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By Andres Heuberger

Uncertain times ahead for industry in flux

The localization industry, for so long the poor cousin to the software industry, has learned a thing or two in the past few years. Not to be left behind by the Internet Gold Rush, the industry has suddenly embraced everything "e".

No company so exemplifies this trend as eTranslate. According to Charlie Baxter, President and CEO, "the Internet is a vital component to the future success of the localization industry."

He predicts that after the dust settles a few major players will emerge-those who have combined cutting-edge technology and outstanding customer service. "The next two years will be integral in determining who those winners will be."

Jaap van der Meer, CEO of Alpnet, agrees. "I see four to six global winners in this industry; others will be marginalized or will disappear."

Who will these winners be? What will the localization industry look like two years from now? Or will there even be a localization industry? In this climate of mergers, IPOs and technological advances, the only certainty appears to be uncertainty.

The Gold Rush Is On

For the time being, though, localization companies are certain that the gold rush is on. Vendors are staking claim to what they see as the mother lode-ownership of the multilingual Internet. No longer are vendors limited to chasing a finite number of software developers. Suddenly, every company with an e-commerce web site and global aspirations is a potential client.

Companies see that technology offers a defensible competitive advantage, and they're investing heavily in retooling systems, developing software and buying or merging with competitors. To finance these undertakings, companies require money-lots of money. Thanks to the current Internet craze, they don't have to search far: investment dollars seem to be falling from trees.

The industry has attracted the attention of venture-capital heavyweights. Cornerstone Equity Group and Equity Group Corporate Investments both have invested in INT'L.com. Earlier this year, eTranslate attracted $8 million in venture funding, led by New Enterprise Associates.

Not wanting to be left behind, a number of other localization and language-technology firms are preparing for initial public stock offerings. They aim to join the eight publicly traded companies that derive a substantial share of revenue from localization activities.

SDL is the most recent example of how a localization firm can leverage an Internet story. On the strength of being portrayed by the business press as a "provider of software to translate web sites" (The Independent) and "Internet translation software company" (The Times), the value of SDL's shares has more than tripled in the days after being listed on the London Stock Exchange.

With success stories like these, the number of localization companies going public is sure to grow. And it's no surprise: "The advantages of having access to capital are enormous," according to eTranslate's Charlie Baxter. "This year, we're spending more on R&D than most translation companies have in sales."

Publicly Traded Localization Companies

* Source: companies' web sites

But going public is a double-edged sword. The pressure for higher margins and accelerated revenue growth will only intensify. As a result, companies are scrambling for new sources of revenue and for improved profitability. Some claim to be getting out of the localization industry altogether.

The End of Localization As We Know It?

"Localization companies today face tremendous price pressures," says Alpnet CEO van der Meer. "The localization revolution that started with the introduction of the PC 10 years ago is about to come to an end. Localization companies have been spoiled by their cozy relationships with IT firms and the plump profit margins of localization work. They have been caught unprepared for the rapid changes ripping through the industry."

Roger Jeanty, CEO of INT'L.com, agrees: "We woke up one morning and realized that 20% of our revenue is coming from web-related services."

In an effort to shore up sagging profit margins, localization firms are combining technology and professional services into new, more profitable client offerings. From testing services, to web-based translation transactions processing, to multilingual information management, localization companies are leveraging traditional human language services with technology. Conversely, lower-margin services such as document translation, desktop publishing, web-site translation are becoming commodities relegated to smaller firms or niche players.

According to van der Meer, with the exception of a few regional and specialty-boutique vendors, "the localization industry is about to disappear. Over the next several years, localization companies will have to transform themselves into integrated solutions providers…or risk perishing."

Whether or not this prediction comes true, smaller industry players are feeling increasing pressure to specialize as large as their larger competitors "reinvent" themselves. Many localization companies are expanding downstream from localization-offering call centers, training and support services-while van der Meer sees Alpnet moving upstream, toward a role of systems integrator. Alpnet plans to offer consulting services, solution design and even ASP (application service provider) capabilities.

But whether these new companies are called "localization companies," "globalization companies" or "systems integrators," many industry insiders agree that mergers and acquisitions are becoming increasingly important as a strategy for growth and expansion.

Do Clients Need Reinvented Vendors?

Before INT'L.com has had time to fully digest its latest acquisition (France-based Motus), the company is itself being acquired by Lionbridge Technologies. But beware the challenges involved in this kind of rapid-fire consolidation strategy. "We invest an enormous amount of time and energy in identifying companies with similar focus and business models in order to find the best synergies. At the same time, we need to continue improving our core business and client-oriented service. It's not a strategy for the faint-hearted!" said Jeanty.

However, Jeanty says that this repositioning is not for the sake of growth alone: global clients require global vendors to support them. And the localization companies who wish to serve the top tier of clients have no choice but to reinvent themselves by aggressively expanding services, capacity, and offices around the world.

Eric Tordeur, International Translation Producer for Yahoo!, agrees. "We wanted to work with a company that was global and present in all 21 countries where Yahoo! has a site. Also, hiring a localization company that merged with, or has among its acquisitions, companies that can offer linguistic solutions such as translation memory and glossary tools is a big plus." Yahoo! is currently working with L&H Mendez, a company that has undergone several mergers and acquisitions.

Many other factors are influencing client demand for added services and global solutions, among them:

• The amount of (multilingual) information companies must manage is exploding.
• Time-to-market pressures are intensifying, requiring companies to find new, innovative means to distribute products and information.
• As companies enter new markets, the number of languages they work with keeps growing.
• Integration of distributed databases, knowledge bases to leverage investments require multi-faceted solution providers.
• Increased competition is forcing companies to become more efficient rather than raise prices.
• The industry is impacted by the emergence of small, yet global-minded companies, especially dot.coms. In contrast to traditional small businesses, these firms are thinking "global" from day one.

Yahoo!'s Tordeur says that companies will have the edge with clients if they operate globally and offer a comprehensive menu of services: "I believe that presence on local markets, high-level engineering skills and, in light of the booming Internet industry, the ability to efficiently localize web pages and offer real multilingual solutions to Internet companies, will definitely make the difference."

Of course, any mistake made by the big guys will leave the door wide open for nimbler, more responsive localization firms. Ironically, client service and quality control become even more critical as vendors expand and technology becomes more integrated. In other words, don't count out the little guys just yet.

In fact, the big guys are going to have to start worrying about even bigger players invading their turf.

Beware of Claim Jumpers

Alpnet, for instance, isn't worried about competition from the likes of INT'L.com. van der Meer sees future competitive threats coming from a different direction: small e-commerce firms and established systems integrators.

One must look no further than the recent announcement of Deloitte Touche Tohmatsu allying itself with VistaTec to offer technology-based global e-commerce solutions in Ireland. Most likely, this type of alliance is just the tip of the iceberg. For IT solution providers will inevitably need to acquire multilingual capabilities to better service their customers. It's not far-fetched to imagine a world where PricewaterhouseCoopers and Cambridge Technology Partners are large-scale players in this industry.

But eTranslate is not content to sit back and watch this happen. They recently announced a $3-million advertising campaign and they promise that big things are on the way.

At this point, nobody can be sure where the industry is headed, only that we're headed there quickly. As long as the industry continues to grow 30% annually and demand for localization services outstrips demand, companies have the luxury of sharing an ever-expanding pie.

And until the current web craze runs its course, investors will continue to fund any losses and investments.

However, for the localization industry to remain viable over the long term, industry leaders have to figure out a way to return their companies to profitability. As INT'L.com's Jeanty puts it: "Spending money is easy; making money is hard."

Andres Heuberger is an editor at multilingualwebmaster.com. He frequently writes on issues related to technology, translation, and regulations. Rants and raves can be sent to aheuberger@multilingualwebmaster.com.

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