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