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Beyond Passion – Business Metrics for Language Companies
By Huiping Iler
Published on January-February issue, 2007, Multilingual Computing
When it comes to running a business, no one will deny that passion is a good thing. But passion alone does not make a successful business. Cold, hard numbers may not be as sexy, but they are just as important. Just ask Andre Pellet, former owner and president of M 2 Limited.
Pellet, who ran the localization company that his parents started 27 years ago, had his eyes opened when his company was acquired by competitor, WeLocalize.
Pellet had always been passionate about his business, and often went above and beyond the call of duty just to appease his customers. Business metrics was not his strong point.
“Many language company owners like myself are passionate about our businesses. We love helping our customers and we will hold their hands when we need to. But sometimes we do this at our own peril. Sometimes we don’t realize just how much the handholding is costing our business,” said Pellet during a straight-from-the-heart panel discussion at this year’s Localization World conference held in Montreal, Canada.
And that’s where business metrics come in handy.
Pellet said M 2 Limited’s top ten customers accounted for nearly 80% of the company’s revenue, a common scenario at many localization firms. It was the handholding of the other 20 percent that was killing the company.
When WeLocalize took over, all that changed.
“At WeLocalize, everything is numbers based. Everybody’s time has a price tag,” said Pellet, who now serves as vice president.
During a recent project, for instance, one engineer was able to complete a task in two hours by writing a macro when the budget was twenty.
“He got a nice bonus (a percentage of the budget minus the actual) and everybody including the client and management was very happy,” said Pellet.
So what exactly is the “management by numbers” approach? How can we complement the passion we bring to our businesses with numbers management? Are gut feelings not enough?
Gut feelings are valuable, but they are not always reliable. The only thing that is reliable are cold, hard numbers. Without them, you could be marching passionately in an entirely wrong direction.
For example, insurance companies live or die by the amount of risks they insure. Is a wooden building higher risk to insure than a brick one? Your intuition may tell you yes but data from actual claims proves just the opposite.
Numbers or metrics, as they are often referred to, bring logic and clarity to decision making. They also help set clear goals and reward progress, as well as point everybody in your team in the same direction.
Smith Yewell, president and CEO of WeLocalize, says it was clear from the moment he started WeLocalize that there had to be some key business metrics in place.
“It was obvious to me that without disciplined measurement, it is pretty hard to make decisions,” he said.
Yewell was a former field artillery officer stationed in Wurzburgfield, Germany. He says the army training he received influenced how he conducts business.
“The army has the best leadership training you can get anywhere,” said Yewell. “Focusing on standards and metrics and applying that to decision-making is very much a part of army training.”
Yewell also worked in pharmaceutical sales for three years, an industry where he claims the sales training was “top notch.”
Today WeLocalize is flourishing. For the past six years, Deloitte & Touche has ranked it as one of the fastest growing technology companies in North America in their annual Maryland Technology Fast 50 ranking.
What kind of things can we measure in the language industry?
“We look at key performance indicators. We also look at key financial metrics down to particular service offerings, particular projects - all aspects of our business. We then grade our performance both internally and externally,” said Yewell.
According to Yewell, customer satisfaction should be one of the first things to focus on for all companies. Many localization companies are already doing that and use the survey results in their advertising. For example, Portland, Oregon based Lingo Systems quotes their customer satisfaction data in their marketing collateral.
But what about internal operational metrics?
“Gross margin is extremely important to the company. We analyze that at the project level and also at the account level. It is spread over a period of time just to make sure that we are earning a certain target margin. If we are not, we need to understand why that is. Is it because we scoped the projects incorrectly? Is it because we are not efficient enough? Is it because we need innovation in our process to improve certain things? Or is it because, frankly, there is too much pricing pressure from the client and we just cannot operate profitably?” explained Yewell, adding that the company managers take all this information into account and review the numbers.
He said that every time a project is completed, the company looks at the budget vs. the actual cost.
“We look at quarterly numbers, monthly numbers. We tie those to our staff and we also communicate some of this information to our clients so everybody’s expectations are in line. Roles, responsibilities, expectations and standards then all start to click together. The result is that you have a happy client and you have got a successful and financially healthy company.”
Other than gross margins, there are additional metrics that you can use to measure the operational and financial health of your company, according to Ray Pearmain, a management consultant based in Ottawa, Canada. A graduate of the famed Wharton School of Business, Pearmain has been advising his clients on how to improve operational efficiency for more than 20 years.
He says you should have a clear understanding of how much your employees’ cost is to your business.
“Take their salary, add things like employer taxes, benefits, office rent divided by the number of employees. Don’t forget training cost if they go to seminars or attend conferences. You add all these up and you will know how much per hour each employee costs,” he said.
Comparing the ratio between billable and un-billable hours is also a good gauge in the efficiency of your business.
“In many large law firms, your billable hour percentage has to reach a certain target before you can be considered for a partnership,” he explained.
Another useful metric is new-to-old client ratio.
Sid Saleh, a marketing consultant based in Boulder, Colorado, says repeat clients are an important measure of customer satisfaction.
“If you are not developing ongoing relationships, you are spending too much time and money on finding new clients. But you also don’t want to be locked up by a few clients that monopolize all your resources.”
According to Saleh, a ratio of 1:1 is healthy. You are doing well if, for each new project from a new client, you have one from a repeat client.
The numbers approach can also be applied to activities related to finding new customers. One common metric is measuring cost per lead. Simply take the total cost for a marketing initiative such as advertising in a trade journal and divide it by the number of calls or emails you receive from this source. The result is what is called cost per lead.
“One of the more successful marketing activities is our annual golf tournament. The results of that are measured through the leads we generate and the closure rate on those leads. So you can mathematically calculate our return on investment,” explains Yewell.
Once you have determined what numbers to measure, you must look deeply at the records you keep to find the numbers to analyze your business. The idea may seem a bit intimidating at first, but Yewell says it’s not as difficult as you think.
“Fundamentally it begins with discipline and time tracking. It is hard to get an entire company to be disciplined about doing that. People have to track their time. There are categories of time. Some are billable categories; some are not billable categories. Employees have to be disciplined in the way they assign their hours into the categories. We calculate our numbers by summing the totals. The hard part is to get everybody to do it. After that, it is automatic because the system does it,” he said.
Many law and accounting practices track time by ten minute intervals. They keep very detailed record for phone calls, emails to support their billing. A good practice is to update your time tracking record once a day while your memory is fresh.
One of the dangers of taking this approach is that you may end up spending too much time on getting the numbers. In that case, the expense may outweigh the benefits.
“That is where most companies run into problems. The first thing you have to do is have an underlying system that will give you those numbers. I did not start with it right out of the gate and getting the numbers took too much time. That is when we started to push for some automation,” said Yewell.
WeLocalize uses Microsoft Project Server and Microsoft Solomon Accounting system which are integrated with each other. They also have their own workflow system which is on a SQL database so that it can communicate with the other systems.
“We can pull information from projects, finance and resourcing to get backlog pipeline utilization, resource availability and tie all those together,” said Yewell.
In an environment where the management is crunching all kinds of numbers and employees are busy time tracking, is there a danger that people are losing their creativity?
Not so, according to Yewell. He thinks clear expectations help employees in their work. “Organizations are very healthy when roles, responsibilities, expectations and standards are very clear and well understood. It is when those are not clear that people run into problems and they leave.”
He points out that his company has a performance compensation program which involves the entire company. If the financial metrics and key performance indicators are met, then employees receive a performance compensation on a quarterly basis.
“It is very important to have key indicators well identified and measured so that people understand where they fit and that they are contributing to the company,” said Yewell.
Once you are equipped with key business data, you must act. Data in itself is useless unless it leads to informed decisions.
“The hardest decisions we make that are based on these numbers involve looking at our client base. We look at our accounts and we scrutinize those in a very candid way. What kind of gross margin did this account generate throughout the year?” said Yewell.
If there are accounts that have fallen below target levels, the company is very proactive in determining why this has happened. If it’s decided that the pricing pressure is the culprit, the company will have a heart-to-heart talk with the client. Sometimes this results in letting the client go.
“You’ve got to be financially healthy in order to continue to have a strong company” said Yewell.
You cannot manage what you cannot measure. Passion-filled company owners in the language industry need to manage their companies well in order to achieve sustained success. Business metrics are the compass on your journey. They are good tools to aid you in your decision-making process. Don’t rely on gut feelings alone, and don’t let passion blind you from the importance of cold, hard numbers.
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