Posted by Hansa Iyengar on May 20, 2013
The proposed reforms to the H1B visa standards under the Senate’s Comprehensive Immigration Bill have the potential to have a profound impact on the outsourcing industry, and therefore the sourcing professional. A Computerworld report on leading H1B beneficiaries in 2012 puts Cognizant on top with 9,281 visas, followed by TCS (7,469), Infosys (5,600), Wipro (4,304), Accenture (4,037), HCL America (2,070), and TechM/MSat (1,963) and put together they accounted for 40% of all H1B visas allotted during the year. These companies have often been accused of abusing the H1B visa program by bringing in lower-cost foreign resources to the US and ‘hogging’ the visa quotas, thereby making it difficult for US companies’ to recruit skilled foreign workers.
While the changes are designed to protect the integrity of the H1B visa program and enable US employers access to the skilled resources they need, they could potentially change several crucial aspects of IT services and outsourcing relationships – many in ways that will be harmful to customers. In particular we see that:
- The low-cost proposition would take a hit. Under the new laws, offshore vendors who have more than half of their US-based workforce on H1B visas will have to pay a $10,000 fee per every additional H1B worker. Many Indian IT vendors have anywhere upwards of 70% of their US-based staff on H1B visas and these changes would make it unattractive (if not impossible) for them to bring large number of employees to the US. At present there are no norms governing the wages that an employee on H1B/L1 has to be paid and the rates vary widely across vendors. However, the new laws aim to rectify that and vendors would have to pay salaries in line with prescribed limits for the profession. This is bound to impact their ability to provide resources at competitive rates, resulting in higher cost for clients.
- Moving work onsite would become expensive. Most efforts to move work onsite, especially in verticals like banking, depend on the vendors’ ability to move key resources to the US to support development efforts. Restricting the availability of visas could hamper these initiatives -- causing a resource crunch as vendors struggle to requisition offshore resources.
- Co-innovation initiatives could suffer. Co-innovation in a global operating model requires vendors’ resources to travel to client sites for critical knowledge transfers. With the changes in regulations, suppliers could find it difficult to provision crucial resources at client premises at short notice, potentially holding up initiatives to foster mutually beneficial innovations in technology and processes. While there are, of course, other ways to work with a geographically diverse workforce, the limited direct interaction would likely harm highly complex co-innovation efforts.
As a sourcing professional, it becomes imperative for you to evaluate alternate sourcing options in a worst-case where your suppliers are hit hard by the changing visa norms. In such a scenario:
- Near-shore is an option, but may not be cheap as the cost of resources is higher in near-shore locations such as Mexico, Brazil, Argentina and Columbia than what the Indian offshore players offer even with resources on-site in customer premises. It would also mean going through the significant process of changing providers unless the Indian vendors significantly ramp up their near-shore presence.
- Domestic outsourcers are not yet the answer. “Domestic” outsourcing is sometimes a bit mislabeled, but is generally applied to IT companies based in the US. These include truly domestic outsourcers who utilize only local talent, the domestic delivery centers of offshore vendors, and vendors headquartered in the US who also have large offshore facilities. Many – though not all – of these domestic providersstill rely quite a bit on H1B workers to staff their delivery teams. Although many of them have partnerships with local universities for training and placing students, it will take time for these partnerships to deliver the large numbers of skilled resources required to fill the demand-supply gap. According to the Computing Research Association, US universities produced around 28,400 computer science and IT engineering graduates (includes graduate, post-grad and PhD students) in 2012. Although the number is increasing each year, it is nowhere close to the several hundred thousand graduates produced by countries like India and China. The current shortage of tech graduates in the US workforce, if not supplemented by temporary workers, would drive up the cost of available local talent.
- Multinational vendors headquartered in the US will be at an advantage. However, most of them have large offshore delivery centers which they can leverage to offer competitive pricing and scalability while still maintaining their front-end client contacts. These vendors are likely to move more work offshore to sustain their margins, which circumvents the entire purpose of the proposed reforms.
Points to ponder - North America accounts for about 60% of the total revenues for the Indian IT sector and, according to The Wall Street Journal, these reforms can wipe out a quarter of the global revenues for this $100 billion industry. Such an eventuality will have a profound impact on the entire outsourcing industry and on enterprises worldwide who depend on their offshore providers/partners to sustain their competitive edge.
I would like to hear more about your views on this game-changing issue. If you’re a vendor, what impact do you foresee on your business model and how do you plan on rising up to this challenge? If you’re a sourcing professional, how do you think the proposed changes will impact your sourcing decisions?
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