The Russian language services market is totally unlike its counterparts in Western Europe. It’s different in terms of size, direction, business models and successful sales practices. From abroad practically none of the global language and technology companies have managed to keep offices in Russia and grow a local customer base. Instead of creating in-country production teams to deliver the language, multilanguage vendors generally rely on subcontractors or hire freelancers remotely.
In a similar way, Russian language service providers (LSPs) that have achieved success in the domestic market find it difficult to get a solid foothold outside of it. Many have tried, but only a handful have succeeded. Here are some of the reasons why.
As a language, Russian is one of the most prominent on the internet, holding the eighth spot in total number of users. However, in financial terms the market is disproportionately small. It might be less than $200 million a year.
The latest annual research by translationrating.ru puts the total revenue of large LSPs at $132 million. This figure includes comprehensive data from company surveys, official tax registry and interviews with CEOs. It features not only publicly-known companies, but also defense contractors and captive operators that normally don’t promote themselves as much.
The “long tail” of the market is comprised of about 2,700 limited company entities and 7,500 self-employed people classified under “translators, editors and secretaries” in the tax registry. Their revenues are not disclosed, and are thus invisible, which is why the only way to size up that portion of the market is to guess. My way of guessing is to multiply the average salary by the number of self-employed people and legal entities. This translates to $57 million.
Top LSPs and the long tail together come close to $200 million as mentioned above. This figure is tiny compared to markets in Western Europe.
In France, a similar analysis conducted with Chambre Nationale des Entreprises de Traduction (CNET) estimates the market volume at $650 to $900 million. In the United Kingdom, LSPs sell services and technology worth more than $1.3 billion every year, according to Association of Translation Companies (ATC). The difference is even more striking when taking economy size into consideration. For perspective, Russia’s foreign trade is roughly half that of the UK’s, yet its translation market is probably seven times smaller (see Figure 1).
Another indicator of the market volume is the size of top translation companies headquartered there. Market leaders in the UK are bigger than their counterparts in France, which in turn are bigger than the ones in Russia. There are industrious and business-savvy leaders in each country, but they depend on a fertile and open domestic market to fully realize their potential.
The decline of the national currency, the ruble, is partially responsible for smaller trade figures. Since 2014 the exchange rate has practically been cut in half, from 32-35 to 65 rubles per US dollar.
When measured in rubles, trade volumes and business sizes look much better, and some of them even grow. In particular, companies with a higher ratio of contracts with revenue denominated in US dollars and euros, and expenses in rubles, have been doing quite well. Another category of growing LSPs in Russia is defense contractors.
Optimizing for cost
Lower turnover levels in Russian LSPs does not mean smaller teams or profitability.
Salary levels in Russia are low in comparison with Western Europe, and employers can afford to keep more people in the office, including specialist translators and editors. In the United Kingdom the median gross salary for an in-house translator is about £20,000 – £25,000 depending on experience (or about $30,000), according to the ATC survey in 2015. An equally qualified colleague in Russia will get paid four times less.
Top firms in Russia employ up to 150-200 people, including potentially hundreds of in-house translators. Moscow-based agencies sometimes take the next step and venture into provinces with strong language training schools and universities. There, they create cost-optimized translation teams. For example, TLS opened a production office with just under 100 in-house translators in Novosibirsk a few years ago; Janus Worldwide hired a team of about 30 in Tomsk; ROID went for Nizhny Novgorod and so on.
This in-house translator model allows a company to build quality over time. However, it is only feasible for translation companies that work with consistent volumes in the same set of languages year after year.
Profitability of Russian translation companies is generally higher than that of their Western counterparts. Per the translationrating.ru survey, median earnings before interest and tax (EBIT) currently stands at 25.4%. Half of the respondents of a similar survey in France had a minimal profitability at around 5%, and EBIT for profitable companies averaged 14%. An average across official tax data yielded similar results: across almost 900 companies the ratio of net results to revenue stayed within the 6-8% margin.
Statistics like this should be treated with caution. They are usually based on a small number of responses, because few companies agree to reveal their profitability, and among those that do many are smaller firms with volatile performance. In addition, French companies might be spending earnings with greater zeal, as the corporate income tax in France is high, 33%, versus 15% in simplified accounting systems in Russia. Still, the difference is staggering.
In practice, rates on the internal Russian market are lower, and Russian companies need the increased level of profitability to stay in business. In absolute figures, not percentages, they would earn the same or less than their French colleagues on a project of the same size. For example, if a French LSP translates 100,000 words and charges 0.12 euros per word, and then adds on a 14% profit margin, they would end up with 1,680 euros in profit. Conversely, if a Russian LSP translates 100,000 words and charges 0.03 euros per word, and then adds on a theoretically much larger 25% profit margin, they will end up with 750 euros in profit — less than half of the French LSP’s profit.
When selling translation services from Russia to overseas customers, companies would charge much more, but they typically also employ more workflows with more steps and more complex quality control, driving up their cost.
While this is a simplified calculation, it reflects reality. LSPs in Russia might translate millions and millions of words every year, and yet their revenue stays small compared to Western European firms of similar volume and staff.
Expanding to new markets
Comparison rates have always pushed Russian LSPs to expand abroad, but few succeed in becoming truly international.
The largest LSP originating from Russia, Janus Worldwide, derives about 50% of its revenue from customers outside of Russia. ABBYY Language Services gets about 20% of their sales from outside Russia. This includes the turnover of US-based translation company Connective Language Services acquired in 2012 and rebranded ABBYY LS USA.
By comparison, top UK firms SDL and RWS are much more successful at exporting. They derive only about 15% of their revenue from home markets. Datawords, one of the market leaders in France, gains 70% of its revenue from overseas operations, in addition to having a very strong position locally. Ubiqus, one of the largest French language services companies, is an accomplished exporter as well (see Figure 2). While UK and French markets offer great rates, the top firms are still motivated to expand abroad.
About six out of the top 20 Russian companies have shown ambitions for international expansion. In the past two years Janus Worldwide has opened offices in the Czech Republic and the UK, in addition to their US office. Logrus has opened up a branch in Chengdu, China, and is now present in six countries. All Correct now has entities in Ireland, Canada and Singapore. Other top companies with overseas branches include ABBYY LS, TransLink and Palex. Others from the top 20 focus their efforts on optimizing their presence inside Russia and near Russian-speaking countries. They don’t have a solid foothold abroad just yet.
Following the growing isolation of Russia’s markets from the Western world, foreign trade continues to decline. It has been dropping in volume since December 2013, and in the eight months of 2016 it is seeing a decrease of about 19%, as follows from the latest national statistics report (See Figure 3). When foreign trade shrinks, so does the need for language services. This is bad news for translation companies that consider Russia their primary market.
As things deteriorate inside the country, more entrepreneurs will be pushed to try again to find new business opportunities outside. A cost-optimized single language vendor for Russian and expanding geographically from region to region works great in the domestic market. But it’s not a good service offering for translation buyers in Europe and the United States. They wouldn’t change suppliers to gain a little economy for one or two language combinations.
To transition to new markets, LSPs that have not yet expanded from Russia to other countries will need to transform their business model first. This could be a new technology others don’t have, or a multilanguage vendor with a clear industry specialization, for example, in life sciences or software localization. This space is extremely competitive.