During the past year, the Indian Rupee (INR) has been steadily depreciating against the US dollar (USD) due to slower overall economic growth, high inflation rates, and unprecedented and rampant corruption in India.
The INR has depreciated by 9.58 percent against Sterling over the last 12 months and agiasnt the US dollar by 6.5% depreciation in the quarter ended June 2013 as the weaker currency keeps pushing up costs of key imports like oil, exacerbating the already high current-account deficit of 5% of GDP.
The INR is currently hovering around 91 for a pound and 60 for a dollar and is expected to stay around this level for the next quarter or so.
Figure 1 The INR has been steadily depreciating against the USD over the past six months
Source: Yahoo Finance
So, what does this mean for clients of Indian IT services suppliers?
- Leverage this depreciation in the rupee to negotiate better pricing. The fall of the INR often has short-term positive impacts on the revenues of the Indian outsourcing community as the weaker exchange rates help boost income earned in USD. This puts them in a position where they can offer lower rates to stave off competition from global majors like IBM and Accenture and from emerging outsourcing locations like Philippines which is also going through a similar weakening of its currency.
- Establish clear timelines to revisit terms. It makes sense to revisit the pricing arrangements periodically and the frequency should be agreed upon at the onset. The optimum frequency for renegotiating terms is once a year and can be tailored around checkpoints or annual reviews. This will enable you to evaluate vendor performance on key SLAs, reexamine future project requirements, and establish a clear picture of what is expected of the supplier. Further, the effects of currency translations at the rates and trends prevalent at that time can be examined to arrive at optimum price-points during renegotiation.
- Negotiate, but don’t throttle the supplier. While bargaining on price, there is a tendency to negotiate as low as possible, but do remember that putting excessive price-pressure on suppliers can have negative consequences. To maintain margins, the supplier may resort to cutting corners on important things like the quality of resources employed which can lead to downstream issues with delivery and service excellence.
Posted by Hansa Iyengar