Inflation: Offshoring€™s nemesis?

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All those involved in our industry will be in general agreement that the main reason for any company looking to offshore is essentially to cut costs. In the past, the main cost concern of outsourcers has been around the money invested in the initial set-up, however now businesses are realising that inflation and currency fluctuation pose a major threat to their bottom line.

The rupee has had a sharp drop in value recently and the effects of this has been felt by some of the biggest outsourcing service providers in India. Tata Consultancy Services (TCS) announced a significant drop in net income last week and believes the reason lies with the unexpected fall in value of the rupee against the dollar. It is possible that other service providers have also felt the squeeze and may subsequently adjust their pricing.

Closer to home, businesses that are looking to save by offshoring to Eastern Europe may have to look harder to find savings that justify the process. The strength of the euro has meant that some may have to look further East in order to find a significant saving. Those already in contract may find that service charges are increasing due to unforeseen market fluctuations.

What is evident is that offshoring is not so invulnerable to market climate as some may think. Businesses that are looking to offshore may wish to time their contract negotiations to coincide with beneficial currency fluctuations. Offshoring service providers should keep a close eye on market prices and most certainly not hedge their bets on a currency rising or falling.