Monday, July 30, 2007

The Road Ahead for Outsourcing Suppliers: Higher Costs


Commercial call center service providers are less able to absorb wage increases and currency fluctuations than software firms and remote computer system administration service providers, in part because of the way billing and payment arrangements for call center firms are tied.

Cost increases are squeezing margins for outsourcing Latest News about Outsourcing companies providing software and call center services to U.S. customers from popular international destinations. No immediate price increases for U.S. customers are possible for suppliers that are locked into fixed-term contracts in U.S. dollars, but price changes could be sought in contract renewals, extensions, and in the pricing of new contracts.

Prices for call center and e-mail Email Marketing Software - Free Demo support services provided by facilities in the Philippines, South Asia and the Persian Gulf have remained relatively constant since the end of 2004, as detailed here. That is likely to change for new and renewed contracts because of cost increases for suppliers.

There are three factors behind cost increases for suppliers:

* Currency exchange fluctuations
* Wage increases
* Tax increases

Canadian Dollar Approaches Parity

The Canadian dollar has gained 50 percent in value in the last five years. It is now within striking distance of parity with the U.S. dollar for the first time in over 30 years, reaching just short of the psychologically important benchmark of 95 US cents in trading last week. Wage rates for skilled customer service Get Automated Customer Contact Solutions Powered by West Interactive agents in major cities in Canada are now higher than wages paid in many second- and third-tier U.S. cities for comparable work.

Canadian governments and educational institutions are implementing coordinated educational and labor market policies to help ensure that staff with requisite skills are ready and able to meet expected job requirements, especially in the Maritime Provinces.

Philippine Peso Rises

The Philippine economy is booming. Exports have increased by 13 percent so far this year. Foreign direct investment increased by 26 percent in 2006. Along with economic growth has come a stronger local currency.

The Philippine peso has gained 6.7 percent in value against the U.S. dollar this year. Outsourcing service providers locked into contracts negotiated when the peso was low are now looking for ways to cut costs. Last June the peso traded at more than 53 to the dollar. It now trades at 46.6 pesos to the dollar.

India Rising

In India, the rupee has gained 8.7 percent against the dollar during the first quarter of this year. It now stands just a few paise bits above the psychologically important threshold of 40 rupees to the dollar.

The customer service industry in India has been consolidating for more than two years. The larger players enjoy profit margins of 20-30 percent and will be able to absorb currency fluctuations in the short term. Smaller players generally have profit margins of 10 percent, with lower profits often due to a reliance on telemarketing projects rather than stable inbound work. Indian firms of all sizes will likely push for price adjustments in contract renewals and in price proposals for new contracts.

India is experiencing the most rapid wage increases of any country in the Asia-Pacific region. Wages in India are influenced by regional factors, as found in this salary survey of call center agents in major metropolitan areas.

Kolkata (formerly Calcutta) continues to be the lowest-wage metro area for both call center and technical staff. Rolta India Limited announced on June 6 that it is building an IT park there with 5,000 seats, primarily for the provision of engineering and software development services.

Wage rates in India as a whole are forecast to climb from between 12 percent to almost 16 percent this year, with professional employees and middle managers expected to be at the higher end of that scale. Increases for technical employees are expected to average around 12 percent, or 7 percent after inflation. Overall wage increases topped 14 percent in both 2006 and 2005.

Call Centers Less Able to Absorb Cost Increases

Commercial call center service providers are less able to absorb wage increases and currency fluctuations than software firms and remote computer system administration service providers, in part because of the way billing and payment arrangements for call center firms are tied to labor hours. A company whose business model is based purely on labor arbitrage will be immediately impacted by currency fluctuations and wage increases.

A company that bills on a task basis without defined headcount requirements may be able to grow without adding large numbers of new personnel. A company that bills on a task or project basis can also raise its prices quietly by simply adjusting the formulas used to submit price quotes and bids for new work.

Indian Taxes

India's current national budget includes a minimum alternate tax Free Trials. eCommerce Data Solutions, Tax Rates, Address Verification & more. (MAT) to be applied to Indian IT firms and call centers on revenue from work done for clients outside of India. These firms had enjoyed tax exemptions from standard corporate income tax rates because of their status as export-oriented IT operations. This 10-year period of exemption comes to an end in 2009, when full corporate income tax rates are scheduled to be applied.

The 10-year exemption was established under the Software Technology Parks of India initiative. Some IT firms are lobbying for the government to grant them tax-exempt status after 2009 under India's system of incentives for firms located in special economic zones.

Indian companies that serve both domestic and international customers are already paying corporate income taxes on income from their domestic operations. Companies locked into multi-year contracts with clients outside India will be under pressure to pass those tax increases along to customers.