Small IT Firms Bear The Brunt Of A Rising Rupee
posted in Outsourcing News and Top Outsourcing deals, New Outsourcing Destinations |Source: Times of India
A falling dollar has resulted in a rising rupee, spreading a sense of doom and gloom amongst the Indian IT industry. And, it is the small and mid-sized firms that have been hit hard by an appreciating rupee, rather than their bigger counterparts. So much so, the have seen a decline in their profits for the quarter ended 30th June 2007.
However, whether big or small, how they are impacted all depends on their dependence and exposure to the US. For example, IT majors, such as, Wipro and Infosys have been far-sighted enough to bring down revenue dependence on the US to 60% and less. But, a large number of small IT firms still rely on the US IT market by as much as 70%, or 85%, as in some cases like AztecSoft.
With the rupee appreciating against the dollar, far more than against Euro or Asian currencies, small and mid-sized firm bottom lines have been particularly severe. Vikram Bapat of PWCoopers India believes, small firms need to diversify geographically, since it is clear the rupee will only strengthen further against the dollar.
Indeed, that is exactly what most of them are doing, as the writing on the wall becomes clearer. Phaneesh Murthy, CEO ofiGate Global Solutions, declares: “In Q1, out of our total off-shore revenues, North America contributed 73%, while Europe and other geographies contributed 16% and 11% respectively. We are looking at geographies like Canada, Europe and the UK to decrease our dependence on the US.”
V. Sundararajan, CFO – AztecSoft, says his firm is also seriously pushing for European revenues, while admitting it isn’t going to be easy or a cakewalk. “We are in the niche space of outsourced product development in data management. Such work is substantially of US origin. We’ll try and bring the proportion of US revenues to 75%, from 85% now,” says he.
The reason smaller firms have been hit harder than big ones is, because often they do not have the capacity to undertake Forex hedging compared to bigger firms, in order to contain the impact of currency fluctuations.
According to Libi Baskarn, an analyst, another reason why small IT providers have been hit harder by an appreciating rupee against the dollar, is because they often go for short duration contracts that range from three months to two years. “Most of them are pilot projects. Due to the short nature of the contract these companies do not get the time or flexibility to exercise Forex hedging options,” he explains.
However, firms who have the capacity are increasing their hedges, with Rostow Ravanan, CFO of MindTree, stating his firm’s $26-million hedge in March this year, went up to $69-million in June. Even iGate has changed from six months hedging and is beginning to move towards longer term hedging i.e. one to three years.
Currently, hedge premiums are high, involving considerable risks, as well, smaller firms lack the expertise required for handling hedging complexities. So much so, Bapat believes forward contracts will become hot commodity, while hedging will offer only short-term help.
Accordingly, mid size and small IT firms need to look at more fundamental ways to counter the rising rupee. “Operations have to provide the necessary improvement,” says Neeta Revankar, CFO of Sasken Communication Technologies.
Surely, that should make them wake up and smell the coffee, as it is simply not enough to acquire a project. It is also necessary to execute it flawlessly and assure customer satisfaction is top priority. A few unscrupulous IT firms are only in the game for achieving their main objective i.e. making as much moolah as possible. All at the cost of clients, who face dissatisfaction with the work, pulling out, even though the work has been paid for. A totally unprofessional way of conducting business, completely dishonest, which sends out the wrong message about professional India.
Outsourcing can be a lucrative business and has seen many little jump start-ups expand and grow e.g. Infosys, Wipro, Patni and others. So, why are these fly-by-night operators ruining the party for others. They need to use transparent practices, including streamlining their HR Processes, and recruiting only management material. Weak management can leave a company floundering, just as an unskilled workforce can make them lose client after client. The trouble is, some of these firms start-off well, achieve success and then lose steam mid-way, letting sychophants take charge over the running of the firm. They let talent slip out of their hands, simply because HR has not implemented a retention policy. End result, the firm is in the hands of weak management unable to control groupism, politicking, and the siphoning of money by those who get their way through sheer flattery, not because they have the talent or the skills.
The rising rupee can be combated and does not have to pinch where it hurts most. One has only to follow the example of firms like TCS, Wipro, Infosys and expand their footprint in Europe and Asia, instead of relying solely on USA. Those who keep abreast of the news are aware that it is just a matter of time before America loses its position as a world leader. The American century is over, with Asian giants, such as, India waiting in the wings to establish it as their own.
However, before it does so, Indian businesses will need to streamline and globalise their work practices, giving back to their employees, not simply taking from them. Sweatshops will have to become a thing of the past, human rights respected, and fair wages for fair work the norm! Can India achieve that? Perhaps, with the help of a mindset revolution!
