Customer companies should be sensitive to the fact that service providers are in business. While they do provide critical operational services and are likely to have a sincere interest in the customer’s success, they also need to make money. Customer companies can proactively address issues mentioned in the article, such as paying invoices more promptly rather than making such issues contentious.

Customer organizations should be aware that opening negotiations for any one term or condition will open discussions for any terms or conditions that are in the contract, including pricing. If a customer is not prepared for negotiations, it should not engage in re-visiting any piece of the outsourcing contract.

Sourcing clients can also take proactive measures to cooperate or encourage provider activities to improve productivity, increase employee utilization, raise staffing ratios, or reduce onsite personnel. Each of these efforts can improve provider’s operating margins. In most cases, they also improve the client results and the quality of services received. 

The collaborative effort can also serve as a project to build relationships with the two management teams — an exercise that will benefit every sourcing relationship. The key is that clients should be proactive rather than waiting and reacting to an agenda driven by the service provider.

PLAY SAFE neoIT expects that service providers could take some of the following actions if the currency gap continues to widen:

Indexing prices to local salaries rather than fixed prices. Using local salaries would protect providers against both currency valuation and salary inflation. A few firms have already attempted similar clauses although customers have strongly resisted

Spreading delivery costs and reducing expenses in rupees by promoting other low-cost locations such as China and Latin America

Pushing for managed services or results-based contracts where the provider can manage the size of the team, onsite/offshore ratio, or team experience

Delaying the hiring of new staff until contracts are signed and in place rather than anticipating demand, increasing the ramp up time for customer companies. New customers should include provisions for transition phases in the agreements

Leverage contract technicalities to reopen contract negotiations and then changing prices during the process. This type of “bait and switch” is not common among global service providers, but caveat emptor

Building currency risk and hedging services into a contract. Global services providers already engage in currency hedging practices. Many smaller clients (small/medium enterprises) without global practices or hedging capabilities could benefit by letting providers manage currency uncertainty, albeit at a price.

Proactive vs. Reactive
While the impact of the U.S. dollar-rupee valuation changes are unknown, companies can take immediate action to assess the impact and alleviate management surprises at the end of the financial year.

Customers of sourcing agreements should assess their service provider behavior and watch for sensitivity or changes in behavior that might be driven by currency risk. Changes can include efforts to drive more revenue by providing unsolicited proposals, billing for more hours per day, or charge for vacation and training time. Providers might also try to reduce costs by streamlining operations and improving productivity, staff utilization, or ratios of staff onsite versus offshore.

Corporations with captive units will find it more difficult to mitigate the impact of currency change. Immediate efforts should include the value of the captive unit’s annual charges into currency hedging strategy.

Executives should include the indirect benefit of tax breaks or government incentives provided. Local business initiatives in India help offset the risk from currency. Organizations that are growing within the country might find that increased emphasis in growing India-based operations is an effective way to offset currency risk.

Whether sourced or captive, executives should be proactive rather than reactive in educating management about the potential exposure, and in taking immediate and decisive action.  

Dean Davison is VP, Research, neoIT, and has more than 18 years of experience in both the supply and demand sides of the services economy. Sumeet Salwan is the Director, Supplier Relations, neoIT, and has over nine years of experience in consulting, sales and operations in the outsourcing industry.