Apples for oranges?

A few weeks back, I wrote about how, even in today’s volatile economy, remarkably few outsourcing customers consider the implications of foreign exchange rates in their negotiations with offshore providers.

Since then, outsourcing advisory firm Pace Harmon has released a report on the subject, “Offshoring - Why Foreign Exchange Matters and What to Do About It.”

In the report, Pace Harmon partner David Rutchik contends that, while it is difficult to completely remove the currency risks associated with offshore service, companies that “side-step” currency discussions miss out on significant potential savings.

It seems to me that getting educated on this issue should be top priority for any organisation considering offshoring in 2009. As Pace Harmon’s report confirms, the fact that many haven’t done so yet is largely down to a lack of familiarity or comfort with the subject.

The report, however, provides some interesting insights into why they should get that fixed - and quickly. For a start, offshore providers typically deliver services from emerging market locations and pay their resources in local currency. Because of recent market fluctuations, many providers’ costs have decreased substantially, resulting in a financial windfall for them that could potentially be passed along, or at least shared, with the customer - but, more often than not, isn’t.

Pace Harmon’s report recommends that companies consider five currency deal structures to yield the best possible financial results:
1. Pay in US dollars [or your local currency] tied to the specific local currency;
2. Arrange for fixed payment in US dollars [or your local currency];
3. Agree to band currency changes to a certain percentage in either direction;
4. Take a hybrid approach of averaging past exchange rates and apply local currency fluctuation to the prospective period; and
5. Engage in hedging.

The report provides a lot of useful detail on how outsourcing customers can put these principles into practice. It could be well worth a look.

Posted by on 06/12 at 05:52 AM

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