The rise in value of the Indian rupee, while a signal of\n the increasing strength of India\u2019s economy and potential\n boon for the general population, is being treated as bad news\n by Indian outsourcing providers and their customers. So far\n this year, rupee appreciation has eroded about 11 percent of\n the dollar\u2019s purchasing power in India, impacting Indian\n IT services providers, who make an average of two-thirds of\n their revenue in U.S. dollars but incur more than half their\n costs in rupees.\n MORE ON Outsourcing\n \n Outsourcer Wipro Pushes Innovation, Acquisitions\n \n Outsourcing and Innovation Survey\n \n Is India Moving Down the Value Chain?\n \n Offshore IT Services Showdown: India Versus China\n The inflow of dollars to India is at an all-time high,\n creating a surplus, says Sumeet Salwan, director of supplier\n relations for offshore outsourcing advisory neoIT. As of Oct. 1, 2007, one U.S.\n dollar was worth 39.65 Indian rupees, more than 10 percent\n less than its worth (45.79 rupees) a year ago. And experts\n do not expect the Reserve Bank of India to do much more to\n stem rupee appreciation because of inflation fears. To put\n the currency situation in historical context, the dollar\n hasn\u2019t dipped this much against the rupee since 1996.\n The dollar\u2019s fall is part of a larger trend of dollar\n weakness against a host of currencies around the globe.Offshore vendors in India specifically are struggling to\n find ways to counter the currency imbalance. The rising rupee\n is hitting midsize Indian providers\u2014such as Syntel,\n Polaris, Mastek and iGate\u2014the hardest because their\n margins are much slimmer than those of the bigger Indian\n outsourcers. \u201cLosing 3 or 4 percent from 25\n percent profits is one thing,\u201d says says Sudin Apte, Forrester Research analyst and country\n manager for India.\n \u201cLosing 3 to 4 percent from 9 or 10 percent\n profitability is another.\u201dFor the first time, some\n vendors are coping by charging non-U.S. customers in their\n local currencies rather than in U.S. dollars. IGate, for\n example, is billing Japanese customers in yen, Swiss\n customers in Swiss francs and Canadian customers in Canadian\n dollars, although it still garners the majority of its\n revenues in U.S. dollars.Many providers, including Infosys, Wipro, and Satyam, have\n also worked to improve their employee utilization\n rates\u2014the average percentage of employees who are\n billable. \u201cAs people move on and off of projects, there\n is a natural \u2018waste\u2019 that occurs,\u201d says Dean\n Davison, vice president of research for neoIT. \u201cIt is\n considered very good to be 80 percent utilized.\u201d Major\n Indian vendors have announced utilization improvements of 1 to\n 4 percent, and Davison expects more improvement in this\n area.\n\nPassing On Rising Costs to Customers\n But those efforts help only so much. Indian vendors and\n global suppliers with Indian subsidiaries will pass on their\n increased costs to their customers. Perhaps it\u2019s only\n fair, given that those customers were beneficiaries of the\n weakness of the rupee in years past. The currency situation is\n going to affect all customers regardless of the pricing terms\n of their outsourcing deal, says Salwan of neoIT. Those with\n fixed-price contracts are no safer than those paying on a\n time-and-materials or cost-plus basis. \u201cEvery CIO will\n see the effects,\u201d Salwan says.\n\n Some things for American IT outsourcing customers to look\n out for include:Increases in billable hours. Vendors\n may bill for hours worked that were previously ignored\n (additional costs for overtime or holiday pay), pressure\n employees to bill for nine-hour days instead of the\n standard eight, include an employee\u2019s vacation time\n as billable hours in contracts where terms are\n ambiguous.Slower response times and less interest in\n R&D projects. Efforts to increase employee\n utilization rates lead to a smaller bench of developers,\n project managers, and others, impacting response times and\n reducing R&D efforts, says Salwan.Personnel changes. Be wary of\n providers\u2019 possible intent to dilute skill level and\n quality to cut costs on projects, advises Forrester\u2019s\n Apte. Vendors may try to increase the ratio of junior staff\n to senior staff from the typical 8:1 to 9:1 or 10:1. They\n may also reduce the ratio of onshore to offshore\n talent.Bill collection. Suppliers may seek to\n enforce 30-day net payment terms (that is, payment is due\n within 30 days of the date of the invoice).Early renegotiation. Some Indian\n companies may play hardball, pushing for renegotiation on\n projects where the client seeks to change scope or\n specifications.Unsolicited proposals. Vendors may try\n to drive revenue by pushing new projects.\n \nExpect to Renegotiate Contracts\n IT leaders with Indian outsourcing contracts up for renewal\n should expect their providers to renegotiate contract terms and\n pricing. \u201cAll new contracts will be at higher price\n points,\u201d says neoIT\u2019s Salwan. Most major Indian\n suppliers publicly acknowledged labor rate hikes between 1 and\n 5 percent last quarter, says Salwan. In addition, large\n contracts may contain a currency fluctuation clause that\n enables the supplier to share the risk associated with dramatic\n shifts in exchange rates with their customers, Salwan says.The dollar\u2019s depreciation against the rupee, expected\n to continue at least through the end of the year, ultimately\n reduces the \u201clabor arbitrage\u201d effect for India.\n But, Salwan insists, \u201cthe arbitrage [possible by\n outsourcing to India] is still very competitive against other\n outsourcing destinations.\u201dForrester\u2019s Apte says IT leaders should look at the\n rising rupee as an excuse to step back and reevaluate offshore\n contracts. \u201cInstead of outright rejecting pleas to\n increase rates, [IT] professionals should give an ear to their\n suppliers in order to understand their plan to handle the\n fluctuation,\u201d says Apte. \u201cUse this opportunity to\n reassess the entire relationship, taking a realistic view based\n on the relationship\u2019s criticality, work complexity and\n the provider\u2019s ability to digest the impact of the rising\n rupee.\u201d The net results may not be all doom and gloom. IT\n leaders may find that they're able to trade rate hikes for\n higher value service from suppliers, for example.If nothing else, managing the risks of the rising rupee will\n be good practice for IT leaders offshoring work globally. The\n Chinese yuan has appreciated nearly 3 percent against the U.S.\n dollar this year, the Euro hit a record high against the dollar\n last week and the Canadian dollar recently topped the American\n greenback in value.