This article was written way back in 2007 end when USD to INR hitted below 40 level.
Are we ready for 1 USD = 30 Rs.?
In 6 months, first half of 2007, the Rupee has appreciated more against the US dollar than it did in over one decade. The Rupee will become stronger by the day.
Have we ever thought of what will be the consequences of it if it reaches to 1 USD = 30 Rs. by 2010 or 2012 & how to tackle risks emerging out of it. This article highlights some aspects of it.
Well at first thought it might appear that 1 USD = 30 Rs. won’t happen by 2010 but looking at Indian political scenario, since elections are expected in 2 years, there are high chances that Indian government will be less aggressive in slashing the interest rates down. This will lead to lots of foreign liquidity flow into our system causing rupee to appreciate a lot in coming few years.
If rupee goes from 43 to 30 level then its gain of around 30%. To compensate that it won’t be possible for software firms to raise billing rates by 30%! This would then pose significant challenges on software firms to maintain profitability.
Now let’s look at what could be the possible solutions to counter those challenges:
1. IT firms can index prices to local salaries rather than fixed prices. Using local salaries would protect IT service providers against both currency valuation & salary inflation. A few firms have already attempted similar clauses although clients have strongly resisted.
2. Reducing the exposure towards contracts getting signed in US dollars wherever possible. One area is bringing change in practices of IT contracts getting signed in USD for countries other than US. Here strategy could be making a shift towards local currency of that country or Euro.
3. IT firm can leverage contract technicalities to reopen contract negotiations & then change prices during the process.
4. Build currency risk and hedging services into a contract. This should enable extra profit margin against dollar depreciation.
5. IT firms need to find more ways towards optimization. They need to stress on higher utilization, higher efficiency & higher effectiveness.
6. IT firm should work towards improving their employee utilization rate – the average percentage of employees who are billable. As people move from one project to other there is some natural waste. It is considered very good to be 80 percent utilized.
7. So far the approach was to take project irrespective of skills needed. Now the approach should be to take projects, only on certain core skills. If you are having multiple projects going on in certain core skills then it would result in higher utilization of your man power.
8. IT firms need to be more aggressive in slashing the costs & wastages. They should come out with more productized and templated (out of box) solutions.
9. Increase the ratio of junior staff to senior staff from a typical 8:1 to more stretched 9:1 or 10:1.
10. IT firm can consider spreading delivery costs & reducing expenses in Rupees by promoting other low cost locations such as China & Latin America.
11. IT firms can push for managed services or results-based contracts where the vendor can manage the size of the team, on site/offshore ratio or team experience. So cost of assigning senior staff will reduce.
12. Delaying the hiring of new staff until contracts are signed & in place rather than anticipating demand, increasing the ramp up time for clients. New clients should include provisions for transition phases in agreements. Client expectations of increased response time should be set accordingly in advance.
13. IT firms should introduce weekly improvement programs where they can capture ideas from employees on weekly basis in different departments & try bringing in improvement changes on ongoing basis.
14. IT firms can take advantage of stronger rupee by converting back their rupee cash assets into dollar assets & buying office space overseas. This will enable them to have long time presence in overseas at relatively cheaper costs.
15. To improve efficiency, IT firms should find improved ways to impart training to their employees at cheaper costs.
16. IT firms can also capitalize on strong rupee by importing cheaper capital goods like Xerox machines, PCs, Hardware devices, software products etc.
17. Lastly, IT firms need to increase billing rates tactfully whenever chances of taking hit of project / customer loss is low.