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