WAYS TO FIGHT THREATS TO ASIAN OUTSOURCING

Note: This article is about India but all of the problems discussed in this post are also being faced by most outsourcing companies in the world.

First, it was wage inflation which they are fighting by moving their offices out of the expensive business districts and by hiring fresh (low waged) graduates. Now, it's the Rupee's appreciation which creates an additional worry for India's outsourcing executives. The two events are further compounded by India's recent rationalization of its tax system which is perceived by some to be detrimental to the industry.

The problem of wage inflation increases in magnitude when Forex appreciation occurs. However, the two problems that can be managed with one solution. A creative method proposed by another blog is to settle wages and a few other costs in the currency of the outsourcing firm's contract price. the method effectively arrests the increase in costs brought about by any appreciation in the currency rate.

Should there be any devaluation of the local currency, the employees and suppliers alike are also bound to benefit. I would call that proposal "fair and equitable".

Taking it a step further, the outsourcing company can bring in additional value to their clients by introducing innovations that will result to bigger gains for their clients. A glaring example is India's newly introduced service area called "Knowledge Process Outsourcing (KPO)" industry which is turning out positive growth for 2007.

As for taxes, I maintain my position that Asia's outsourcing businesses should be officially considered a part of its export industry. As such, it deserves all he breaks being enjoyed by all the other exporters in the country. Importations of equipments should be free of any tariff, sales taxes should not be collected and several other incentives should be given to any offshore outsourcing company. An outsourcing firm exports its services and being a labor intensive industry, wages paid to the employees go back to the local economy in terms of consumer spending.

STRONG ASIAN CURRENCIES SCARE ASIAN BPO FIRMS

I have always argued that the BPO industry should be treated by Asian governments as a part of its export industry. As such, it should be given the full incentives due to exporting companies. With the current strengthening of most Asian currencies, the export market is generally suffering and this situation is very much being felt by BPO firms.

Since most outsourcing contracts are dollar denominated, a boost in the value of the local currencies has resulted in corresponding cost increases and decline in profits.

The Philippines, which earned approximately US$2 Billion in 2007, is becoming a little nervous due to the continuous appreciation of its currency. The Peso, which closed at PhP46.60=US$1.00 last Friday, has been on a constant climb since last year.

The other Asian currencies (Malaysian RmB, Indian Rupee, Chinese Yuan, etc.) have also appreciated despite governments’ attempts to restrain its value.

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Peso to reach our 46 target sooner than expected

"General weakness of the dollar. Despite attempts of most Asian Central Banks to keep their currencies from further strengthening against the dollar, the pace of appreciation seemed to have increased over the past two months. The Indian rupee, which was quite stable from January to March for example, suddenly moved eight percent higher in just two months. This is an exceptional move given that the Reserve Bank of India has been managing its exchange rate closely with the rupee appreciating by only 1.8 percent in 2006 and 3.6 percent in 2005. Likewise, the Malaysian ringgit began accelerating against the dollar in mid-March following announcements of key economic reforms. The Philippine peso, meanwhile, has been on a gradual appreciation since the start of the year primarily due to healthy remittances and capital inflows, and a generally peaceful election period. Finally, the baht is still up 2.3 percent against the dollar despite earlier attempts of capital controls by the Thai government."

Strong peso may dampen foreign investors’ interest in BPO sector

"A strong peso may deter foreign investments from coming into the country as this makes the cost of doing business here more expensive.

International real estate provider CB Richard Ellis warned that the continued strengthening of the peso against the dollar may be a threat to business process outsourcing (BPO) firms in the country.

“If the exchange rate continues to climb, it can potentially be a threat because it makes it expensive to do business here,” CB Richard Ellis general manager Trent M. Frankum said."