In the recent past, more and more multinationals have been scaling their operations in India and more(and more) work getting outsourced to fast developing nations like India and China. Everyday in magazines, newspapers and various other places, we have news about "more and more jobs being cut in US (or some other developed country) and getting outsourced to India". But, on the brighter side "Outsourcing has impacted the economy of India in a very positive way" and Outsourcing has become a buzz word.

Today we look at the other side of the coin-how it is hurting the American outsourcers.U.S. companies had looked to India for their outsourcing in the first place with the intention of saving money. 

Now, with the dollar plunging the way it has, things have suddenly become more expensive for the Americans. The falling dollar is affecting the business world by making American services and goods cheaper and raising the cost of foreign goods and services at the same time.

With the Indian outsourcing companies raising their fees to make up the difference, many American businesses are hit hard. Within the space of a year the American dollar has dipped 13% from about 45 rupees to about 39. Now with marked pay increases to India, suddenly the prospect of saving money doesn’t seem very palpable and both, the outsourcers and the outsourced have been compelled to adapt. In addition, experts expect the rupee will go from strength to strength as its economy further establishes itself.
Not that India’s outsourcing industry isn’t thriving. Americans still find it more profitable to use it.

But the necessity of raising Indian salaries and the rising currency is causing Indian vendors to look more closely at their costs and prompting them to make small price increases. This leaves the Americans sending over more dollars than they had in the past and therefore not saving as much money as they had expected. In spite of this the businesses hardest hit by the devaluation are small and medium sized Indian companies that cannot shift work to other cheaper places in the world as outsourcers can still do. Most of them work for a limited number of clients with contracts that are fixed in dollars each year.

The rising rupee and the fluctuating dollar have affected the Indian IT industry adversely. It has dented profits and at the same time, many foreign clients with a dollar budget are finding it too expensive to use Indian service providers. 

Sudin Apte, country head, Forrester Research, discusses the steps Indian IT companies need to take to face the current situation.

How has the fluctuating dollar affected Indian ITES companies? How are they coping with the situation?
The appreciation of the rupee against the US dollar is affecting the margins of Indian outsourcers. In the last quarter ending June 2007, the rupee appreciated almost seven per cent while the dollar has gone down 14 per cent in the last 12 months. This has hit profitability.

For example, Wipro’s operating margins went down by four per cent. Indian IT exporters say their revenues have gone down, while their costs have moved upwards. Our own client interactions, both in the US and India, show that some Indian ITES companies are trying to push prices to tide over the situation. They want their American clients to share some of the risks.

Moreover, larger Indian companies want to maintain a base level convertibility and assured returns in dollars. But American companies are not happy to link prices with the movement of the dollar. They want to have fixed rates and are not willing to change according to the rise and fall of the dollar. A dollar is a dollar, they say, so take the risk that comes with it.

Then how should Indian companies protect their margins?
Typically, Indian companies react by pushing up utilisation. From 70 per cent they can push up utilization by a few points more, but this may not be the solution, for the results are limited. Companies need to take other initiatives. First, they need to look at non-linear service revenues.
Follow the mechanism of lean principle, that is, build IP assets that are reusable. Second, they need to dramatically boost front-end sophistication and automate several managerial tasks.
In fact, companies like TCS and Infosys have already taken a lead in this regard. They are building tools that will help replace some part of costly and scarce middle management. These include standardization of sales process and large deal management, accounts management etc. Third, they need to flatten their delivery system. This will help companies to predict better skills and resource requirements.

The small and medium IT companies are facing maximum challenges. How should they cope?
Their biggest problem is lack of specialization. These companies need to focus, make choices and identify their strengths or choose one or two slots where they can provide services instead of spreading themselves thin. That is the only way out for them.

Why are so many high-tech jobs still going to India?

You might be surprised at what started it all. Join New York Times columnist Thomas Friedman as he explores the growing trends of outsourcing American jobs. Don’t miss the Discovery Times program, Thomas L. Friedman Reporting: The Other Side of Outsourcing. Outsourcing used to be the domain of the top consulting companies, but not anymore.

The market has grown more crowded and more competitive due to the emergence of the Indian IT services companies and other mid-tier process and vertical industry specialists.
This documentary below looks in depth of outsourcing and its hazards. The Process and how it actually began.

The video brings Bangalore alive to people that have never visited India.

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Read more: The Other Side of Outsourcing: Dangers Offshore