Out to Kill

The world’s most powerful country’s paranoia, or call it xenophobia, is driving it to erect barriers against temporary immigration of highly-skilled Indian tech talent. 

The proposed US immigration bill regarding H1B visa could spell massive disruption for the Indian outsourcing industry model. It directly hits the nerve of the industry which is based on people mobility between India and its largest market, the US.

The submitted Senate Immigration Reform bill recommends sharp changes to the professional (H-1B, L-1) rules that could force the India-centric providers to meaningfully change their business approach if enacted in the proposed form. The level of success on the Senate side could provide an indication of whether the House will be able to produce a bill. Uncertainty around this key issue would prevail for a while. Says Azim Premji, chairman, Wipro, “It will take a few more months before the bill converts into a law. We have to make sure our country’s voice is heard during this process.”

Indian companies, traditionally used to collective lobbying under the umbrella of Nasscom, have activated individual lobbying efforts. For example, Cognizant has spent the highest amount of money among outsourcing companies on lobbying, shelling out about $1.95 mn. This figure is higher than amounts spent by any of its India-based IT outsourcing rivals or even Nasscom, the industry body that represents India’s $108 bn IT industry, a Times of India report states.

The Proposed Bill

The first and the draconian part of the bill is called the 50-50 rule. Sen Grassley (R-IA) introduced an H-1B/L-1 visa bill that, among other changes, would introduce a “50-50 rule”, which purports that an employer with more than 50 employees would not receive any additional visas unless 50% of the workforce is American. For example, if company X that has 800 employees in the US (or read onsite), additional H1B visas would be granted only if more than 400 employees are American. This means that the number of American employees have to be increased. It is an indirect way of forcing the recruitment of American employees.
Most Indian companies have been very liberal in using Indian employees on H1B and L1, even as they have been increasingly proactive in recruiting American employees.

The bill also envisages steep increase in visa fees for H1B and L1. This is designed to act as a deterrent to mass filing by companies.

Indian outsourcing companies are waiting to understand the full implications of the proposed bill. Says T K Kurien, CEO, Wipro Technologies.

 

“We haven’t fully understood the implications of the immigration bill yet. It’s too early to talk about the cost implications. Our prime concern is that the procedural aspect–the compliance and the time it will take. Procedural compliance implies a higher turnaround time. The advantage we see is the increase in cap.”

Impact

The cleverly drafted bill is purely aimed at curbing the Indian outsourcing industry from freely serving its US clients. First, the 50-50 rule would mostly apply to Indian companies, especially the large ones that are likely to have less than 50% of their employees (even if they number in thousands) of American nationality. It is like flanking Indian companies in a huge semicircle.

The other semicircle is the 15% rule that acts like a safety valve for American companies like IBM, Microsoft, Accenture, and others. According to this rule, companies that have less than 15% of their employees on H1B, can apply for more H1B visas. That is, an IBM or Microsoft can freely add on more H1Bs till it reaches the 50% mark.

For the Indian companies, steep increase in visa fees will add salt to the wounds since it would directly add to their costs. 

Thus the provisions of the bill taken together are a clear indication of the US adopting a protectionist approach and wanting to erect a trade barrier for India-centric IT services companies.

Analysts estimate that the impact of the bill if it comes into force would be a reduction of 20-130 basis points (bps) on the operating margin and a 1-5% EPS reduction.

According to a prominent US analyst, who wishes to be unnamed, the bill has meaningful negative consequences for all the large India-centric providers that rely heavily on the H-1B and L-1 visas to handle the on-site portion of their support and development work. He adds that in the worst case scenario, this could go as far as preventing the “Tier I” providers from doing work with US clients.

This would be so disruptive to the existing way that the Fortune 500 companies manage their critical IT operations that cooler heads will prevail and the legislation is not passed, the analyst firm hopes.

Large Indian outsourcing companies might look at acquiring US companies with large local workforces. Another consequence could be that clients might be willing to let a greater percentage of projects shift to offshore locations.