Butler Group, Renewal of Western Contracts
<strong>London — Oct. 18</strong><br />The Indian rupee has risen around 12 percent against the U.S. dollar in the last 12 months. The expectation is that the outsourcing providers based in India, which service organizations in the West, will be affected worst. <br /><br />Alan Rodger, research analyst with IT research and advisory organization Butler Group, said the rupee's growth will present a challenge to India-based outsourcing providers when it comes to the renewal of contracts with Western companies. <br /><br />But he points to the high quality of service and talented workforce available in India, which together with the continued improvements to the infrastructure will, continue to keep India in good stead, he said.<br /> <br />This rise in the rupee against the dollar is expected to continue for some time, barring any political crisis or natural disaster, according to the Indian press. <br /><br />NASSCOM, the public body that represents outsourcing organizations based in India, forecast that the Indian technology sector would rise by 27 percent in fiscal year 2006-2007, but in fact it rose 30 percent to $40 billion. <br /><br />During fiscal year 2007-2008, NASSCOM has forecasted a rise of between 24 percent and 27 percent, equivalent to $50 billion of revenue.<br /> <br />According to research earlier this year by CLSA, it was identified that the IT industry in India employs about 1.6 million directly, with a further 6 million in related industries. <br />The industry itself contributes 5.2 percent to India’s gross domestic product (GDP), and it is estimated that between 20 percent and 25 percent of India’s GDP expansion in the next three to four years will come from the IT industry in India. <br /><br />About 75 percent of the country’s software industry is exports, and it is this huge figure that will be affected the most by the rise of the rupee against the dollar.<br /> <br />This will bring into stark relief the reasons that many organizations use third-party providers for IT and business process outsourcing (BPO) services based in India. <br /><br />Cost never should be the only reason for outsourcing any services, but it is a major contributor to any decision to deliver from overseas, and a rise in prices of this nature might make some businesses question the financial advantages. <br /><br />But the majority of outsourcing contracts between Western countries and India are in, for example, U.S. dollars or U.K. pounds.<br /><br />Therefore, it will be the India-based providers that will suffer the immediate effects of this situation, not the customer organizations. <br /><br />This is one of the reasons that has made India a popular outsourcing destination in the past — the ability to protect against the rising cost of the rupee.<br /> <br />It will be a challenge for the likes of Wipro, Tata Consultancy Services, HCL, etc., to minimize the impact of the rising rupee and maintain and renew their outsourcing contracts with Western organizations. <br /><br />But even if prices should rise marginally when these contracts are up for renewal, it should be remembered that the quality of the talent available in India remains extremely high and the infrastructure improves on an almost daily basis, and many these and other factors will continue to make India an attractive place to continue to do business with.