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Global Watchtower
Common Sense Advisory Blogs
American LSPs Poised to Increase Rates for Translation Services
Posted by Renato S. Beninatto on November 14, 2007  in the following blogs: Supplier Business Issues, Translation and Localization
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Just three weeks ago we wrote that American LSPs using non-U.S. translation resources were suffering squeezed margins due to the devaluation of the dollar against major world currencies. We also predicted that when the U.S. dollar/euro exchange rate reached 1.45 translation prices would need to be realigned. Well, the euro is now worth US$1.45 and anyone selling internationally faces a tough pricing decision.

Just as airlines impose surcharges on their tickets because of increasing oil prices, Common Sense Advisory believes that it is time for LSPs to pass on the additional costs to the final clients who theoretically are reaping the benefits of significantly higher international sales because of the cheap dollar.

Let’s look at the financials of a typical project -- 10,000 words from English into FIGS, Brazilian Portuguese, and Japanese – and how the falling dollar affected them over a period of six months.



In this example, the final client paid the same amount in May and November 2007, but the LSP's total cost went up by 8.8%. The LSP margin fell from an already strained 37.2% to 31.7%. That 15% drop in operating profit will have an even graver impact on the bottom line, of course, as other costs remain static and the very profitability of our hypothetical company is now threatened.

Lionbridge mentioned in its latest investor call that it has started negotiating higher prices for its dollar-denominated contracts. The company also indicated that despite major efforts to reduce overhead and transfer costs to Poland, India, and China, the exchange rate factor had a negative impact of a couple of million dollars in its quarterly results.

Brazilian vendors tell us that they have passed on all the efficiencies that they could to their American clients and that higher rates are inevitable if they are to stay in business. The U.S. dollar depreciated 16.2% against the Brazilian real in the past six months, but much more than that in the past couple of years. However, currencies pegged to the dollar -- like the Chinese yuan and the Argentinean peso -- have not fallen as much.

Conversely, this situation is beneficial for companies that invoice in British pound, euros, or Canadian dollars. For them, the United States has become a cheap labor market where they can buy translations from ATA members at the standard U.S. rates. One possible strategy for American LSPs is to switch their price lists to the euro, as supermodel Gisele Bündchen recently did. However, we think that it will be a long time before U.S. companies ditch the dollar.

 

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