Idea Factory Languages, with 85 full-time employees and production centers in Brazil and Argentina, specializes in translation and localization for the Spanish and Brazilian Portuguese language markets.

CEO Teddy Bengtsson periodically sends out “state of the business” updates which I always find interesting. I asked him if I could pass along his note and he said yes.

Here is what he had to say…

So – now that we are a couple of months into 2010 – can it be said we are past the worst in terms of the global financial crisis?  Too early to tell I think, but there are some signs suggesting there may be cause for modest optimism.  Up until the end of 2008, the effect of the crisis on IFL’s financial performance had primarily been that revenue growth was slowing down or come to a standstill.  The situation got worse during the first half of 2009, with year on year revenues down by 10-20% over the two quarters.  This pattern continued in the third and fourth, but for the latter it was only marginally down when comparing year on year and we saw a 12% growth compared to the third quarter (despite a seasonally slow December month).  I expect the first quarter of 2010 to be a turning point and we will see positive year on year revenue growth for the first time since 2008.  Naturally, this is partly due to the easier comparisons as the crisis was starting to bite for real early in 2009, but nevertheless significant in terms of direction.  Looking beyond pure financials, we are also seeing increased recruitment activity, growth in some existing client business and new customer acquisitions, adding to the reasons for a cautiously positive sentiment.

Several general and market specific factors continue to be very challenging however.  Price pressure remains as intense as it has been, but I get the impression that the industry is starting to realize it is being pushed too far.  We are seeing instances of returning accounts, i.e. business lost to cheaper suppliers is coming back to IFL as clients realize that a lower price does not mean lower total cost.  In fact, almost without exception the opposite is true as increased management overheads and post-processing costs quickly accumulate to eat up the superficial advantage of a word rate that is a cent or two lower.  Not to mention the truly high cost caused by late and/or sub-standard quality deliveries!  IFL neither can nor want to compete on price alone with the many agencies in our region operating with minimal infrastructures, but I remain confident that service quality and reliability will ultimately generate the true value that makes a partnership sustainable and mutually rewarding.

Market factors in our local production environments tend to be in stark contrast with most parts of the world.  In these times when deflation, salary reductions and declining property markets seem to be the norm, Argentina continues to run its own very different race.  Private consultants estimate that Argentina’s inflation in 2009 was the third highest in the world – only behind the Democratic Republic of Congo and Venezuela – strongly contesting the cosmetically enhanced official number below 8% and stating the real figure as somewhere between 15-18%.  As you can imagine, this puts local companies servicing global clients looking for price reductions in a near impossible situation.  Especially larger companies like IFL with a high number of permanent employees, as we cannot simply pass the resulting problems further down the supply chain.  A saving grace has been the easing of the local currency by around 10% against the USD.

Inflation is less of an issue in Brazil, IFL’s other production location.  Although not inexistent – it was close to 5% in 2009 – the bigger challenge here has been the strengthening of the local currency.  When we saw the Brazilian Real going in the opposite direction in 2008, predictably we came under pressure to reduce pricing accordingly.  Unsurprisingly, few are equally eager to suggest that we now increase rates to compensate…!  Seriously though, a pricing correction of 20-25% from January 2009 levels would be perfectly logical from strictly an economic data perspective.  Furthermore, Brazil’s growing stature as a global power is making it an even more attractive target for international companies seeking alternatives to their existing, often troubled, markets.  This is becoming evident in increased competition for the relatively scarce competent translation/localization resources, so my recommendation is to expect to pay reasonable rates and make sure to find a partner you can trust.