How can BPO’s de-risk the rupee volatility?

The global BPO market is presently valued at USD 26-29 billion and is expected to grow at more than 35 percent in the coming years. India has established itself as a “destination of choice” and the BPO industry has matured in terms of service delivery capability. The Indian BPO industry has been witnessing the following developments in the recent years:

  • Greater penetration across vertical and geographic markets served
  • Widening service portfolio
  • Development of global delivery capabilities
  • Increased scope of services &
  • Evolution of business and engagement models

Though the key driver of growth of this industry has been labour cost arbitrage, the industry is going through turbulent times in the recent past especially in India because of high volatility of Indian Rupee. The rupee has touched 55 and more per US dollar in the recent times which is bad news for IT and BPO industry as most of the firms are export oriented. The recent fall in the rupee is not going to help the players in the industry in any way since most of the firms would have taken forward cover from banks at certain price levels. Since the firms have hedged their Forex risk, any depreciation of rupee beyond a point is only going to benefit the bank and not the BPO companies.

The BPO firms are looking forward for new models of customer engagement looking into the volatility of rupee as older payment models would neither be helping the company nor the client. Companies are increasingly looking at new ways of de-risking and entering into new types of agreement with clients where the client gets the benefit of the depreciating rupee and bears the risk associated with appreciation of the rupee. In this payment model, the client takes the risk of the currency and the margins of the company are protected.

How this payment model works? A rupee-dollar exchange rate agreement is arrived at the end of every month between the client and the company. If the rupee depreciates, the company raises an invoice on the lower rate based on the percentage of depreciation and if it appreciates it increases the invoice in same proposition and the customer needs to pay more. One of the main advantages of this model is that it helps in protecting the profits. When the rupee depreciates or appreciates it might affect the revenue of the company but the margins are protected.

The BPO companies mainly look for two options of de-risking. One is hedging their risk with the bank or hedging it with the customers. Though majority of the BPO companies fall in the first half, there are some companies like EXLService who have started following the second option. The industry experts feel that though IT service companies have started passing on the benefit to its customers, it will not be more than 5% of its portfolio. It is high time that the BPO companies pass on some benefit as well as risk in currency fluctuations to its customers as well.

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