Dallas, Texas 11/17/2010 4:00:00 AM
Keep Currency Risk from Ruining Your Offshore Outsourcing Agreement
Global sourcing advisory firm, Alsbridge Inc. offers
several methods to appropriately assess and allocate foreign exchange
risk in order to maximize the economic benefits of a company’s offshore
outsourcing agreement.
“The global recession created a volatile market for currencies,” says
Alsbridge founder and CEO, Ben Trowbridge. “Understanding how to manage
these risks are extremely challenging for companies as well as the
providers,” Trowbridge adds.
Exchange rate fluctuations can be beneficial to the provider, the buyer,
or both if an appropriate agreement clause is set in place moving
forward.
In a recent whitepaper, “Managing Currency Risk in Offshoring Outsourcing” Alsbridge offers these approaches:
1. The provider bears full currency risk by accepting a contract in
U.S. dollars based on a fixed exchange rate. Under such agreement, the
provider will offer the client a fixed U.S. dollar fee for the services,
regardless of currency exchange rate fluctuations. Typically, the
provider will increase its price by some amount to cover future currency
fluctuations or to include the costs of hedging the currency risk. This
approach is the most common as clients avoid the uncertainty of
potential increases in fees due to adverse swings in exchange rates.
2. At the other extreme, the client assume the foreign exchange
risk by accepting a contract priced in Indian Rupees then converted to
the U.S. dollar rate the day of the invoice. Under this approach, the
client would not only bear the downside risk (e.g., increased services
fees) of adverse exchange rate fluctuations but also capture the upside
benefits (e.g., reduced services fees) of any favorable changes in
exchange rates. In some unique instances, clients may be willing to
take that risk because of its global presence and ability to effectively
managing currency risk.
3. The provider and the client may also agree on a currency
risk-sharing alternative. The parties may agree to a fixed exchange rate
with no variation in services fees as long as the exchange rate
fluctuates within a specified band, such as a plus or minus 10% around
the baseline rate. To illustrate further, let’s assume the exchange rate
at the time of contract signing is 40 INR per one U.S. dollar. This
exchange rate of 40 would be considered the fixed exchange rate. The
services fees would be unchanged when the rate fluctuates plus or minus
10% around 40 (e.g., 36 to 44 INR per one USD). If the rate were
increasing to 52 equivalent to a 30% increase from baseline rate, the
provider agrees to bear 20% of the increase (e.g., 10% of the specified
band plus 10% of the increase above the band) while the client agrees to
bear 10% of the increase.
Regardless of the approach used, Alsbridge advises companies to
negotiate the allocation of currency risk in tandem with the inflation
adjustment index (COLA).
“All good contracts start with clear communication,” Trowbridge
explains. “Getting off to a good start opens the door to a wide range of
risk-sharing possibilities and a shared win.”
More information can be found in an Alsbridge whitepaper titled,
“Managing Currency Risk in Offshoring Outsourcing” at Outsourcing
Leadership.
About Alsbridge Inc.
Alsbridge, Inc. is an award-winning global advisory firm and a
distinguished member of the 2010 Inc. 500 fastest growing privately held
companies. Alsbridge redefines the way companies reduce costs and
improve back office operations. Our proprietary benchmarking tools and
data resources enable clients to utilize the most cost effective and
value added sources globally for information technology, business
processes and telecommunications networks. Through a combination of
internal optimization and outsourcing, our clients achieve cost savings
that support their strategic business objectives. Founded in 2003,
Alsbridge is the proven, effective difference. The company’s web site
is: www.alsbridge.com.
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