How to stop the fire? BPO firms dealing with rising rupee
SOURCE: The Hindu
DATE: January 28th, 2008
MOHIT SOAPBOX
The article talks about vendors view points on how to manage the rupee risk. I wonder what the firms who are leveraging offshoring view this. Would be interesting to hear more from a perspective of John Atherton about how he justifies the cost increases and what it does to his
business case and budgets in this ‘financial turmoil environment’.
ARTICLE
John Atherton, CIO of a Texas-based insurance firm, is keeping a lynx-eyed surveillance on the Indian business process outsourcing (BPO) industry. It is not that Atherton has major concerns about the quality or security of the work that his company outsources to a Bangalore-based BPO.
Strangely, it is the Indian rupee that is bugging him. Atherton’s BPO vendor of five years has requested a 9 per cent price hike in the outsourcing deal, so that the Bangalore-based third party player can sustain itself against the appreciating rupee. With all BPO companies trying to redefine their billing policy in some way or the other, the Texas firm does not have too many options.
Atherton’s company is one of the many clients that have been approached by Indian BPOs in a bid to re-align their billing strategy, both for existing as well as new contracts. As a tactic to counter the appreciating rupee, while some BPO firms are hiking prices to match current exchange rates, others are keeping the price constant as long as the rupee trades in a particular band.
Billing rates getting firmed up
Industry watchers estimate that across the board, billing rates are being firmed up by 5-20 per cent depending on the nature of the work. Billing rates are usually charged on a ‘per person, per hour’ basis and are in the $10-$25 range, depending on the nature and the complexity of work done.
Narasimhamurthy B.N., senior vice-president at the BSE-listed Hinduja TMT (HTMT), says industry expects the rupee will continue its strengthening spree and hence most BPO firms are quoting higher billing rates to make up for exchange-related losses. For almost every company, fresh contracts are being signed at a new rate. HTMT is concentrating on increasing prices by 5-7 per cent, Narasimhamurthy adds. Intelenet and KPIT Cummins are some of the other companies that have hiked billing rates on BPO contracts. BPO companies take serious note of the rupee appreciation because of the impact on export revenues. BPO firms can absorb a marginal movement in the rate of the rupee. However, if the rupee moves up by 12 per cent (against the US dollar), as it did last year, new rates become absolutely essential to stay commercially viable. A 1 per cent rise in rupee has a 50 basis point negative impact on the margins of a BPO, according to industry watchers.
KPO firms have edge
Firms that do KPO or knowledge process outsourcing-related work have an edge over their pure-play BPO counterparts in getting steeper hikes in billing rates, primarily due to the transformational nature of these engagements. Clients have agreed to steep price hikes in areas such as financial and accounting outsourcing, risk advisory services and other knowledge analytics work, according to Rohit Kapoor, Co-founder and Chief Operating Officer of the Nasdaq-listed EXL Service Holdings (EXLS). In such areas, billing rates have increased by about 20 per cent as offshoring such services gives clients 60 per cent reduction in costs, say analysts. For existing deals, rates will be revised when the contract comes up for renewal, generally in six months to a year’s time. However, some firms such as Integreon and Intelenet have managed to convince a handful of clients to accommodate rate hikes even in existing contracts.
Cover for currency risks
Till recently, pricing agreements did not provide cover for currency-related risks. But now, companies are asking customers to bear the currency exchange fluctuation if the rupee appreciates beyond a point, says Sanjay Kumar, CEO, Vcustomer Corporation. Explains Kapoor of EXLS: “We offer our clients a fixed price as long as the rupee trades in a particular band. If the rupee crosses the upper end of the band, the price point is increased; if the rupee touches the lower end of the band, billing rates are decreased.”
For example, if the rupee is trading at 39.5 against the dollar, then a price band of Rs 38-Rs 41 is fixed. If the rupee moves out of this range, the billing rate will either push up or edge down by 5-8 per cent. EXLS and vCustomer are some of the companies that are going in for such a model. BPO companies claim that it is easier for the customer to take on the risk of currency fluctuations, as they save about 40-50 per cent of costs by outsourcing.
“If the value addition is significant, clients concur to give up certain percentile points of these savings, by agreeing to higher pricing,” says Raju Venkatraman, Joint Managing Director and Chief Operating Officer of Firstsource Solutions. Agrees Narsimhamurthy of HTMT who says that very few customers have flatly refused to adjust with the new billing initiatives.
Billing in rupees
Billing in rupees instead of the US dollar or any other global currency is also being talked about in BPO circles. However, not many are convinced about the viability of this model. “Customers are not very keen to invoice in rupees. From an accounting perspective, US customers need to book their expenses in dollars. So they prefer dollar- denominated contracts even though the price points may change,” says Kapoor of EXLS. However, Spanco BPO has convinced three of its clients to bill in rupees.
The Indian subsidiary of an overseas firm could be an interesting candidate for rupee billing. In such deals, however, there are taxation issues. As revenues from such a deal are not considered ‘export revenues,’ there is a tax ceiling on the net profit you make out of the deal, according to Lokendra Tomar, Senior Vice-President- Knowledge Services, Integreon. Most Indian BPO`s earn about 25 per cent of the total deal value as net profit, on which an income tax ceiling of 30 per cent will be applicable. “This high tax incidence is passed on to the customer, thereby wiping the benefit of billing in rupees,” Tomar says.
Some players feel that unless the rupee gets a stature on a par with the dollar or the euro, convincing clients to go in for rupee-centric billing will be an arduous task. However, Narsimhamurthy of HTMT does not rule out the possibility in future. “It could be just a matter of time; if one major player gets a large deal in rupees, it will set the ball rolling for others as well,” he says.
Firms such as HTMT and EXLS have a few clients who are charged on a rupee per hour basis. At the end of the billing cycle, the rupee amount is converted into dollars, and a dollar invoice is prepared, which means that billing still would happen in dollars. Though it is a feasible model for Indian BPO`s, it has few takers because of client scepticism to facing variability in costs, says Aparup Sengupta, CEO and managing director, Aegis BPO. “Not many clients prefer this model as they like to have a clear idea of the total cost of ownership for managing transactions and processes,” says Sengupta. The ones that may lose
The bad news is for those BPO firms that provide low-end commoditised and undifferentiated offerings, such as pure play contact centre services, according to research from ValueNotes. Even as margins of such firms have been under maximum pressure due to the rupee appreciation, they will not be able to raise prices, the study estimates.
Agrees Venkatraman of Firsource. “There will be no pricing advantage in engagements involving players wherein the customer can either get rid of the entire process or migrate it. to a larger player, who can offer a larger bouquet of services,” he says, adding that typical outbound telemarketing types of businesses will suffer.
Small Indian vendors will have to ‘innovate with a focus on differentiating their services,’ if they wish to manage price hikes, the ValueNotes study adds. Firms unable to get out of the low-cost-low price game will start fading away from the competitive landscape.
No relate
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