.Com (formerly International Communications) for US$190 million in stock. Two other companies worth mentioning are SDL, which went public recently and Vistatec, which has linked up with Deloitte and Touche to exploit the opportunities in global e-commerce. This is a new twist, but it is where the market is going. Lionbridge is currently losing money, like most Internet companies, and needs to grow into its valuation. In other words, it is positioned correctly but needs to execute its strategy. The object of the exercise is not only to be the best localizer in the world, but to be the best in the world and be valued accordingly.

In terms of market perception, my previous employer Bowne Global Solutions, Alpnet, Berlitz, and many others, have well trained staffs who deal with Internet issues on a daily basis. However, they have not yet repositioned their companies towards the Internet economy, and do not have the important first mover advantage. I do not claim that the skills or the execution of projects is any worse or better. Only that they have not taken full advantage of the convergence of globalization and the Internet in their business models.

The death of translation

Globalization is a business imperative and requires e-commerce implementation, content development, marketing, fulfillment, representation, technical support, Web site development, application development and testing. This means that, if you want to increase value, it does not suffice to remain a translator. In fact, localization must reduce its dependency on translation, and the sooner the localization industry treats it as a commodity, the quicker it can move on to the next phase. Localization is a huge opportunity on the Web, but not for the localization industry as it now stands, since it is localized—not translated—content that the Web needs.

Changing the business model

Service providers therefore need to find ways to create more value that will translate into their own valuation. They can do this by conducting deals in which they do not get paid up front, but rather take a percentage of their client's success. They must also find ways to get closer to end users and should take significant risks to achieve significant rewards.

When I was head of the Alpha Language Group, a translation agency, my biggest concerns were having enough money to cover my payroll and cash flow. At this stage of the industry’s development short-term cash flow does not determine valuation. The markets are open to companies that wish to raise money to invest it in big plays and big opportunities.

A significant level of risk is necessary to create significant value. Translation means adding one person for each 2,000 words per day, and this is not the way to create value. The same applies in principle to engineering activities, unless one can create reusability. The smart move is to automate processes and keep the value generated by the hard work this represents. In other words, service providers should retain ownership of their processes and intellectual property and should not pass them on to their clients without proper compensation.

In this context, it is interesting to look at the evolution of localization. Services today are utilizing Internet protocols, but this is only the beginning—we need a global support infrastructure that accomplishes new levels of service that clients will want to use to gain a competitive advantage. Many clients do not want to operate directly everywhere, and service providers should focus on understanding what key differentiators will allow them to meet the challenges of a globalized Internet economy, while ensuring that they retain the intellectual property in their work, or that they derive the proper value from it.

When recording labels or movie production companies reach agreements to sell their products, there is a clear understanding that it is their right to collect monies on the sale or use of those products anywhere in the world. There are huge growth opportunities in the area of content creation for the localization industry. It is not enough to translate more words for pennies – you need to create value.

Claudio Pinkus
Chief Operating Officer
Ask Jeeves International
5858 Horton Street
Suite 350
Emeryville, CA 94608
USA
Tel.: +1-510-985-7706
Fax: +1-510-985-7416