The weakening of the U.S. dollar could lead to poor quality and substandard skill sets in Indian offshore services, Forrester Research warns, as Indian service providers struggle to stop falling revenue.

According to the research firm, variations in the dollar-to-rupee conversions have been at a record high, with the dollar falling 7% in the quarter ending June 30, 2007. This value decrease directly affects Indian offshore service providers whose income is calculated in U.S. dollars, but costs are paid out in rupees. For instance, Wipro reported its operating margins have dropped by between 3% to 4%.

The weakness of the U.S. dollar is causing revenue to drop and forcing Indian companies to search for ways to stay in the black, Forrester says.

"Given that 60% to 80% of income is in dollars and more than 50% of providers' costs are incurred in rupees, offshore providers are struggling to find ways to cope -- including asking clients to bail them out by increasing billing rates, or in some cases, renegotiating master service contracts," Forrester analysts write in the October report. "Already struggling to protect margins, Indian providers have been dealt a major blow by the falling dollar. To curtail their own losses, providers want their clients to absorb at least some of the fluctuation."

And for clients that agree to renegotiate contracts that could mean an increase in monthly offshore fees and reduced cost savings from choosing to offshore parts of their business, Forrester warns. Yet the research firm says that with or without renegotiations IT executives to be aware that offshore providers could skimp on the quality of the services or opt to hire less-talented workers to cut costs.