Wednesday, December 05, 2007

IT Opportunities due to the weaker Dollar

The dollar, currently valued at about two-thirds of a Euro, has been continuing on this trend for the last two years. With future interest rate cuts all but inevitable, and the likelihood of interest rate increases or holding steady in Europe in the near future, this trend is likely to continue.

From the Economist:
The ECB is managing an economy that has relied much less heavily on rising house prices to fuel consumption. As Jean-Claude Trichet, the ECB’s president, made clear, the main worry is about higher inflation, which is currently at 3.0%, well above the target of a bit below 2%, rather than lower growth.

The cheap dollar brings about a number of arbitrage opportunities, since goods and services produced in the US, but consumed in Europe are likely to be significantly cheaper. Retailers and the tourism industry in the US have already seen this trend, and opportunities for technology goods and services cannot be far behind.

S-as-S and Web 2.0 markets

Web-based services developed and hosted in the US may have significant cost advantages over European counterparts. Building in multiple language and multiple currency support early should be a key priority for most S-as-S companies because of easier monetization opportunities.

IT equipment

While large semiconductor plants like the one built by AMD in Dresden employ 2,000, labor costs account only for a fraction of operating expenses. However, other costs - including transportation and other costs may make large projects like this unviable if their primary market is outside Europe. More companies are likely to build manufacturing plants in the US because it may now make economic sense to do so.

Outsourced IT Services

IT and BPO outsourcing firms are likely to face pressure in face of rising salary costs in emerging economies and lower revenues due to a weaker dollar. For companies considering or using outsourced IT services, increased prices or lower quality of services are inevitable.

For application development, processes like LEAN and Scrum help projects move forward faster, but aren't geared towards geographically distributed teams. ALM tools (ECF, Microsoft Team System, Serena) and application frameworks (.Net 3.5, Django) drastically improve software developer productivity. In many cases, it may therefore make more economic sense to develop software locally rather than using offshore teams.

Voice recognition and self-service technologies have also developed significantly and are widely used by many large firms, and while not as personal, may be an adequate replacement for Tier 1 offshore call-centers. Canadian firms may also find it easier to outsource IT work to the US.

Customers

European and Asian customers in emerging markets, who are used to paying significantly higher prices for technology products and services, may find services from US firms (particularly S-as-S) cheaper and more customer-friendly. It may also be difficult for internet firms to geographically segment customers.

While the falling dollar may mean some increased costs for some, many opportunities like the ones mentioned exist for firms seeking to exploit such opportunities. While arbitrage opportunities exist in exports from the US to Canada, Europe and Asia, the Pound is also likely to depreciate against world currencies due to lowering of interest rates fueled by the deflating housing bubble there.