Beware of rate changes for IT offshore and nearshore resources

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Bad news: in the next coming months European clients of IT and BPO offshore and nearshore will face significant mark-up’s due to exchange rate changes.

During the last 12 months the euro/dollar exchange rate has moved from 1.38 to 1.08 (March 19th).

As a European client of US products you won’t be surprised when your US supplier will increase his prices. But how about your nearshore supplier in Russia, Ukraine or Belarus? If you may think the recent devaluations of the Russian ruble or Ukrainian hryvnia would lead to price reductions, you will face an unpleasant surprise: IT service providers in Russia, Ukraine, Belarus pay their employees in US dollars. Even if the contracts with their European clients only mention euro’s.

Therefore these vendors have seen their gross margin drop by 22%. Within the next coming months they will feel forced to take actions to cope with the loss generating contracts.

What could you expect as a client?

Euro-zone clients

Dollar countries like Russia, Ukraine, Belarus, Philippines and Vietnam will increase their prices to compensate for the changed dollar/euro exchange rate. Expect +22% apart from individual salary raises. Please don’t expect your contract in euro’s will protect you from these mark-ups.

India: the euro/rupee rate has gone up 16%. However rate mark-ups will be lower due to the current surplus of IT labour resources in India.

Prices from vendors in Romania and Bulgaria won’t be significantly affected by exchange rates. However, due to the scarcity of qualified resources in these countries the salaries have gone up with around 25% in 2014. You may expect this will have its effect on the prices.

Other Eastern European nearshore countries that have been regarded as ‘more expensive’ during the last few years, like Poland, Hungary, Czech Republic, Slovakia and the Baltic states will become more attractive.

UK clients

Dollar countries will increase their prices to compensate for the changed dollar/ British pounds exchange rate. Expect +11% apart from individual salary raises. India: the British pound/rupee rate has gone up 7%. However rate mark-ups aren’t expected due to the current surplus of IT resources.

Price effects in European countries will be similar as described above.

The British pound/euro rate (-13%) will deliver a bonus from Euro-zone suppliers to UK clients.

US clients

For US clients the effects will be neutral in dollar countries. Some vendors might try increase their prices for US clients to compensate for loss generating contracts with European clients. On the other hand, these vendors can’t afford losing any US clients in the current financial situation. Therefore this effect is expected to be minimal.

Countries like Poland, Hungary, Czech Republic, Slovakia and the Baltic states will become more attractive. Since their cost structure is based on euro’s, one may expect significant mark-downs in US dollars.

Future

What will happen on the longer term? Some changes – like the development of upcoming countries and availability of technical knowledge – may be predicted. However, nobody is able to predict the outcome of world politics, wars and financial markets.

Looking at the changes during the last few years, one thing is clear: there will be many changes that have impact on the rates in various geographies.

Although we don’t know what will happen next, we do know what is happening now.

Be sure that your IT or BPO business case includes the most recent numbers.

I’ll keep you posted!

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