Forrester: Room for Indian outsourcers to lower prices

But cost cuts by outsourcers may impact quality of service, Forrester report warns

Benefiting from a depreciating Indian rupee against the U.S. dollar, lower staff costs, and internal cost-cutting measures, Indian outsourcers can provide up to 12 percent discount on current rates of offshore contracts, according to a report by Forrester Research.

The report is in response to a number of queries to Forrester from clients who wanted to know what discounts they should aim at in their negotiations with Indian vendors, said Sudin Apte, senior analyst at Forrester Research on Saturday.

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Customers will however have to watch out for the impact the cost cutting by vendors may have on the quality of service offered. More junior staff may be deployed on projects, and service providers are likely to invest less on innovation, Apte said.

Discussions for rate cuts must therefore include a stringent reassessment of service-level agreements, so that the provider does not cut corners, lowering quality and delivery, Apte added.

In the past 12 months, the Indian rupee has depreciated against the U.S. dollar by over 30 percent. Indian outsourcers earn most of their revenue in U.S. dollars.

The depreciation translates into higher rupee realizations for Indian outsourcers, most of whom have more than 60 percent of their expenses in rupees. Higher realization helped vendors improve operating margins by over 10 percent, Forrester said.

In a survey by the research firm about four months ago, as many as 65 percent of offshore clients wanted to negotiate rates, Apte added.

Following the economic downturn, outsourcers have also cut their expenses in a number of areas including staff costs, marketing and discretionary spending, Forrester said.

Infosys Technologies, India's second largest outsourcer, announced last week that it was freezing staff salaries for the year.

Hexaware Technologies, a mid-size outsourcer, said in March that some 350 staff that were not working on projects, would be paid 50 percent of their salary until the company finds projects they can work on.

As outsourcers hire less, staff attrition has dropped from 15 to 12 percent, and may even go into single digits, Forrester said. Suppliers are benefiting from lower headhunting fees and staff replacement costs, while customers will benefit from higher retained institutional knowledge, as there will be fewer new members in the teams working for them, Forrester added.

On the flip side, the cost cutting is expected to affect innovation from suppliers as they are less likely to invest in research and development, Apte said.

Indian outsourcers are likely to cut down on new centers of excellence and on hiring senior people whose work is not billable, but are required by the company to build domain knowledge and consulting capabilities, he added.

Only high-end work that requires innovation from the service provider will however be affected, Apte said.

In a bid to cut costs, outsourcers are also cutting their "virtual bench" of staff who are not assigned to any project, but kept on the ready for any surge in demand from customers, or to counter staff attrition. A quick ramp up of staff for project work will not be as easy in future, Apte said.

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