360° Vendor Management

Impact of Foreign Currency Exchange Rates on Outsourcing

One of the most challenging aspect most outsourcing relationships are now facing is the impact of the declining value of the US dollar in the face of the growing foreign economies in India and the Philippines. When the US economy was stable with gradual growth, the impact of foreign exchange rates was manageable. However, with divergent directions, many vendors are faced with significant financial challenges - and they aren’t hesitating from discussing the materiality with their clients.

Most US clients have not budgeted for the level of increases they are now experiencing. Furthermore, the financial business cases associated with offshore labor can be shattered by dramatic price increases. Even if higher rates do reflect savings in comparison to US domestic rates, the multiple is no longer as advantageous…and with no end in sight, it is unlikely that US buyers are going to experience 1:6 savings again. 1:2 or 1:3 savings simply isn’t as appealing when one calculates the high cost of telecommunications, vendor management, and the risk a company assumes by outsourcing (which could cost millions to transition).

Most offshore vendors with experienced financial teams have deep experience in currency hedging, but few vendor managers do. Vendor managers should consult their treasury teams to seek a fast education on the available options. We aren’t financial advisors, don’t wish to offer you financial advice, and don’t make any recommendations. Get advice from the experts.

Keep in mind that most vendors do protect themselves from currency fluctuations. Consequently, don’t necessarily allow your prices float based on indices. Everything is negotiable, but also remember that your vendor will provide lower service if they are not profitable. Vendors track project profitability on a weekly basis and over the entire multi-year contract term. Remaining a strategic client means that your vendor must be profitable.

One element that all outsourcing executives should keep in mind is that labor arbitrage is a fleeting opportunity. Outsourcing should provide your company with significantly improved capabilities and performance. If you’re just outsourcing for cheaper labor, you are truly missing out on the greatest opportunity that outsourcing provides.

How do you manage currency risk with your vendors? Leave a note below or send us one.

This entry was posted on Wednesday, March 12th, 2008 at 1:16 am and is filed under Contracting, Outsourcing, Vendor Management. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.