The upward spiral coupled with the volatile movement of the Indian currency against the US dollar has driven IT services majors to look at multiple options to minimise its shock.
In the last 15 months, the rupee has appreciated in the region of 14 to 15 per cent and every 1 per cent rise has a margin impact of 40-50 basis points for IT companies.
Indian IT giants have started taking cover in fresh clauses in contracts, price re-negotiations and extended forex covers to beat the rupee appreciation and volatility risk.
For instance, Wipro has now started forward covers extending to the entire length of the project. Satyam BPO has had a couple of cases where they have gone back to the table for rupee-triggered price renegotiation.
The most favourable option for the Indian companies has been re-pricing and many have managed such raises during contract renewals. Both Wipro and Infosys have managed price increases in the range of 3 to 5 per cent from both existing and new customers.
Offshore advisory firm Tholons CEO Avinash Vashistha says, “there have been three key drivers for the IT services vendors getting a price increase: Exchange rate fluctuation, demonstration of higher productivity and the competitive scenario for buyers of IT services.”
However, analysts are quick to add that, in the long term, rupee is something Indian companies will have to deal with on their own. Also, wild currency fluctuation is not something that these companies can easily pass on to their clients completely.
While they may hope that client companies would meet them mid-way in raising billing rates, IT industry trackers say that companies will have to learn to deal with such volatility.
As part of risk mitigation, what Wipro will do in the future is that if a contract lasts for four years and the current rupee rate is Rs 39, it will cover the currency at that level for the entire tenure of the project so that the margins are protected.
Wipro is also looking at non-dollar denominated contracts. While US business still accounts for 62 per cent of the business, it is looking at the possibility of dealing with local currencies such as euro with respect to European countries.
Most non-US based companies traditionally transact in dollars. “We are talking to customers to move into local currency in which they are. And, we are making decent success with new customers,” Wipro CFO Suresh Senapaty says.
Satyam BPO has attempted some re-pricing with its customers and also new outcome-linked contract structures. For instance, it has included in the contract clause that any significant deviation in the currency appreciation, say above 5 per cent would bring both parties back to the table for re-pricing.
Satyam BPO chief Venkatesh Roddam says the company is looking at outcome-linked, guaranteed revenue structures. This means that the company will commit to guaranteed savings or productivity increase for the client in a given period of time and the pricing would be linked to the outcome.
Infosys CFO V Balakrishnan says new structures based on risk-based pricing and productivity-linked contracts will emerge. Though for now, the dominant pricing structure is time and material or fixed price.
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