Offshore outsourcing rates headed higher

Offshore outsourcing rates headed higher

Summary: India's currency is gaining on the U.S. dollar. Workers at Indian outsourcing firms still garner double-digit raises.

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TOPICS: Outsourcing
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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.

In recent days, three Indian technology bellwethers--Infosys, Satyam Computer and Wipro--have all reported solid earnings. The common thread between all three reports was the following:

  • 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.

Topic: Outsourcing

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12 comments
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  • Hope they are enjoying thieir 'bargain' service...

    That's what you get when you think short-term.
    BitTwiddler
    • If we are told "You get what you pay for"...

      Even Indian and Chinese middle class participants will get annoyed with their own 'quality products and services' at some point.

      And nobody tell me it's about exploitation and not about altruism; the fact these countries can raise middle classes and pull people out of poverty is damning evidence to the contrary. It is not about exploitation.

      Of course, if all the gibber about "peak oil" is correct, then maybe the tinfoil hat fluff about abandonment is true?
      HypnoToad72
  • Which means its a good time to stop offshoring

    With the cost of offshore outsourcing increasing its a good time to reevaluate that position and correct that mistake by bring the work back in house, or outsourcing to an on shore provider since the cost savings of using an offshore group is rapidly decreasing.
    jfp
  • So much for the articles claiming jobs are coming back.

    What fields are left? Lawyers, certain type of doctors, politicians, store clerks, and garbage men.

    With luck, the North American Union will make us all prosperous again.
    HypnoToad72
    • Ummm... I don't think so.

      Where I live, a lot of the store clerk positions require bi-lingual English/Spanish ability, so that leaves me out. The garbage men (Sorry, I meant the sanitation engineers) are likely illegal immigrants. I guess that just leaves the lawyers and doctors, although the HMO's and malpractice insurance seem to be doing a real number on my doctors. So I guess if I lost my job, I would need to abandon my scruples and go back to school for law, which I couldn't possibly afford, or claim that I am an illegal immigrant and live off social services. Like the comedian Yakov Smirnoff used to say: America; What a country!
      jonnjonnzdnet
  • There's always China/Vietnam/Mars...

    Somewhere in the world it's got to be cheaper than in the US/EU. I mean, forget about the language barrier, forget all the timezone delays, forget ramping time, forget lower employee morale, forget all of that...what we really want to see is how many people we can get offshore per person in the US/EU.

    It comes down to productivity! If you have someone who knows the tools, understands the "reasoning" behind processes, and can adapt at a moments notice then they cannot be compared to someone who's been handed a task for which they have relatively little experience, especially on a purely cost basis.

    Now if they're saying that the offshoring is providing a better level of talent, that is a completely different arguement, but I don't think that's what's going on.

    Give me passion over price any day of the week. Give a person who can't sleep until the problem is resolved over a 9-5'r. I want someone who will kick walls and scream if they are having trouble with a problem, I don't want someone to pawn off the problem on someone else and head home. I want someone who gets cut and rubs dirt in it, not someone who visits the emergency room for a little scrape. I want someone who will prepare their mind to dream of solutions, rather than have nightmares of worry and doubt.

    To all those who search not for talent, but for an increased bottom line; it is a sign that you are attacking the wrong end of the spectrum. Beware of companies that increase margin not through innovation, dedication, and perspiration, but through cutting, collusion, and conceit.

    Those companies who short themselves, much like stocks, have a very limited upside and infinite downside.
    THEE WOLF
  • Total Cost of Productivity

    The thing that everyone's ignored in the past fifteen years is TCP. Pardon the rant here, but I don't care how cheap the Indians (or any other offshore resource for that matter) are. If it takes them 4, 5, 6 times to get it right then it does, in the end, end up costing just as much as if the project's resources were all state-side, and don't even get me going on the frustration factor in the interim. I've seen it time and time again. CXOs on the American side only looking at the numbers on the balance sheet, Indians the new "used car salesmen of the 70's" blowing smoke up anybody's skirt who will let them and all the while project after project going down the turlet. On this too the pendulum will swing.
    Nobody_really
  • Offshore Salaries

    I can't help but wonder how many offshore employees are re-circulating their wages back into the US marketplace. It's not happening! US dollars go out to offshore companies, never to be seen again in the US. Imagine if those same US dollars were spent right here. The money would, most likely, be re-circulated back into the US economy. (Econ-101)
    mhallgath
    • I hope your programming logic is more sound...

      Better study Econ-101 again.

      First, what conceivable reason would offshore workers have to recirculate money back to the USA?

      Your statement makes no sense whatsoever.

      However, you're still wrong because Indians still purchase plenty of European and US-made products where it makes sense.

      When US companies SAVE MONEY to have products and services produced, the money DOES get circulated back into the US economy:

      1. More people can AFFORD to buy the products/services. The lifestyle of the Americans is better because they can buy stuff they otherwise couldn't afford if "Made in the USA".

      2. Companies spending less on input can spend more in other areas, or recycle the profit to shareholders -- again, the money goes back to the US economy.

      3. Companies with higher profit margins pay more profit taxes. This takes the tax burden off all other taxpayers. More money in your pocket. (At least the members of Bush's "Friends and Family Program" will have more money to circulate. ;)

      4. Companies that go broke and go out of business because they couldn't be competetive don't have employees. Successful, profitable companies employ people -- even more money back into the economy through taxes, salaries to the employees and everyone spending locally.

      Unions and protectionism have turned entire industries into the 'walking dead'. Like the US auto industry. Can't produce a decent quality affordable product except in plants overseas where unions don't cripple them with their rediculous 'job for life' and extortional salary demands.

      And last, but not least, look at the actual number of jobs offshored as compared to the total US technical job market -- it is a MINISCULE percentage. Good grief, the US has the lowest unemployment rate in the tech sector in decades and still people bitch and whine.

      Most likely the 5% or so of the population who can't get jobs are chronically unemployable for one reason or another.

      For sure, NO country in the world, except for perhaps the Soviet Union at the height of communism EVER had 100% employment -- is that what some people want?
      Marty R. Milette
      • "Companies with higher profit margins pay more profit taxes"

        Your arguments are full of holes, but this
        one is so big it's like the Grand Canyon.

        http://www.pbs.org/cringely/pulpit/1999/pulpit_19990527_000396.html

        Cooking the Books: How Clever Accounting
        Techniques are Used to Make Internet
        Millionaires

        http://www.billparish.com/20000418microsoftnotax.html

        SOURCE: Parish & Company?? ? Copyright
        April, 18 2000.? All Rights Reserved
        Microsoft Now Pays No Federal Income Tax
        Based Upon The Success of Its Financial
        Pyramid Scheme

        http://www.fool.com/portfolios/rulemaker/2000/rulemaker000217.htm


        Why Microsoft's Stock Options Scare Me

        http://www.pcworld.com/article/id,117876-page,1/article.html?RSS=RSS

        How Much Money Does Bill Gates Make?
        Microsoft details the compensation paid to
        its top executives.

        http://www.theregister.co.uk/2000/10/16/it_giants_who_dont_pay_2/

        IT giants who don't pay tax part 2: how
        Microsoft does it
        MS financial practices questioned

        You should take a course in Sociology before
        starting Business 101.
        Ole Man
  • They might work for cheaper?

    Ask them to "shake-a-leg" and they really shake 1 leg. haha. They should have chosen the Muppets instead of Sesame Street to learn English. Baddi Maddi, Foodi Maddi. haha
    watzupchuck
  • The ultimate Corporate Greed

    After raping the American public to the
    point impotency, they now resort to outright
    theft and broaden their malpractice to world
    wide proportions.

    Can anyone say "New World Order"?
    Ole Man