Using an e-auction to select your LSP will seriously affect their margin!

I have been involved in a number of multilingual tenders over the years and have recently been reviewing them to see if there are any emerging trends.  I came across a raft of statements during this process and some of which quite frankly annoyed me.  I will paraphrase three of them to give you an indication of what I mean;

  • Suppliers already providing services to XYZ are not permitted to submit pricing which exceeds previously submitted pricing!
  • The standard payment terms are 120 days!
  • The price to and from a source language will be identical!

All of the companies I have reviewed have a significant annual spend on services offered from within our industry and are, as a result, in a very strong position to demand that we all dance to the beat of their drums, however I feel that the balance of power has swung too far in their favour.  Finally, just to complete the picture, to procure these services a number of buyers hold something called an e-auction; where each lot is bid upon by all the potential vendors and the winning vendors are then asked to sign a 2 or 3 year contract within which a further 3 to 5% reduction in the price from year 2 onward is not an uncommon request.

Let’s start by stating the obvious first:

To win this very lucrative “volume of work” you decide that you will reduce your margin figure because it will be worth it based on the volume of work.  So you streamline your processes to accommodate for it and then you’ll be fine! REALLY???” Let’s take a look shall we.

As a supplier of language services we are affected by many factors but one thing is for sure, our company running costs over a 12 month period are highly unlikely to be reduced.  In fact an increase of 2.3% is probably not unrealistic.  So if you were a successful bidder in the previous year this means that a 5% reduction of costs in the second year equates to a net reduction of 7.3% due to increased running costs.  If you’re not permitted to raise your bid above your initial bid from 2 years ago, a further increase in running costs of 2.3% (over the original bid) means that in 2 years from now your net decrease in pricing is going to be 9.6% over your initial bid by the end of term 2, year 2.

So now you’re just 3 years into the contract, your average running costs have increased by 6.9% (actually it is slightly more but let’s spare the full financial detail) but the language pairings you won on the e-auction are actually costing you 8% more than they did 3 years ago due to world events in that region.   This is now eating significantly into your profit margin and the only thing you can do, because you’ve already streamlined your services, is to negotiate better rates with your existing linguists or find new ones.  Both these options are risky strategies when you still have a year or more left to run on the original contract.

….so far so good then???

Point 2, 120 day terms.  The volume of work being produced by the client, as we have mentioned previously, is quite significant, this means that you have to pay your linguists, staff, and all the business running costs for 4 months in advance before you have even the glimmer of hope of getting your money back.  You will most likely have heard the phrase “cash flow is king“; this statement has never been more appropriate than in this situation.  Effectively you’re giving the company you won the contract with 4 months’ interest free credit.

Point 3, So you’re not only being asked to be as competitive as possible on price, you’re also being asked to provide a “one size fits all” price for language pairs, with no indication of the ratio between the two directions.  In simple terms the most expensive direction for the language pairing is also going to take a hit on margin.

To summarise, the net result of this e-auction is a client who, on face value, gets more bangs per buck (notwithstanding the age old “you buy it cheap you buy it twice” saying) an LSP who has been beaten down so hard on price that the longevity of this business relationship is limited from the outset and a bunch of linguists worldwide who are being asked to do large volumes of work at rock bottom prices.

No wonder people are suggesting that the only differentiator in our industry is the price per word!!!!

So what can we do about it?

This is where you come in.  Aside from the obvious sales tips about educating the buyer to the services we offer and how the behind the scenes activities all adds up, I’m pretty certain that there is a whole raft of other ideas out there.  I’m looking forward to hearing your suggestions.

You get what you pay for

You get what you pay for

The Danger of Departmentalization

I recently came across a blog on the Harvard Business Review which departmentalized sales people into 5 different categories.

  1. Relationship Builders
  2. Hard workers
  3. Lone Wolves
  4. Reactive Problem Solvers
  5. Challengers

After reading the article I posted a question on the Advance Selling Podcast LinkedIn group page asking the question as to whether “Challengers” were the future of sales.  There were a number of responses to the question and these prompted a new debate in my head about how easy it is to “box” something up into a pre-fabricated category just so that it is easier to filter through it and find what we’re looking for. Within the Localization industry we too are departmentalized; company size, service offerings, geographical location, etc etc and this is why a salesperson’s role in our industry has become so much more difficult.

There is a pre-conception about you and your company before the first contact has even been established, you have already been departmentalized.  It is now your job as the salesperson to first understand which box you have been placed in and then go on to find out from the prospect why you have been placed in this box. You then need to establish if this is what the prospect is looking for or if it was just some kind of filtration method they’ve used to narrow down the 47,000 field of LSPs into a more manageable size.  Regardless of which the world within which we now find ourselves is so fast-moving that if you’re in the wrong box you’re in for a bumpy ride.

So let us presume that you have found yourself in a positive filtered box and the prospect is now engaging with you.  It is now your job to establish the full extent of the prospect’s requirements and, within boundaries of their departmentalization system, differentiate yourself from the others in this same box.  The sales process hereafter continues in earnest and each of you will have your own way of doing things.

Back now, to the original statement; “The Danger of Departmentalization” In this very brief description above about how difficult understanding the departmentalization of a company can be to the sales process in the localization industry, we can quite clearly see how limiting it can be to narrow down a large field of providers by using simple departmentalization tactics.  It is understandable that reducing such a large field of providers is a requirement but at the end of the process are we really getting the best service for our specific requirements?  Let’s be honest we all see ourselves and our business as unique so why should our requirements be any different?

The reasoning behind this process is driven by our need to have something quickly, so why not step back and start the process a little sooner?  In so doing you can be more specific about your requirements and take a little more time listening to, and then choosing, the right service partner for you.  Departmentalization is a very valid requirement but over simplifying and rushing the process will lead to poor decisions being made.