India's currency is gaining on the U.S. dollar. Workers at Indian outsourcing firms still garner double-digit raises. And demand shows no sign of slowing.
Add it up and it spells price increases for companies outsourcing technology work offshore to India. At this point it's unlikely that demand will diminish, but the pricing power enjoyed by Indian outsourcing firms is notable.
- India's currency the rupee has wreaked havoc on profit margins;
- Workers are garnering raises at a rapid clip as usual;
- India's tech giants can offset those two aforementioned developments because they are negotiating price increases when contracts come up for renewal.
Here's a more in depth look at the key themes facing offshoring firms.
The rupee: Infosys first raised the currency effects of the rupee vs. the dollar, which has been weak against most currencies around the world. Infosys trimmed its outlook because it is taking in revenue and paying workers in rupees. For a U.S.-based company a currency fluctuation in the rupee is an afterthought. For an Indian company a wiggle in the rupee can cut profit margins.
Azim Premji, chairman of Wipro, said the company's quarterly results were "satisfying considering the strong headwinds faced by us in the form of appreciating rupee." Other Wipro executives noted that Wipro was able to offset currency effects with better utilization elsewhere.
Satyam chairman B. Ramalinga Raju called the rupee's appreciation against the dollar and other currencies "unprecedented."
In both cases, Satyam and Wipro were able to offset the rupee fluctuations, but it remains to be seen whether that performance can be replicated in future quarters.
Salary increases: Nearly every quarter, Indian outsourcing firms talk about raises.
Wipro is hiking wages on August 1, which will hurt current quarter operating margins. Wipro expects to offset that hit elsewhere.
Satyam's Raju noted that the salary hikes have been consistent, and in many instances high.
Price increases: So how can these firms offset these rupee and wage hits?
Indian offshoring firms are raising prices and negotiating better deals for themselves. They are also moving up to business process outsourcing, consulting and other high-margin businesses.
Infosys chief operating officer S.D. Shibulal explained the current pricing environment:
The pricing environment continues to be stable with an upward bias. For the majority of the new contracts we are seeing about 3% to 4% above our average. On the renegotiations, on the majority of them, we have seen maybe 2% to 3% above our average. And it flows into our revenue productivity. That is how we have seen 5% revenue productivity increase last year and 1% this quarter.
Negotiating based purely on rupee appreciation may not be a viable option, because then that in turn will also lead to a negotiation when rupee depreciates. The negotiation has to be based on value, the value which we provide, the overall estimation of compensation and various other factors. And that is what we do on an ongoing basis.
Wipro's Sudip Banerjee echoed those comments:
I think in the last six months we have seen pricing steadily moving up at a rate which has been faster than what we have done. And in the last three months, after we have seen the impact on account of the appreciation, we have gone back much more aggressively to all our customers for increases in different ways.
The upshot: If you're an offshore outsourcing customer don't be surprised if your supplier approaches you soon. At least now you'll know why.