February 13, 2017
Although US immigration reform is front and center in the media since the Trump administration took office, the US Congress has debated the need to change immigration legislation for years and has introduced significant proposals since 2013. An integral component is the H-1B work visas heavily used in the global services industry. Right now, the details of visa reform are a moving target, but there is a new angle in the shake-up – the proposed benefits are likely to benefit Global In-house Centers (GICs.
CNBC interviewed Congressman Darrell Issa (R-Calif.) this week about proposed policy changes and his discussions with President Trump. Issa stated that Trump believes foreign service providers are gaming the H-1B visa program, undermining the intent of the program.
He explained that Trump may be more favorable toward a policy capping the minimum H-1B salary at $135,000, as opposed to the current minimum salary of $60,000. Two other minimum salary proposals are on the table: $100,000 proposed by Issa and $132,000 proposed by Rep. Lofgren (D-Calif.). In essence, all three plans thus emphasize focus on allowing visas for high-skilled labor, and Issa affirmed that he expects Congress will pass bipartisan immigration reform dealing with high skills this year.
Two Greatest Impacts from Proposed Changes
It’s still unclear, but it’s likely that the changes won’t affect US providers and tech companies to the same degree as the third-party service providers in India. Changes aim to raise their onshore costs. This will significantly raise costs for H-1B-dependent providers such as Cognizant, Infosys and TCS. Although these firms currently enjoy a competitive advantage over Accenture, Capgemini and IBM, the advantage will narrow and potentially go away with the increased costs.
The second greatest impact from proposed changes is the GICs. Notably, the proposed legislation does not impact firms with GICs. In fact, it is likely to make the Indian GIC model (or captives) more attractive, thereby increasing employment opportunities in these Indian firms and giving these providers a greater share of the offshore pie. Why? Because reducing or restricting the available pool of H-1B talent when there is rising demand for US-based tech talent is likely to create wage inflation.
Although rising tech wages in the US will create a tailwind for all offshore models, GICs may benefit disproportionally because, unlike third-party providers, GICs don’t depend on the H-1B onshore model.
Digital Revolution Impact on Job Creation
Visa reform is not the only factor disrupting the labor arbitrage model. The emerging digital revolution holds the promise of significant productivity increases in the existing workforce – often as much as 30-60 percent. Coupled with US companies’ increasing risk of reputation damage for using offshore services, I believe the move to digital services will accelerate, as its value proposition includes the advantage of onshore delivery and relies less on service delivery based on the offshore labor arbitrage model.
H-1B-dependent service providers will likely use digital technologies and business models to offset the impact of rising wages. A short-term rise in employment is probable, given that it takes some time to implement digital productivity improvements.
No matter which side you’re on, the offshore labor arbitrage market is shifting. The US government definitely is moving aggressively in the direction of significant visa reform, especially focusing on high-skilled workers. However, the other items high on the loaded US policy agenda – especially repealing the Affordable Care Act and changing tax laws) could become a factor moving visa reform to a lower priority.
Already pressed for margins, IT service providers would try to pass the TCV impact on to their enterprise clients. As it is very unlikely clients would be willing to bear the cost increase, it would remain with the providers. As a margin decline of 500-700 basis points would significantly disrupt any company’s financial standing, the providers would need to deploy countermeasures to mitigate this impact.