The Indian IT industry has long counted The USA as one of its biggest markets for IT related services. Several models have evolved in the IT industry to cater to the US market and among it is the Onsite-Offshore model of service delivery. This is a highly effective model for delivering IT services at a lower cost that leverages low cost resources at locations outside USA to execute a major part of the work combined with a few client-facing resources in the US.
One of the fundamental principles of this model is labor arbitrage. The use of a combination of low cost offshore resources with high cost onsite resources on a need basis not only brings in cost efficiency but also allows the time difference between India and USA to be leveraged. This in turn leads to higher efficiency. For instance requirements that are sent offshore at the end of the day US time can be turned around during the night in the US, leading to higher efficiency.
But, all this is set to change.
With the new US President Elect Donald Trump pushing for immigration changes, a bill on immigration is imminent. And, with it the entire concept of labor arbitrage leveraged by Indian IT firms in the US could vanish in an instant. This bill seeks to restrict companies with more than 50 employees in the US from hiring employees on a H-1B if more than half their employees are already on H-1B and L1 visas.
Essentially, this will hit Indian companies hard. Most of the large Indian IT companies like TCS and Infosys have several offices in the US and also a significant workforce there. For these companies, getting employees on an H-1B or L-1 visa is a very efficient way of delivering high-end service at a highly competitive price.
This is because, the IT industry requires a wide array of technology skills and much of these skills cannot be substituted for one another. For instance, if you require a person with skills on Siebel, a Customer Relationship Management solution, you cannot just bring in another programmer in Java to do this work, no matter how good he or she may be.
With the availability of H-1B and L-1 visas it was easy to bring people with specific skills onsite quickly to execute a project, without having to hire multiple people for every conceivable skill that may or may not be required on an ongoing basis.
With the new restrictions, Indian companies will need to depend on people recruited locally for a significant portion of their work. This will not only raise costs immediately, but will also create issues of retaining employees onsite as people whose skills become redundant may need to be retrained or let go if there is no demand for their skills.
Many Indian IT companies have reduced their dependence on the US market post the sub-prime crisis. That was the time Indian companies consciously shifted their focus from the US market to European and Emerging Markets to insulate them from the sudden lack of demand in the US. Hopefully that could mitigate the impact of this bill to some extent.
While the US government is moving ahead with this bill in the spirit of nationalism spurred by the fact that it will result in employment creation for more US nationals, what cannot be ignored is that this would come for a price.
This bill is expected to increase the number of US nationals on Indian IT companies workforce in the US. This will lead to a significant increase in delivery costs, which in turn will be passed on to their US clients. This in turn will result in higher costs for US companies that will eventually be borne by their end customers. So US nationals are also bound to experience increase in costs of goods and services that they purchase.
In the past, US companies were able to access a wide range of technical skills on demand by retaining an Indian company and that too at a very competitive price. With the new bill this will change and now US companies will have access to Indian company resources that will cost something similar to what any other US company would charge.
This new bill comes on the heels of another recently passed bill that has essentially doubled the cost of H-1B and L-1 visas. A conservative estimate of the impact of the increase in visa costs is $400 million annually. It goes without saying that this increased cost will be passed on to US clients and from there it will ultimately be borne by end customers. If you add the impact of the proposed bill, the increase in costs for US customers could be quite substantial.
Consider the fact that the operations of Indian IT companies in the US and their ability to deliver solutions at a significantly lower cost not only benefits US companies who engage them but also increases the level of competition in the US market. This in turn spurs other US companies also to explore ways and means of providing their services at a more competitive price thereby benefitting the US economy eventually. With the advent of the new bill prices in the US may rise across the board, as all the increased costs will eventually be passed on to consumers.
USA is a pure capitalist economy where market forces determine supply and demand with very limited interventions by the Government. That is what makes their economy so different from socialist economies.
Whether this is a step in the right direction or not, only time will tell.
About the Author:
Srinivasan is an independent consultant working in the area of strategy and technology interventions in the public sector domain. He has worked in companies like IBM and TCS and has over 30 years of experience spanning 24 countries.