Strong rupee poses offshoring risks

"Wild" appreciation of the rupee may increase offshoring risks for UK firms

UK firms working with Indian IT outsourcers are being urged to assess the risk posed by currency fluctuations after the recent appreciation of the rupee against the dollar prompted reports that leading Indian IT services firms could increase their rates for US customers.

The rupee has appreciated by 10 percent against the dollar in the past six weeks, recently hitting a nine-year high and experts agree that if it continues to appreciate, Indian-based IT services firms will be forced to increase rates for US customers to protect their margins.

Phiroz Vandrevala, head of global corporate affairs at Indian IT services giant Tata Consultancy Services (TCS), said that the leading Indian firms had strategies in place to manage currency fluctuations for the next few quarters, but admitted that if the "wild" appreciation continues they would ultimately have to talk to customers about rates increases.

"Currency fluctuations are part of every day life and we use strategies like hedging to deal with them," Vandrevala said. "But the problem at the moment is that there has been a 10 percent appreciation in six weeks - that changes the game for managing currency. At the moment no one is talking to customers about [increasing] pricing but if this wild appreciation continues then there will be an issue on the table."

However, Mark Kobayashi-Hillary, offshore director of the UK's National Outsourcing Association, insisted the current appreciation of the rupee posed a "real threat" to Indian IT companies' business models and there were signs that some of the larger outsourcers were already talking to US customers about price inflation.

"They all bill customers in US dollars but most of their costs are in rupees, so the currency appreciation is a serious problem," Kobayashi-Hillary said. "It is eating directly into margins, and while you could argue that with 25 percent margins they can afford to absorb the loss, they are used to big margins. It wouldn’t surprise me to see prices in the US increase by several percentage points."

The relative strength of the pound and the euro means the problem is yet to cross the Atlantic and Vandrevala insisted that the currently normal level of currency fluctuation between sterling and the rupee was manageable. However, the experience in the US highlights the risk that the cost savings many firms expect to gain from moving IT work offshore can be quickly eroded.

Vandrevala also predicted that the current currency fluctuations could prompt many Indian outsourcers to push for more flexible contracts with Western customers. "We've already seen some contracts that include a clause that says that if there is a plus or minus currency fluctuation of more than five percent then you have to have a meeting with the customer [to discuss possible changes in rates]," he said. "Such a clause would protect both the supplier and the customer from currency fluctuations and I'd expect to see them used more wildly. "

However, while such a clause could benefit the customer in the event of the rupee depreciating, Kobayashi-Hillary predicted that many firms would be reluctant to sign such a contract. "If I were a client I wouldn’t want to sign a contract like that," he said. "If we've agreed on a price for a service then it is not my problem if your staff get paid in a different currency and its value fluctuates – the client needs to plan for their own cost exposure and wants costs to be stable."