Supply chain management as a way to multiply net profit for LSPs

Surprisingly, many of our users are unaware that Smartcat is actually much more than just a CAT platform, and how broad its capabilities in Supply Chain Management (SCM) are compared to any other platform in the translation automation space.

We’ve learned from our past experience in the translation industry (our executive team’s cumulative experience is something close to 100 years ? ) that not many involved in it clearly understand that supply chain management is the second largest expense for an LSP business after direct supplier costs, which is what you pay to your suppliers, including freelancers, subcontracted LSPs, etc.

So if you believe you’ve optimized your direct supplier costs and are leveraging the most out of your translation assets (with TM being the most important one), then focusing on your supply chain management process can really boost your profits.

I’m serious here, with this function properly optimized, you can cut your operational expenses by 10–20%, which usually multiplies net profit 1.5–2 times or frees up extra budget for growth.

Let’s take a look at the six major stages we define in an efficient SCM workflow:

Obviously, this is the most comprehensive scope of stages, activities and tasks of the whole Supply Chain Management process in a mature translation business. Of course, not all of these stages are present in every LSP out there. This depends on the business’s size and maturity level. And they may not have the same potential when it comes to efficiency gain. But for any translation business it’s crucial to streamline the information flow and ensure seamless handover of tasks and responsibilities between all stages, while simultaneously eliminating as many manual routine tasks as possible at each stage. But to begin with, I would recommend focusing on Search & Hiring, Project Management and Billing & Payouts. They are present in almost every translation business and can generate up to 80% of the efficiency gain that you can leverage from the whole Supply Chain Management process after it is set up and automated properly. Project management is obviously the starting point for every LSP, and it usually will be the main focus right after direct supplier costs. It obviously deserves a separate article containing some automation best practices and insights from industry leaders (let me know if you like to read one). The other two stages, which in general have a potential for optimization comparable to project management, are often automated quite poorly or not automated at all. According to our statistics, on average, the whole Supply Chain Management process costs LSPs around 35% of their top-line revenue, including project management costs, of course.

Even if we don’t consider project management, which usually accounts for up to ⅔ of this cost, focusing on these two stages alone can increase gross margin by 3 to 5 percentage points, significantly increasing net profit.

For most LSPs, a 5% gain would result in a ~50% net profit increase. This can unleash the potential to, for example, invest more aggressively into Sales & Marketing or acquisitions. Or, if you ever consider selling your business, this can also make a big difference. In most M&A deals, LSPs were valued at X times EBITDA, where X depends on multiple factors, which I do not cover in this article (see Slator, for example). Leaving the X factor out of the equation, EBITDA is the key indicator and if multiplied by 1.5, the business would become 1.5 times more valuable. You can go even further and double your bottom line if you also focus on project management and QA automation! Of course, these transformations don’t happen overnight. They usually require sustainable execution over a period of 6–12 months or even longer, depending on how focused you’re going to be. The Smartcat model, on the other hand, is a no-brainer and does not require investing in software licenses. With our platform’s helping you hire language professionals and automate billing and payouts you can start reaping benefits from day one.

After I posted “Why we don’t count seats”, some people wrote back saying they liked the reference to the “5 monkeys experiment”. So here’s another fun experiment:

This video goes to show how selective our attention is. So, when we’re focused on something consciously or, which is even more scary, unconsciously, we tend to ignore all other arguments or opportunities. If you are interested in this subject read about anchoring, which is a cognitive bias many people are prone to. But not you of course. You are perfectly objective and logical ? Now, back to where we started. Most LSPs continue looking to gain efficiency by squeezing direct supplier costs. This is the largest expense category for any translation business, so it naturally gets the most attention. The negative outcome of this approach is that it’s getting harder and harder to find high-quality translators. But that’s a completely different story.

The aim here is to help you focus on supply chain management. This can be a really efficient way to increase your margins after you’re done optimizing your direct supplier costs and your translation assets.

In my next piece, I will talk specifically about how to increase margin and improve cash flow by automating billing and payouts. After that, I will explain how you can increase your efficiency in searching, testing and hiring new suppliers by leveraging the Smartcat ecosystem with 100,000+ freelancers and LSPs available.