About eight months ago, I posted on the sudden concern for the weak dollar and how I thought this could be a good thingor at least not entirely bad. It looks like I was wrong on some predictions, and right on some others. Let’s check out some of what has happened:

1. Is the US now a low cost location? Yes and no. The auto industry, admittedly a mess, is running back to the US. GM and Ford are suddenly shuttering relatively new but suddenly “expensive” Canadian plants. Fiat (Fiat!) is going to build cars in the US “to take advantage of its lower cost of production“. My once solid theory that call center outsourcers should default to Canada until proven another location could outperform it needs to be revisited, with the Canadian dollar at $1.06 as of today. It doesn’t take much more than observation to notice the amount of European tourists in the US has increased significantly (but here is the study in case you need it). And what about other places? Chinese currency strength is making a lot of the products we sell and buy in the USA relatively expensivemost businesses importing manufactured goods from China are increasing prices or slashing margins. So because of pre-existing demand for imported goods (both b2b and b2c), it doesn’t really feel like low cost around here. This will balance out, of course, if the dollar stays weak. We haven’t seen an increase in job demand, which could indicate the economy is weaker than we think, or it could just be the lag timeit’s not easy to just repatriate operations overnight and it may take some time.

2. Has off shoring become expensive? Here the answer is a little clearer, but the explanation more subtle. All of the recent deals I have worked on are providing my clients with 20-30% cost improvement over their insourced operationsactually an improvement in savings from just 18 months ago when we were getting an average of about 16%. What gives? In 2005, of every dollar a company paid an Indian outsourcing provider, only about $0.06that’s right, 6%!went do direct, fully loaded labor. Now let’s imagine since then labor costs have doubled (they haven’t). The component of the fees paid to the provider that is represented by labor is still only 12%, leaving the seller 88% of their total fees to play with. There is an old McKinsey Institute Study which I am still fond of that outlines how each dollar of offshoring revenue is split up. Bottom line, only $0.33 cents stay in India, and the restthe majoritycomes right back to the US in the form of Computer purchases from Dell and HP, telecomm purchases from AT&T and MCI, salaries paid to local staff, taxes, etc.

   If you understand this breakdown, you understand why savings for outsourcing buyers are up and profits for outsourcing sellers are at least consistent but more likely up as well. Of the inputs required to deliver the service, two thirds are cheaper than they used to be, far outweighing the increase in the one third that has gotten more expensive. So savings are up. The “secret” nobody is talking about is that sales are up too. But that has an easy answer. Even if my recent experience is an outlier and surprises cut savings down the line so buyers only end up realizing half of the savings, that leaves 10-15% in “found” money through offshoring. Will the CEO who would not like to see her/his back office costs down by 10-15% please contact me?

   So far, it appears, the weak dollar is helping everyone except those of us planning a European vacation this Fall! OK, I exaggerate, there are always winners and losers in currency fluctuations. But being a low cost location isn’t so bad, is it?