"US clients are not happy linking prices with the movement of the dollar."

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 utilisation 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 standardisation 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 specialisation. 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