Declining Dollar Impacts Outsourcing Market

Recent changes in the global economy, the Federal Reserve’s loose monetary policy and historically high U.S. deficits have contributed to a rapid decline in value of the U.S. dollar. This decline is impacting the outsourcing market due to the overwhelming proportion of multi-year U.S. dollar denominated contracts. Profit margins on contracts are compressed because the cost of providing outsourced services (e.g., human capital, equipment, facilities and other resources) has dramatically increased relative to the dollar.

The narrowing margins are driving a number of important developments in the outsourcing marketplace, and customers should keep these in mind. Service providers are contractually shifting the risk of exchange rate fluctuations to customers by insisting on inflation and exchange rate adjustments in new transactions and in renewals of existing contracts. Customers are seeing additional fees, various kinds of change orders, a decrease in the number of individuals assigned to provide services, the use of less experienced and less expensive personnel, a shift to higher risk and lower cost geographies and a movement toward shared platforms and service centers.

Customers should be familiar with the protections that exist under their outsourcing contracts and should make sure that the governance team knows what every contract requires of the service provider and what types of requests could lead to additional charges. Where existing protections are not enough, key terms of existing contracts may be open to renegotiation, especially if the customer can offer the potential of new work.