Its hard to read the newspapers these days without reading about the impact of dollar depreciation on Indian export industry, including IT Services and BPO. Large players like Wipro and TCS have taken the hit (stock markets will tell you that), but have also been able to come up with plans to counter the issue. These include:
- Smart hedging
- Repricing some contracts
- Increasing productivity
- Geographical diversification
Some of these options are really not available to startups in these areas. Wage inflation is further setting back the profitability of these companies. What are startups doing about it? Small-mid sized firms would be worst affected by the rising rupee, because of their inability to deal with the issue. In my opinion, startups need to differentiate and establish the value of their offering more ever before. Additionally, the innovations around platform based services should help delink the revenue and direct cost side of the picture.
Interestingly, the downward trend is a good one for firms bringing in dollars to invest in India. Unfortunately, that means even more downward pressure!
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Deepak, (Sorry, my comment got truncated…)
Leave alone startups, even companies that are in expansion stage often leave their exposures uncovered not because they have a greater appetite for risk or have a favorable outlook for the Rupee to fall, they simply cannot afford to take a one year forward cover in these times when it costs a bomb. It further squeezes out their already squeezed margins. Not all companies operate at a 20% plus margin levels to absorb the incremental cost of forex cover. So normally smaller companies (that have not
Deepak,
Leave alone startups, even companies that are in expansion stage often leave their exposures uncovered not because they have a greater appetite for risk or have a favorable outlook for the Rupee to fall, they simply cannot afford to take a one year forward cover in these times when it costs a bomb. It further squeezes out their already squeezed margins. Not all companies operate at a 20% plus margin levels to absorb the incremental cost of forex cover. So normally smaller companies (that have not
Infy ,Wipro are derisking by hedging.But will not everyone love 1INR=1USD.That means our country would be a developed economy 🙂
Krish: Good point. We got our logo designed in the US for $200, a far lower cost than the equivalent in Bangalore (and we got letterhead, envelope and business card design with it).
I think if we’re good managers, we can farm out work through elance and rentacoder. If we’re good programmers, we can even go a step further and create HITs for mturk (amazon) , to do a lot of the BPO style work or for stuff like filtering spam and obscenity from websites.
Alok, One point here is that some companies do NOT have smart hedges. For instance, after getting hit on the dollar two quarters in a row, Infy is hedged $1.4 billion. That’s about 1 and a half quarters of revenues, that’s all! Last quarter they were hedged $1 billion, and the earlier quarter they were hedged $375 million…A smart hedge IMHO is only if you cover yourself for a year, which is what Genpact has done (they have ongoing hedges above Rs. 42 per $ and are actually covered for more than a year)
One thing people can do is attempt to create companies will fewer employees. That should reduce the dollar impact. You actually don’t need 50 programmers for a project, unless you are charging by the programmer hour rather than by what is delivered.
Another thing to do is to try and sell to India itself – revenues in rupees, expenses in rupees. Though that model isn’t quite that attractive for scale reasons.
The currency fluctuations are clearly factors beyond anyone’s control. For startups, it’s even more so. As you rightly put, the measures such as hedging (the unremunerative size of revenues, high cost advisory fee and high option/rollover margin costs), Repricing (the client is not your uncle to agree to hike the price midway thro the deal, besides you didn’t give him a discount when Rupee was heading southwards !) etc., are clearly out of bounds for startups.
One way is to naturally hedge yourselves. Incur costs in the same currency as you earn by shipping your development and SGA costs overseas, wherever the currency is a dog. US is not a bad bet since the outlook for the $ is `down’ for the foreseeable future. You can as well get some top (subprime hit) talent, that’s out looking for job at reasonable cost. If you are lucky, you might as well get the same talent that had left you earlier – saving training costs and time :-). (Reverse) Outsource as much as possible.
Another way is “Farmed out sourcing” as I would like to call. To battle the rising wage costs / attrition / shrinking numbers of employable engineering talent in India, one can adopt a truly global model of breaking up and farming out pieces of work to any corner in the world that has the requisite supply of qualified talent at affordable economics – that once India had. In outsourcing industry, Bangalore based Anantara Solutions is known to have developed this into a fine art. Even as it just has 40 employees on its rolls, it has an ecosystem of 25 other companies including Russia, China or Singapore, with a total of 2,500 employees that are specialists in everything from Java coding to software testing. Resultant cost savings are huge in this break up, farm out, re-integrate and deliver model. Rather than having huge fixed costs, like TCS, Infosys, and Wipro, Anantara pays for value received–and billed to clients. That is incredible leverage.