Continuing depreciation of the Indian rupee against the U.S. dollar has enterprises wondering about the economic effect on IT and business outsourcing services by India-based providers. Here’s what you need to know:
No major impact on contract size or pricing. Outsourcing initiatives are increasingly strategic; therefore, we do not expect a currency change to motivate enterprises to outsource more, nor do we expect the fall of the rupee to spur a dramatic rise in the number or range of strategic engagements for service providers. Enterprises that are in the midst of an outsourcing project initiation or a renegotiation / restructuring of existing contracts – especially those with set currency rates – may realize some benefits, but overall, as with previous currency fluctuations, we expect to see relatively little effect on contracting. Agreements that include greater investment in automation may be less likely to see any price improvement at all.
Provider-hedging strategy has an important role. Most large India-based IT providers have mature hedging strategies, which should help them either leverage the decline to their advantage or at least avoid major challenges. Most providers are hedging for two calendar quarters, while a few use longer-term, hedging strategies. Infosys has traditionally taken a short-term view of currency movements, hedging future cash flows for 12-15 weeks. TCS and HCL Technologies tend to take positions in currency-forward markets beyond 52 weeks. Despite the outliers with longer hedging cycles, the consensus is that the decline in value of the rupee will allow some short-term gain for providers. The severity of the current decline is likely to push at least a few providers to revisit their hedging strategies.
Offshore:onshore ratios may trigger hiring. Most India-based IT providers maintain an offshore:onshore ratio balance of about 80:20 that allows them to maintain a low-cost base that is beneficial for hedging in these situations. As a short-term outcome, we may see some increased hiring – especially by western providers seeking to optimize their workforce. Still, we could see higher costs in situations in which services are delivered from outside of India to India, or in which the primary component sold is not labor but relied-on imports (such as in an operation performing physical tests in a lab). Providers that are tied to a domestic business or are part of a larger conglomerate and the finances are linked outside of India may need to use profits from their services to prop up other entities.
Investing in themselves. We see a high probability of India-based IT providers investing gains from the rupee decline back into their business. Enterprises should be looking at where their providers are investing; are they driving toward more innovation, improving/increasing IP -based advantages or just cashing in? We do expect to see some investment in smaller acquisitions, scaling up capabilities, new training, and possibly greater resource allocation toward sales and marketing efforts.
Overall, we do not see any significant, long-term negative impact on the stability of the outsourcing industry from the current decline of the rupee against the dollar. Rather, the falling rupee is enabling a windfall for well-managed providers with large India-based resources and presence, which, in turn, enables economic advantage for enterprise clients that know what to look for and how to enable it.
Mitigating the risks and building opportunities that grow from unsettling market changes is an important part of what a firm like ISG provides its client. For more information, please contact your ISG representative or local ISG office.