When it comes to offshore outsourcing, there are a variety of key considerations you should keep in mind such as the location of the service provider, roles and responsibilities of both the parties, service level agreements, pricing and so on. However, one of the most important factors that clients often forget is the exchange rates.

Share the Currency Fluctuation Risk with the Service Provider's

The service providers generally are able to absorb the risks and detrimental effects associated with currency fluctuations more efficiently and safely as compared to the clients. Therefore, while deciding on the contract terms make them bear the major part of the risks of currency fluctuations. Adopt the 'Banding' process wherein both the client and the vendor decide on the baseline price. The vendor bears the risk of currency fluctuations up till this amount and anything above than this figure is paid by the client.

Make Payment in Dollars tied to Foreign Currencies

The clients pay the service providers in dollars. However, the amount of money varies depending on the value of currency of the country where the service providers are located. If the local currency devalues against the dollar, clients would have to pay less and the savings can be used to evade the risk of inflation. This approach works well for the service provider even because their profit margins get stabilized and motivates them to deliver consistent services.

Avoid Fluctuations in Exchange Rates with Hedging Strategy

Offshore outsourcing service providers use the hedging strategy to avoid the risks associated with the currency fluctuations. This involves quoting a higher cost figure as compared to the actual cost of the services so that even if there is any fluctuations in the exchange rates, the service providers would not be facing any loss. In this case clients need to make use of the negotiation skills and try to bargain on the quoted figure.

Make Payments in the Local Currency

Some of the outsourcing clients, especially the ones that seek long term outsourcing alliances prefer to make payments in the local currency of the service provider. This is because the U.S dollar always fares higher against these currencies. However, this method is not advisable for short term outsuorcing contracts as it faces immense currency fluctuation risks.
Evaluating the risks associated with the fluctuations in exchange rates and taking appropriate steps to evade them is extremely important in offshore outsourcing deals. This ensures that there is smooth processing of the deals and the relationship of the client and the service provider doesn't face any unnecessary strains.

Maneet Puri is the director of LeXolution IT Services, a reputed Knowledge Process Outsourcing Company located in India. His company provides a range of business support functions and administrative support services like data entry, data formatting and data processing and management.