Many of the translation industry’s largest agencies worldwide outsource the vast majority of their translation assignments to contracted freelancers around the world. This allows them to cover more languages and thus, generate more business. Furthermore, by contracting vendors worldwide, they make substantial savings by avoiding the necessity to employ translators internally. In order to pay these service suppliers, who essentially form the lifeblood of a translation agency’s product – quality and efficiency of translation – these companies must send payment worldwide to vendors in scores of countries, involving dozens or often hundreds of currency types. How does the way they pay impact their business?
Case study: Best Translation, a translations company
Best Translation is a fictitious California-based translation agency. They handle translations for multinational clients in over 50 languages worldwide, paying native translators in these languages in US dollar from their headquarters. Best Translation, like many businesses, assume that by paying foreign service providers in USD, their home currency, they are eliminating the
4 ways paying in home currency detrimentally affects Best Translation:
1. Increased supplier prices to cover FX costs
Suppliers typically add a surcharge, usually between 10 and 20%, to their regular price in order to cover the costs of exchanging currencies and indeed, the risks of the fluctuating exchange rate. If Best Translation changed to local currency payment, they would receive lower rates from their suppliers, driving down costs.
2. Reduction in supplier pool
Best Translation inevitably suffers from a limited supplier selection, as charges for converting currency and exchange rate fluctuation lead many suppliers to turn down Best Translation in favour of more favourable offers elsewhere.
3. Loss of quality of supplier
The best, more experienced providers typically charge higher fees. Many do not work with Best Translation as they are at risk of losing a substantial portion of their fee in the exchange rate and on bank fees. In more exotic languages, such as some African tongues and regional languages, this proves particularly detrimental to Best Translation as they struggle to locate the necessary resources. They often have to turn to inexperienced, less reputable translators. Furthermore, the top-grade suppliers tend to instead work with Best Translation's competition.
4. Negative image of Best Translation
Through paying in their own home currency, Best Translation is widely perceived as a company that does not consider the interests of its partners. A negative image of a company, to a degree, is highly likely to impact its ability to recruit employees and contractors, and may even impact its ability to attract and retain clients.
Advantages of changing to local currency payment for Best Translation
If Best Translation switches to local currency payment, contractors will likely be more willing to work with them because:
- They can price assignments in their own currency.
- They are not exposed to foreign exchange risk.
- They save time and effort by avoiding the confusion of working with different currencies and seeing if it is viable for them once converted to their currency.
- Best Translation will project a more cooperative image of a company that thinks of the needs of its suppliers.
Further advantages for Best Translation:
- Charges that vendors add to their regular rate to cover the forex risk will be eliminated.
- Many suppliers take on FX risk without benchmarking their service or managing FX costs effectively, ending up paying high fees (typically 2.5% on the exchange rate, and often additional bank/broker fees on top). Once Best Translation sets an efficient, optimised FX
management system in place, they will ultimately win extra profit margin by paying fair, transparent fees (hedging fee with Kantox of 0.19% / Paypal 2.9% / Banks and brokers up to 2.5%) and extending their supplier pool in number and talent. - Recruitment and administration costs will be lowered as time and resources will not be wasted on communication with suppliers who later decide not to work with Best Translation as a result of their payment system.