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The last twelve months witnessed record high variations in the dollar,to,rupee conversion as the US dollar fell against most currencies including the Indian rupee. In the quarter ending June 30, 2007, the dollar saw more than a 7 percent fall thereby resulting in a dramatic drop in Indian providers revenue realisation in rupee terms.Given that 60 to 80 percent of income is in dollars and more than 50 percent of providers costs are incurred in rupees, offshore providers are struggling to find ways to cope , including asking clients to bail them out by increasing billing rates or in some cases, renegotiating the master services agreements. But this phenomenon will then gradually endanger the offshore IT services.
Finance and treasury operations experts claim the challenge is more severe for the US businesses as the strengthening rupee has gained more than any other currency against the American dollar. The rupee appreciated almost 7 percent in the quarter ended June 2007, affecting the Indian providers profitability dramatically. For example, Wipro took a hit of around 4 percent in its operating margin. In the past 15 months, the dollar saw a depreciation of 15 percent against the rupee.
Considering 70 to 80 percent of revenues of most Indian providers are generated from the US,based clients through contracts that are billed in dollars, this is indeed a major blow to most Indian providers already struggling to protect margins.
So striving to curtail the losses, these providers want and are approaching, their clients to absorb at least some of the fluctuation. But for the clients who agree to renegotiate rates, this may result in a sharp increase in monthly offshore fees and ultimately reduce the cost savings they’ve been enjoying.If we look at the offshoring phenomenon, cutting costs,saving money was the prime driver most companies went offshore and became IT,ITes services providers clients.
But despite good success of these initiatives, these client companies are already seeing mounting challenges such as staff attrition at their service provider s and rising rate pressure from higher salaries for offshore workers. And many client companies do not feel it is their responsibility to address currency issues, and that such a problem is simply a risk of doing business.
On the other hand, service providers believe that this is a genuine problem that goes beyond a general business risk , since bearing all responsibility for the currency variation would hurt their profitability dramatically. In fact, the rising rupee has already pushed several mid,sized Indian providers to the brink of operating losses. And although providers are taking steps on their own to address the currency issue, they also want clients’ help.
Clients believe this is fair given that for many years, the rupee was low relative to the dollar. Most offshore clients with whom we spoke agreed that the challenge concerning currency fluctuation does exist, but believe it was a business risk the providers should have prepared for and should mitigate on their own.
They point out that their suppliers never passed on the benefits when the dollar was appreciating for a decade, and needed to predict this fluctuation in their cost models. A few mentioned that the high profitability of the top Indians suggests that the providers can bear this fluctuation without any renegotiation.
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