Forever Fragmented. The Language Services Industry and The Consolidation Curve

Introduction

In 2004, I founded a language services company. Two years earlier, experts claimed that by now, the language services industry would be largely consolidated, and that the top-three players would dominate. It hasn’t happened. In fact, the data show that language services may be even more fragmented today than when I started out 18 years ago.

In addition, the industry segment identified as “Everyone Else” by the latest Nimdzi 100 report seems to be faring quite well despite what experts might have predicted to be “The Great Disappearance.” 

What is happening here? I don’t have all — or even most — of the answers. Hopefully by looking at the data and documenting my anecdotal observations stemming from 18 years in this industry, we’ll start a conversation that I think needs to be had.  

The language services industry may never consolidate, and that’s probably a good thing for everyone.

Data

In December 2002, the Harvard Business Review published an article entitled “The Consolidation Curve.” The thesis of the article is that all industries consolidate as they mature and will predictably move through four stages. Furthermore, companies unable to adapt and move through each stage will cease to exist.

“Today, we predict an industry will take on average 25 years to progress through all four stages; in the past it took somewhat longer, and in the future we expect it to be even quicker. But, our research suggests, every company in every industry will go through these four stages — or disappear. 

-Harvard Business Review: The Consolidation Curve 

That same year (2002) I was living and working in Santiago, Chile. My time abroad introduced me to language services, and I saw opportunity. I began researching the language services industry in my free time and planned to start my own LSP upon returning home to the US. 

As part of my research, I purchased a report entitled Language Translation, Localization, and Globalization from Allied Business Intelligence (ABI). To this day, it is the most comprehensive report I’ve seen on the language services industry. I reached out to the company and was told they followed up on the report in 2005 but have not touched the industry since.

The 2002 report contained 280 pages of insights and data, and I consumed it all. Its data and insights enabled me to gain what I thought was a strong understanding of an industry I didn’t even know existed months prior. 

Starting any new venture is risky, but three general themes encouraged me to do it anyway. Specifically, the ABI report was clear that the language services industry was large, growing, and highly fragmented.

It went on to conclude that despite rapidly changing and improving technology, the industry would continue to depend largely on human translators, making economies of scale — and thus consolidation — more challenging. 

With no one company claiming more than 1% market share, as the report suggested, I concluded that I could carve out a niche and build a profitable, long-lasting business. Thankfully, I was right.

Far be it from me to say the folks at HBR got this one wrong. I will leave that to people much smarter than me. Nevertheless, the language services industry appears at least to be a strong exception to the consolidation curve.

If it takes around 25 years for all industries to consolidate as the HBR article claims, language services should be in Stage 4 where, “The top three companies claim as much as 70% to 90% of the market.” Being conservative, let’s say it’s going to take more time — even though HBR says consolidation will require less time in the future. So, maybe we’re in Stage 3 where, “After the ferocious consolidation of stage 2, stage 3 companies focus on expanding their core business and continuing to aggressively outgrow the competition. The top three industry players will now control between 35% and 70% of the market.”

Thanks to our friends at Nimdzi Insights, their annual Nimdzi 100 — a ranking of the largest LSPs in the world — was recently published. Maybe this report will help confirm the claims in the HBR article.

“Although consolidation continues, the language services industry remains fragmented. The top-100 companies in our ranking accounted for just 17.9% of the overall language industry in 2021 — a rise of 1.9% from 2020.” 

-2022 Nimdzi 100

Wait, what?

A conservative estimate of our industry’s position on the consolidation curve is that the top-three companies should claim 35% to 70% of the market, and the most recent data is that the top 100 claim just 17.9%?

Adding to my confusion, I went back to 2010 and reviewed The Language Services Market report from Common Sense Advisory (CSA). Way back then CSA wrote that, “Those top 40 or so companies would account for US$4 billion, which means that these few top-level firms account for approximately 15% of the current market size.”

If this is accurate, the language services industry is becoming more consolidated, not less.

Let’s throw one last piece of data into the mix.

According to Common Sense Advisory, the market for outsourced language services in 2010 was $26.3B, and the largest player — HP ACG — had an annual revenue of $457 million. In other words, the largest provider in the industry claimed a 1.7% market share.

Fast forward 12 years to today. The Nimdzi 100 estimates the language services industry reached $60.5B in 2021 and the largest player — Transperfect — had revenues of $1.1B. If you’re doing the math, that’s a 1.8% market share.

In short, in more than a decade, the industry’s top player increased its market share by a whopping one tenth of 1%. Not exactly a ringing endorsement of the consolidation curve.

Finally, if we track the progress of Transperfect over the last 12 years, their revenue grew from $221.5 million to $1.1B. The industry, on the other hand, also grew significantly from $26.3B to $60.5B. Once again, if you’re doing the math, Transperfect increased its market share from 0.8% to 1.6%. This is a great achievement to be sure, but one could hardly characterize this as industry dominance.

Observations

The industry is likely larger than estimated

In 2018 an investment banker approached my LSP and asked if we would be open to selling the company. This wasn’t the first time this happened, and we weren’t looking to sell. But we liked the firm’s credentials and allowed them to take us through their process.

The affair was long, and the firm did a thorough job. We received dozens of inquiries and letters of interest. I then spent countless hours on management calls with suitors. 

Among the many things I learned on those calls was that there are many LSPs out there that I’d never heard of or seen profiled in industry reports with revenues in the tens of millions.

In the end, we did not sell. But the exercise was educational, and we are much better off today for not having exited.

Next, US government contracting is a huge and transparent industry. Language services is a robust segment within the larger industry. It’s easy to see contracts awarded, their value, company names, and more.

Again, there are companies flying under the mainstream LSP radar that are doing millions of revenue in this segment that may or may not be included in industry revenue totals.

Finally, I’ve met other LSP leaders from around the world at conferences, and I’m pleasantly surprised to learn of their size and scope.

The “Everyone Else” segment of the language services industry is thriving

First, an anecdote. When was the last time you heard about an LSP going out of business? In my experience it’s almost never.

Second, if you’re spending time at conferences and speaking to LSP leaders, you’re more likely to hear that they are healthy and have more demand than they can handle.

Earlier this year I had the pleasure of meeting many CEOs and founders of LSPs from around the world. Their stories were amazing, and the themes were consistent.

Business is good — no, excellent.

There are many multi-million dollar LSPs all over the US that dominate their segment within their state and/or region.

There are others with valuable client relationships. We’re talking household-name clients that have lasted for decades.

These LSPs have dynamic CEOs and teams that love working with them and for their companies.

Conspicuously absent from my conversations with other LSP leaders is any talk or anxiety related to being made obsolete by larger players. You’re much more likely to hear that these companies have picked up new clients from larger players that didn’t service them well, delivered poor quality, or charged unnecessary fees.

Finally, M&A is a healthy topic at the conferences I’ve attended, but it’s about opportunity and monetization. There is no sense of desperation from a looming wave of consolidation that will make these firms irrelevant. On the contrary, my sense is that “Everyone Else” LSPs are thriving and looking to the future optimistically.

Technology in language services is empowering smaller LSPs

Among the reasons why industries consolidate is the desire for economies of scale that can be achieved through technology.

I recall at times feeling less competitive in the early days of my own LSP because larger players had the resources to build technology in-house. During those days, industry outsiders often asked whether I was worried that Google or some other game-changing tech would soon kill the small LSP. 

My doubts and anxieties never realized, and I can attribute that to at least two factors simultaneously at work that have allowed companies like mine to continue to thrive.

First, and as stated earlier, the language services industry continues to largely depend on the work of individual people, thus rendering the ability of larger firms to capture economies of scale more challenging. Large LSPs and language technology companies still require armies of people to achieve an acceptable level of quality. There are content types that don’t, but these represent new industry segments that have only served to increase the size of the pie.

Second, new technologies enable smaller LSPs to deliver enterprise capability with small-company customer service. Anyone reading this who works in language services knows that small and large LSPs compete head-to-head regularly, and smaller LSPs frequently win. 

I believe there is a virtuous circle of technology development helping to drive the success of smaller LSPs as well. Specifically, the market for many language tech firms is the “Everyone Else” LSP. These companies typically don’t have the capital to build the tech on their own. And even if they did, they shouldn’t. Therefore, the market has answered the need with countless companies offering a variety of software solutions on a SAAS and/or license basis. As market needs change, tech firms continue to innovate and smaller LSPs invest and add capabilities.

Together, these forces — human constraints and access to tech — create a powerful combination enabling them to continue to thrive.

Questions

What’s driving consolidation in language services?

“Ferocious consolidation” is an accurate characterization of the language services industry today. But given the industry fundamentals, why is this happening? Apart from the more obvious and more headline grabbing-reasons like new capabilities, expanded footprints, and market-share gains, many LSPs are looking to move into the next chapter of life. As stated earlier, it is uncommon to hear of an LSP going out of business. So owners looking to retire or simply do something else after decades of running a successful — and in some cases quite large — business are selling.

This “passing of the torch” is a healthy phenomenon in our industry. It injects new blood and capital into a business and allows the owner to pursue other interests.

Who are the winners and losers?

This question is difficult to answer and deserves a deeper dive than this article can provide. Hopefully this piece will be a catalyst for healthy debate on the topic.

Among the losers, in my humble opinion, are the most important people in our industry — the translators, interpreters, and editors. Because our industry depends heavily on these people, it is more difficult to capture economies of scale following an acquisition. Companies finding it hard to gain desired efficiencies following acquisitions will instead squeeze these all-important workers and pay them less. A vicious cycle develops. As competition for enterprise accounts grows, downward price pressure mounts, and downstream workers pay the price through lower rates.

The following is an excerpt from the 2002 industry report mentioned earlier.

It’s amazing how far we’ve fallen.

“Typically, for the more basic languages (English, French, Italian, Spanish) the per-word rate in the U.S. is $0.32. Asian, Arabic, and Russian-based languages can cost as much as $0.45 to $0.47 per word. In Europe, the rates tend to be lower, with European-language translation costing $0.18 per word, while Asian language fees are roughly $0.32 per word. Additional services such as desktop publishing, graphic translations, and technical documents typically fetch additional fees.”

Do the customers win?

Customers do win in a variety of ways. First, they reduce their language-services costs. Second, as the industry evolves through acquisition and new capital flowing in, companies innovate. New technologies are developed, and buyers can localize more and different types of content more efficiently and more cost effectively.

On the flip side, customers are also winning because the industry is slow to consolidate relative to the consolidation curve. Clients have many choices. If the language services industry had followed the consolidation curve, clients would have fewer choices, would likely be paying more, and surely workers would be paid even less. Consolidation is good for the customer to a point.

Is consolidation good?

Once again, this is a question that goes beyond the scope of this article and one that is open to debate. Consolidation in the language services industry appears to have found this Goldilocks state of continuing to consolidate but enabling a vibrant majority of smaller companies to exist and thrive.

Conclusions

The Top-100 LSPs deserve our admiration

These so-called “super agencies” push the industry forward and inspire everyone else to stay sharp, innovate, take risks, and focus on the customer. I’ve always read the ranking of the industry’s top companies with much interest. Others do as well. Another LSP founder recently told me that each week, they have an activity whereby a different team member is responsible for analyzing a company on the ranking and presenting his/her findings to the rest of the company. Larger LSPs inspire smaller ones, and their success is not a zero-sum game.

The world of the smaller LSP is a rich and vibrate universe of companies

At close to 80% of the language services industry, these companies represent its lifeblood. The next super agency may come from this group, but even if it doesn’t, it’s OK. Years ago, I read a book called Small Giants. It was a collection of stories about small companies that had the opportunity to become giant and chose not to. They rejected going public, taking outside money, or M&A, because doing so was not in alignment with the company’s vision for the future. Such choices carry obligations that are often overlooked. Behind the attention-grabbing headlines are people, responsibilities, and burdens that didn’t exist before. Making these choices is certainly one path to growth and success, but not making them is as well.

As long as the language services industry continues to be powered primarily by humans, it will remain “Forever Fragmented”

Since I founded Keylingo in 2004, technology has certainly changed the game — but not how I thought it would. Today’s research reports seem to discuss things like MT in much the same way as reports dating back to 2002. Instead of displacing smaller LSPs and driving what I thought would be more in line with the consolidation curve, tech has increased the size of the pie, creating even more opportunity and more jobs for people and companies willing to adapt.  

Dating back to my business school days and before that in banking, I analyzed my share of industries. And far be it from me to question the brilliant minds at Harvard Business Review. But, like everything else, there are exceptions to every rule. Will the language services industry be forever fragmented? It certainly has been for the last 20 years, and at the current rate, no one reading this will likely be around if it ever does. I like to think our industry is in a Goldilocks Zone — not too consolidated and not too fragmented. Just right!