True Impact of Currency Changes on Cost arbitrage

Over 2008-2009, the global economic crisis sparked currency changes which impacted economies differently. This research brief explores how this trend has impacted offshore cost arbitrage for companies leveraging global locations for service delivery. In particular, we look at how this trend has varied during this time period and across source-destination combinations.

Key takeaways:

Currency trending continues to be an area that significantly impacts offshore cost arbitrage. Short-term fluctuations create operational implications, especially for captives. However, even though short-term cost arbitrage improvements seem attractive, these are difficult to capture and capitalize upon and may be fleeting.

Over the medium term horizon of three to five years, currency trending is difficult to predict. Both buyers and suppliers need to implement strategies to manage risks of different scenarios rather than trying to forecast precise trends.

Over a longer-term period, managing offshore cost arbitrage will require both buyers and suppliers to actively pursue a strategy of remaining cost competitive. This could be achieved through proactively seeking newer low-cost labor pools that are relatively less competitive and will be a process of continuous evolution.

Exhibit: Sustainability of cost arbitrage for U.S. and India

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• RPO Supplier Landscape and Capability Assessment
• Outsourcing and Offshoring Trends in Consumer Electronics

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Industry news

• IBM recently opened a center in Manila which is the company’s first innovation center in the Philippines to develop new digital technologies in banking, energy, telecommunications, transportation, and retail
• Wipro opened a global delivery center in Chengdu (China) to provide testing and enterprise applications for manufacturing and BFSI verticals. It would also provide multi-lingual services in English, Chinese, and Japanese. The center currently employs about 100 employees but has the capacity of 1000 FTEs
• Teleperformance acquired operations of Teledato, a Colombia-based provider of contact center services, in Bogota and Medellin (Colombia). The capacity of this center is 6,000 employees
• The provincial government of Buenos Aires (Argentina) recently enacted a legislation to provide tax breaks to software producers that set up their operations within the province. Under this legislation, companies will be exempt from income, building, and stamp taxes for 10 years as long as software accounts for at least 80% of their overall income
• Capgemini recently opened another center in Katowice (Poland), for global BPO operations

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