How e-procurement is driving down LSP profitability in Russia –
Did you think the biggest threat to translation business is machine translation? Well, depending on where in the world you are doing business, you may need to think again. Let’s take a look at how mandated tendering has slowly but surely been destroying LSP profitability in the Russian market, and what some savvy LSP’s are choosing to do about it.
No time to read the full report? Watch and listen! –
In 2009 and 2013 Russia adopted laws that mandated public sector organizations to do competitive procurement. Major clients had to change their old ways and stop buying from suppliers they had been working with consistently for years. Instead, they were forced to roll out new competitive tendering processes for all kinds of purchases, including translations. Over the span of 5 years, tendered work grew 6 times in volume and now amounts to about 10% of the total annual translation turnover in the country.
That’s a lot considering that competitive bidding may cause the contracts to change hands. Imagine having to fiercely defend 10% of your portfolio every year, even for healthy accounts that you have worked with for years. Russian LSP’s don’t need to imagine such a scenario, because they are already living it.
FIgure 1 shows the drastic increase of both number of RFP's managed through tenders as well as the overall volume of work sourced. It is interesting to note that the total amount of money spent continues to increase, even as the prices are being driven down.
Impact on energy, space, aerospace and defense
Procurement laws (numbered 44 and 223) affected government institutions first, and state-owned corporations in the wake. Russia is a state-corp rich environment, and the government controls stakes in many sectors, including exporters in aerospace & defense, energy, and oil & gas.
Russian nuclear agency Rosatom, aviation conglomerate UAC, and space agency Roscosmos have been especially active buying translations in lump on the government’s e-procurement platform. State-owned Rosneft sourced a lot of work as well, but it does not appear on top-20 list because their procurement has been split among multiple subsidiaries.
FIgure 2 shows the ranking of top buyers using e-procurement to purchase translation services. Source: Seldon.info tendering software, purchases under Federal laws 44 and 223
The winner’s curse
Many established LSP’s have regarded e-procurement as a blight in the industry, and rightfully so.
Competitive tendering is handled by purchasing professionals, who often know nothing about translation. These procurement managers simply buy from the cheapest supplier offering the service. Translation services are all classified as the same and are assigned a single business code regardless of whether these services are performed by a single freelancer or a mature LSP. This can be ridiculous when you consider all of the value-added services that a mature LSP would bring to the table. However, theoretically anyone with a business license and access to the tender information can compete as equals and win the work.
This has led to low-cost providers winning a lot of work away from higher-cost vendors. Once the buyer has signed the contract, their internal translation consumers were stuck with these low cost vendors. You can imagine the potential dissatisfaction this causes on the buyer side.
Meanwhile, on the vendor side, paper-thin margins leave little room for vetting translators (only the least expensive ones are chosen), ordering additional proofreading or review (little or none), or performing complementary services like glossary management.
This conundrum is well recognized by vendors and buyers alike. A typical comment you could hear was “how the heck could these guys provide any level of quality on [ fill-in-the-blank] cents per word?!”
As we all know, the laws of Supply and Demand are not always fair. Due to competition from desperate companies, the average price for translations sourced through e-procurement has quickly deteriorated to under 50% of the market price offered by most companies in Moscow. In some cases vendors have even found themselves bidding at prices lower than their supplier costs.
It is not uncommon for companies to win contracts in the spur of the moment with a very low price, only to realize later that they would actually be losing money on the deal. Sadly, though, the terms of the contract are binding. Such situations are basically nothing more than modern-day indentured servitude, a situation so tragically common these days that those familiar with it have dubbed it “the winner’s curse”.
While the majority of established firms considered e-procurement a threat to their business, others saw a bit of opportunity here. They adapted their companies to tenders, developed processes to win contracts, counteract and keep competition in check, and to fulfil contracts terms. Out of established market leaders, EGO Translating and Translink have channeled lots of resources into tendering. Out of new players, Proflingva, Linguist (Moscow) and LS Group have been especially successful in challenging top firms, and squeezed them out from some of their old contracts after awarding these contracts started to be a matter of e-procurement procedure.
A typical LSP business unit targeting e-procurement platforms consists of:
- 1-3 salespeople to monitor RFP feeds and prepare documentation
- An analyst to monitor pricing
- Subscriptions to procurement aggregators (seldon.site,goszakaz.ru, sbis.ru/tenders, etc)
- 1-3 legal entities with documented experience in target domains (for example, nuclear energy portfolios)
- Document templates
- Cash reserve for tender security payments
Additional setup includes:
- A technical legal entity to can play the part of competitor in procedures that real competitors are not aware of
- A legal counselor to attack competition and attempt to cancel their contracts with procedural mistakes (or defend against similar attacks)
The big question for every firm specialized in tenders is how to do business and achieve profits when the rates are so terribly low. It is not easy to find translators that would agree to work for the rate that contracts with state agencies demanded. Furthermore, LSP’s have to pay sales commissions, project management costs, taxes and a host of other expenses. Yet this isn’t to say that it is impossible. There are cases in which LSP’s have been able to enjoy 40% net margins on $0.016 per word.
The key is to keep translation memory benefits on the LSP side entirely, hire inexpensive translators full-time in depressed regions of Russia, and to leverage rush rates where possible.
In many cases tender participants use what could be considered insider information. For example, if the contract with a buyer requires 10 language combinations, and an LSP knows in advance through inside sources that some of these languages won’t ever see any meaningful volume, they can offer those languages at zero rate. This effectively brings the average rate down, but still achieves an acceptable rate for the bulk of the project. We know what you are thinking, though… This can be risky! Such practices have been known to backfire in the long run, as buyers kept registering historical prices in the database, and eventually hit their suppliers with projects that had real volumes at the proposed starting price of zero.
Knowing the background of what is going in the language services market in Russia provides us with some useful insights. LSP’s will need to think carefully about whether they are willing to compete in such an environment. If they are not properly set up to handle the competitive landscape, it is perhaps better just to avoid bidding on these projects. To summarize, we can draw several useful conclusions from this information.