No, Canada! Dollar's Decline Undercuts Near-Shore Option

If the hockey strike weren't bad enough for those north of the border, there's this: The declining U.S. dollar is making Canada less attractive as an outsourcing destination. "The whole cost advantage has almost been wiped out," says Atul Vashistha, CEO of outsourcing advisory firm neoIT.

U.S. businesses used to save about 20% of IT costs by outsourcing to Canada. They opted for its proximity and cultural similarities over greater savings in India. But with the Canadian dollar rising more than 20% against the U.S. dollar in the past two years--it stood at about 84 cents last week, compared with 63 cents two years ago--more U.S. companies likely will move work to India, Vashistha says. The advantage has been mostly currency driven, he says. A U.S. and a Canadian programmer both can earn $30 an hour in local currency, but the exchange-rate difference has made the Canadian cheaper.

As the Canadian dollar approaches parity with the U.S. dollar, the advantage is evaporating. The Indian rupee is relatively stable against the dollar, and Indian programmers are cheaper regardless of currency fluctuations. Because IT-service providers generally absorb the cost of currency shifts, Vashistha says, they'll likely push customers to India, "particularly if the [U.S.] dollar remains relatively weak." An EDS spokesman confirms that EDS already is moving some work from Canada to India.