LSP Concentration Ratio Nimdzi Finger Food
In the business of translation, the most influential factor affecting competition is the LSP (Language Service Provider) concentration ratio. It is a measure of how concentrated the total amount of business is with a small number of firms.
Fortunately, we don’t have to reinvent the wheel here and define a way to measure this ourselves. We can rely on a useful tool that is widely used to measure firm concentration ratio: the Herfindahl-Hirschman Index (HHI).
Concentrating on the competition
The Herfindahl–Hirschman Index (HHI) is a way of measuring concentration among players in an industry. It is calculated by squaring each player’s total market share and then adding all of these together. A high number will mean that the industry is very concentrated. The higher the number, the closer the market is to a monopoly. A lower number indicates that the market is more decentralized and therefore more competitive.
HHI is a well-known measure for market concentration and is used by private businesses, as well as government and regulatory agencies to measure market concentration. For example, the Antitrust Division of the Justice Department uses HHI to decide whether or not to approve mergers that could potentially limit competition in an industry.
The language services industry is not fragmented. It is completely pulverized.
The language services industry has an HHI index of 67. This seems pretty high, right? Well, we may have forgotten to mention that the HHI Index is on a scale of 1 to 10,000. Generally speaking, a score from 1,500 to 2,500 is considered to be a moderately concentrated market, while any score above 2,500 is considered to be a concentrated market. The language services industry is not fragmented. It is completely pulverized. You would be hard-pressed to find a less 97 concentrated market. If you take the top 20 players in the industry, they represent less than 5% of the whole market for language services. Compare this, for example, to the personal computer industry, in which only the top six companies make up almost 80% of the total market share. There is no one single player or group of players that comes anywhere close to controlling the language services industry.
The market has only gotten more decentralized
Even in an industry where mergers and acquisitions are a pretty common occurrence, the market has only gotten more decentralized with the passage of time. Low barriers of entry, the Jell-O effect, and continuously decreasing costs of running an international business are some factors that ensure sustained healthy competition. The top companies can grow and acquire competitors, but they will never catch up with the ever-increasing demand in the industry, and we will continue to see small LSPs entering the market and ensuring that the LSP concentration remains low.
What this means for LSPs is that there will always be competition. Always. Most large LSPs have accepted this and have long ago given up any dreams of overtaking the market. In the language services industry, LSPs do not compete at the industry level. Considering the level of competition in the industry as a whole, that would be madness.
LSPs compete at the niche level. By carefully defining their niche, LSPs are able to shrink the overwhelming amount of competition to a more manageable level.
For more on Market Influencers and industry forces leading to risk and opportunity, see our book The General Theory of the Translation Company.
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