Forex fluctuations can be significant, and
may lead to either currency appreciation or depreciation. If the supply-country
currency appreciates against the billing currency of the demand country,
service provider revenues and margins decrease, as they're reported in terms of
the supply-country currency. On the other hand, if the currency depreciates,
service provider revenues and margins increase.
So there's a clear need for a mechanism that adjusts the pricing changes attributable to forex fluctuations, as was discussed in "Dynamics of Price Adjustments in a Globalized Sourcing World". Here are a few at the disposal of contract negotiators:
- No adjustment allowed - The company outsourcing does not provide for any price adjustment attributable to the forex fluctuations, as the service provider can hedge its currency exposure as it deems necessary.
- Adjustment within a band - Price adjustments can be allowed up to a certain percentage, based on forex rate movement; while a greater adjustment may be subject to negotiations.
- Adjustment beyond ceiling - Adjustments are allowed only for extreme fluctuations.
Negotiators can vary their forex adjustment approach by considering the direct movement of one currency versus another, a set of representative currencies of countries that are major consumers of services, or a basket of currencies that represent a mix of supply and demand countries.
No matter what the approach, a company outsourcing should compensate the provider for impact of forex fluctuations, if it was spelled out in the agreement. It should also avoid paying for what the service provider could have hedged against. But most importantly, it's important to avoid double dipping (of inflation) by using real exchange rates.
At the end of the day, the service provider and its client need to reach a mutually acceptable solution and discuss any extraordinary situations. It's more about the negotiation and less about the actual numbers. Turns out, the relationship is the best safety net of all.
