How IT Outsourcing Customers Can Benefit From a Weak Rupee
The rupee's depreciation has been a windfall for IT service providers in India, but there are steps customers can take to share in the benefits. Before you head to the negotiating, or renegotiating, table, there are some things you should keep in mind. Here are six tips for leveraging the rupee's depreciation to get a better deal.
Fri, August 16, 2013
CIO — Too many buyers ignore the importance of currency fluctuations in their offshore outsourcing arrangements, both the risk and reward that changing valuations may bring. But the steady fall of the rupee this year -- India's currency hit an all-time low on Aug. 6 -- has shed light the significance of foreign exchange rates to offshore deals. And, based on year-to-date depreciation, this year is almost certain to be the third straight year of rupee depreciation against the U.S. dollar, says Alan Hanson, senior vice president with offshore outsourcing consultancy Neo Group.
But there's no reason that IT buyers can't benefit as well. Indeed, customers ought to leverage the rupee's depreciation to get better pricing, says Hansa Iyengar, a sourcing and vendor management analyst with Forrester Research. But before you head to the negotiating -- or renegotiating -- table, there are a few things to keep in mind.
1. Know your power. "New customers negotiating large engagements would have more leverage than a new client negotiating a smaller engagement as scale matters when it comes to the vendor's top and bottom lines," says Iyengar. "Existing customers, especially key clients where the vendor is involved in multiple mid to large size projects across several departments, would have more leverage here."
2. Consider not paying in U.S. dollars. Just because the supplier prefers to be paid in American greenbacks doesn't mean you have to oblige. Customers should make the best choice based on internal company dynamics, particulars of the transaction, deal structure, and currency impacts, says Rutchik. "One option is to pay in local currency, depending on where the company does business, or to pay in dollars that are tied to local currency," Rutchik says. "Of course, this option could present a risk as the rupee's value could swing back in the other direction."
3. Look for good renegotiation opportunities. Routine maintenance and support is an area where downward negotiation is more feasible than a critical application development project. "A critical application would necessitate the use of higher-skilled resources or experienced staff," says Iyengar. "The vendor may feel cornered if there is too much cost-pressure and could cut corners by bringing in less qualified staff causing downstream quality issues."