Category: Onshoring

Global Supply Chain Management Strategy in Times of Disruption | Blog

The RussiaUkraine war is further disrupting already deteriorated global supply chains. With the high political tensions, service providers need to implement a mix of short- and long-term approaches like reshoring, ally shoring, and partnerships to overcome the crisis. Read on to understand Global Supply Chain Management Strategy and the global supply chain issues and strategies to build greater resiliency in times of disruption.  

Global supply chain issues and strategies  

The global supply chain has been upset over the past two years, starting with back-to-back global economic setbacks that impacted nearly all goods and services in every industry around the world.

While the supply chain hit on essential goods and medical services from COVID-19 is now plateauing, rising tensions between Russia and Ukraine have only added to the already strained global channels and delivery.

The ripple effects of the Russia-Ukraine war can be seen in rising oil prices, trade restrictions, and financial sanctions. Even though Russia is receiving economic penalties, countries that depend on Russian goods and services have to begin looking for an alternative supply. Similarly, countries depending on Ukraine’s IT outsourcing services are suffering as well.

With these recurring global shocks unsettling global trade dependencies, the changing dynamics of international relations, and the growing uncertainties, governments across the globe are moving to implement policies to make supply chains more resilient.

Impact on service providers  

During the pandemic, the Information Technology Sourcing (ITS) industry observed a dramatic 3% fall in overall growth, and the Business Process Sourcing (BPS) industry growth lagged. The Russia-Ukraine conflict is estimated to impact between 70,000 and 100,000 service professionals in Ukraine, Russia, and Belarus, including highly-qualified workers with digital engineering and IT skills.

The immediate concerns go beyond ITS to Engineering Services (ES) since Ukraine has been a go-to-market with a mature talent pool for both sectors. The full trickle-down effect on BPS is yet to be fully seen. Although BPS’ dependency on Ukraine is minimal, the conflict’s escalation to neighboring countries is expected to more noticeably impact Eastern Europe, which forms the third-largest outsourcing location, following India and the Philippines.

Eastern Europe hosts several service providers across industry verticals, including Banking and Financial Services (BFS). Sixteen major service providers already directly engaged with Everest Group are located in this region, enabling different processes across the BFS vertical, including capital markets, banking operations, and financial crime and compliance. Outsourcing adoption across the payment vertical had been growing as well and could be impacted.

The conflict majorly derails Ukraine’s focus on driving Fintech and tech and banking collaboration that started in 2018 with major FinTechs in Ukraine raising US$7 million in funding. In addition to the growing concerns among service providers, the increasing sanctions have already resulted in volume spillover, and firms are starting to become more vigilant in their strategies to brace for the future.

Global supply chain management strategy to consider

Given the latest scenarios and rising political tensions, countries increasingly are investing in shifting their shoring operations to form leaner and more robust supply chains. This move has been underway since nations began reducing their dependencies on China following the COVID outbreak. Japan has been incentivizing such shifts and encouraging private companies to move operations to countries like India, with friendlier ties than China. Taking a similar approach, the US is now limiting its dependencies on Russia for oil and looking to be self-sustainable in the longer run.

On the financial services front, long before the Russia–Ukraine war, countries have been encouraging citizens to limit dependencies on foreign platforms for their financial transactions. This can be seen by Russia’s MIR and China’s UnionPay advocating for using Rupay for all card payments and lessening its dependence on Visa and Mastercard. Yet, Rupay’s technology operations are partially sourced by an American technology provider. Thus, the question of complete independence, reshoring, or nationalization of financial services is rather difficult.

With rising global tension and the downturn of cyclic economic globalization on the horizon, firms need to consider remediation action for the future. Let’s explore some of the global supply chain management strategies to consider for the near- and long-term.

Five global supply management strategies

Below we have identified popular global supply management strategies and their impact on costs and investments:

  Strategies Impact
1.Friend shoring or ally shoring: This form of outsourcing where countries with friendlier diplomatic ties leverage their connection to ensure business continuity is growing. Post-pandemic, it has been imperative for enterprises to focus on business continuity, especially with growing outsourcing demand across industries such as banking, healthcare, insurance, etc., and for a wide range of capabilities, including financial accounting, customer experience management, and human resource management.Short-term strategy
2.

Reshoring: While not a new concept, reshoring is increasingly being explored now. In 2010, US firms brought back more than 1 million jobs post the economic downturn. Reshoring helps save costs, strengthens a firm’s supply chain, and can even bridge language and cultural gaps. But reshoring is not possible for everyone if resources are limited.

Long-term strategy and investment
3.

Talent upskilling:  Given the rising talent shortage, upskilling internal resources should be in the cards to provide better leverage and control over internal resources – even without the current tensions.

Long-term investment
4.

Partnerships: Partnerships within existing firms in the country should be explored to bring capabilities and processes nearer to home. In addition, partnering enterprises can leverage existing service provider relationships to fill gaps in capabilities. Firms also can form public-private partnerships with governments and state-funded universities to provide skills training and then hire new talents.

Long-term investment
5.

Automation:  Given the rise in digital transformation and the adoption of newer technologies, an automation-first strategy is imperative. Automation of high-frequency tasks can speed up processes and decrease human dependency on outsourcing partners.

Long-term investment

In today’s volatile environment, service providers need to assess and weigh the options before making shoring decisions to maintain a balance between cost competitiveness and labor shortages.

With the current disruptions, reshoring and friend-shoring strategies should be explored in the short term. Moving forward, when the climate is more stable, cost optimization and efficiency should be prioritized. Understanding the issues and balancing short- and long-term global supply chain management strategies will help firms get through this disruptive period.

For more about the successful mix of approaches the industry has been using across various domains, see our State of the Market reports.

Read more about the Russia-Ukraine conflict and potential impacts to nearshore European countries and the larger global services industry in our blog, Will Ukraine’s Invasion Have a Domino Effect on Other Geopolitical Equations?

To discuss global supply chain issues and strategies, contact us.

Call Centers Show Bright Spot In COVID-19 Crisis | Blog

We just came out of one of the best economies in history, but we now face a recession brought on by the COVID-19 pandemic crisis. Even if there were a V-shaped curve to the recovery, it would not change a looming huge factor going forward: cost reduction is more important than ever before. Although lower cost was not the significant driver in creating value in the digital world, COVID-19 adds a new wrinkle to transformation because it exposed the underlying support for business processes. It set the stage for what is now an overwhelming impetus for companies to take on the risks of changing the way they do business.

Read more in my blog on Forbes

Impact Of Coronavirus Threat To The IT Services Industry | Blog

Clearly, the coronavirus (COVID-19) already has an impact on the global economy and broader market. Companies are cancelling conferences and events. They are closing their campuses to outsiders. Travel is restricted. And in some instances, companies impose a work-from-home policy. In the IT and BPO services industry, decision-making is stalled, and we already see clients cancelling planned contracts.

How bad is the disruption to the services industry? It will have a negative impact on revenue growth in the next quarter (ending in June 2020) and potentially in several quarters to come. New projects will be postponed or cancelled. This is because, first, companies simply cannot buy complicated services without some form of travel. Second, any large initiatives require executive support and energy, and they won’t have time to push contracts forward during the next few months.

Read more in my blog on Forbes

Visit our COVID-19 resource center to access all our COVD-19 related insights.

Ongoing Coverage of the Service Delivery Impacts of Coronavirus | Blog

Ongoing Coverage of the Service Delivery Impacts of Coronavirus

Coronavirus, or 2019-ncOv, creates many uncertainties for organizations engaged in the delivery of business process, IT, and engineering services. While the initial focus is the delivery of services from China, geographies such as India and the Philippines (and perhaps others) may also become areas of increased concern. Global service delivery organizations are typically large and involve extensive international mobility, increasing their risk exposure; at the same time, they are also leaders in virtual interactions via phone, email, and video.

This is the first in a series of blogs that explores a range of topics related to these issues and will naturally evolve as events unfold and facts reveal themselves. The blogs are in no way intended to provide scientific or health expertise, but rather focus on the implications and options for service delivery organizations.

These insights are based on our ongoing interactions with organizations operating in impacted areas, our expertise in global service delivery, and our previous experience with clients facing challenges from the SARS, MERS, and Zika viruses, as well as other unique risk situations.

Everest Group recently published a Risk Radar update on China related to coronavirus. With this update, we increased our risk rating for service delivery in China from “low-medium” to “medium.” Members of our Locations Insider, Catalyst, and Market Vista memberships can access the report.

We recommend that business process, IT, and engineering services firms migrate their critical operations to alternate delivery locations and promote the use of teleconferencing and work-from-home policies to ensure business continuity with minimal impact to operations. Additionally, companies should implement precautionary measures in compliance with the government guidelines.

In the coming days, we will publish additional blogs covering a range of topics related to this issue. At this point, mortality rates appear low, so the main concern may continue to be basic availability of business operations in China and implications on travel, families, and in-flight initiatives.

Visit our COVID-19 resource center to access all our COVD-19 related insights.

Why Many Banks Might Have to Dump Their Delivery Location Strategy | Blog

Long gone are the days when consumers were welcomed with toasters when they opened a checking or savings accounts at their local bank. Today’s consumers don’t want toast-making capabilities from their financial institution: they want cheaper, easy-to-use Internet- or smartphone-based financial products and services, including payment applications, lending platforms, financial management tools, and digital currencies, all with hyper-personalization. Most customers are quick to make a move if their current financial institution doesn’t deliver.

So, what do banks need to do to retain their customers? Two things. First, they need to deliver the banking experience their customers are increasingly demanding. Second, they need to reconsider much of their service delivery location strategy.

What do Bank Customers Want?

Let’s first look at banking customers’ requirements for a SUPER banking experience.

Banking Requirements

Few, if any, banks have the ability to deliver on these requirements. So, they’re increasingly partnering with financial technology start-ups – popularly known as FinTechs – to meet customers’ expectations.

FinTech solutions

This brings us to the second thing that banks need to do to retain and grow their customer base: reconsider much of their service delivery location strategy.

Cracking the Service Delivery Location Strategy Code

With innovation and personalization topping customers’ list of banking requirements, banks can no longer rely on the same location strategy they’ve used to deliver traditional functions such as applications, infrastructure management, and business processes. Why? Because FinTech requires a higher proportion of onshore/nearshore delivery compared to traditional functions and co-locating all FinTech segments such as payments, lending, and capital markets in the same region may be difficult given varying maturity of locations across segments.

To help banks find locations for successful FinTech delivery, Everest Group developed a framework – presented in our recently published research report, “FinTech Services Delivery – Traditional Locations Strategies Are Not Fit For Purpose!” – to measure the innovation potential of a location.

With the framework, banks can evaluate all aspects of innovation potential, including the availability of talent with emerging skills (such as artificial intelligence, machine learning, and analytics), adequate cost of delivery, and providers’ financial services industry domain knowledge.

Framework to Measure a Location’s Innovation Potential

Framework to Measure a Location’s Innovation blog image

To develop our FinTech Services Delivery/Locations report, we started with a list of 40+ global cities with leading FinTech investment and market activity. Subsequently, we shortlisted 22 locations based on multiple criteria including overall investment, technology and infrastructure, and talent. Finally, we used our innovation potential framework, coupled with other factors such as maturity of the FinTech ecosystem and cost of operations, to determine the top locations banks should consider for specific FinTech use-cases such as payments, lending, and capital markets solutions.

Here are some key findings from our location strategy research:

  • Banks may need to create a parallel portfolio of FinTech delivery locations, as they may be far different than those that are mature in delivery of traditional functions
  • A location’s innovation potential (not its cost arbitrage or delivery efficiencies) is the most important factor for successful FinTech delivery. This is because the right location will offer depth and breadth of maturity across multiple financial segments, a vibrant startup scene, agile academic institutions, tech-savvy government, ample financing options, modern technology infrastructure, and friendly regulatory environment
  • Locations that are currently regarded as nascent (e.g., West Africa, Southeast Asia, and Latin America) may emerge as attractive alternatives as the market evolves.

For more details, please see our report, “FinTech Services Delivery – Traditional Locations Strategies Are Not Fit For Purpose! Plus Profiles of Emerging Offshore/Nearshore FinTech Hubs” or contact Anurag Srivastava or Anish Agarwal  directly.

Commercial Options for India GIC Setups | Sherpas in Blue Shirts

There are two primary commercial options – or export-oriented schemes – available to GICs looking to export IT/ITES services from India. One is setting up a 100 percent Export Oriented Unit (EOU) under the Software Technology Parks of India (STPI) scheme. This allows operations to be carried out from any location in the country. The other is setting up a delivery center in a specified, demarcated, duty-free enclave called a Special Economic Zone (SEZ). These offer additional economic benefits (e.g., tax holiday) in lieu of positive net foreign exchange earnings from the export of IT/BP services.

Which option is best for your company? Read on to learn the differences, the trade-offs, and the variables you should factor into your decision.

The Major Differences

  • Income tax holiday: SEZ units enjoy a graded income tax holiday period that translates to significant tax savings for a large-scale setup in India. The tax holiday incentive for STPI units expired in March 2011
  • Indirect tax benefits: both SEZ and STPI schemes provide custom duty exemption on imports of capital goods. However, SEZ units are also eligible for a “zero-rated” Goods and Services Tax (GST) that effectively decreases the cost input for domestically procured goods and services
  • Location: STPI units can set up operations in any location in the country. SEZ units are restricted to a designated area.

Key Decision Variables in Selecting SEZ or STPI

  • Financial attractiveness: SEZs outweigh STPIs in both direct and indirect tax incentives. Where cost savings are significant (e.g., a large-scale setup) and need to be prioritized, SEZ is a clear choice for many enterprises
  • Access to a broader ecosystem: Many SEZs offer a complete ecosystem, with easy access to commercial, residential, healthcare, and educational options. Further, SEZs offer quality infrastructure and business continuity planning advantages including:
    • Large reputed SEZs offer a more reliable supply of utilities including electricity, water, telecommunications, and overall security
    • The office space standards and building compliances (e.g., natural disaster preparedness) are typically more stringent in SEZs
  • Access to large talent pool: Given their size, SEZs offer ready access to a large, skilled talent pool with relevant technical, functional, and managerial skills. And the ecosystem often developed in and around SEZs is a significant attraction for the talent pool to work in them
  • Site and scale flexibility: STPI units provide far more location (e.g., financial district or central business district) and scale options than do SEZs. Many small-sized GICs tend to prefer this flexibility
  • Ease of compliance: Compliance and statutory reporting requirements in STPIs are relatively more lenient than in SEZs. For instance, introduction of GST has increased the compliance and record maintenance burden on SEZ units. Exiting SEZs may involve more scrutiny given the higher economic benefits involved.

SEZ vs STPI

How a Financial Services Firm Made the Decision

Everest Group recently supported a U.S.-headquartered financial services company looking to set up a small-scaled GIC in India to deliver high-end niche IT services. Our setup advisory team used a three-step process to ultimately recommend the right facility and commercial model to meet all the client’s requirements: outlining the space, handover timeline, and proximity to the central and/or secondary business districts; assessing potential savings in operating from an SEZ; and evaluating and scoring the additional pros and cons of shortlisted sites to make our final recommendation.

When we evaluated and scored the client’s “must-haves” — scope for expansion or relocation, access to social infrastructure, lower commute time, and proximity to talent hubs – against the limited SEZ options available, it became clear that an SEZ was not the right answer for the client.

Thus, we recommended that the client go ahead with an STPI option in a large IT business park, and register the unit with the STPI to benefit from indirect tax benefits. This option allows the client to take advantage of all the business park’s large talent pool, marquee tenant profile, social infrastructure, and other amenities, and gives it flexibility for any future expansion or potential relocation within or outside the business park.

More than 30 new GICs are set up in India annually, and half of these are first-time center setups. In order to ensure their success, the enterprises establishing these centers must take the time upfront to clearly understand their objectives and requirements against the trade-offs of SEZs and STPIs.

Sourcing Professionals Have a Tough Job | Sherpas in Blue Shirts

If you are a sourcing professional, you have our deepest respect, because now, more than ever, your job is a tough one. The sourcing industry is changing fast, disrupted by emerging technologies, shifting talent requirements and evolving service provider capabilities. Moreover, fluctuating geopolitical and legislative issues are causing enterprises to rethink substantial, long-held sourcing strategies and provider relationships. Sourcing professionals face formidable challenges in the global economy as the new year approaches and they look for better strategies in an industry experiencing unparalleled turbulence.

Technology is Changing the Game

It used to be that a sourcing professional’s No. 1 responsibility was finding a way to get the work done as cheaply as possible. Not any more. Technology has changed the game. In nearly every industry, digital technologies are driving the development of innovative products and services and improved customer experiences. To keep pace in this digital world, enterprises are now pursuing a digital-first rather than arbitrage-first strategy. In fact, the global services market has seen a threefold increase in digital-focused deals.

Automation, once merely a service delivery tool, is now “front end,” with enterprises demanding strategy, vision and strong Proof-of-Concepts (POCs) for advanced automation in 33 percent of all application services contracts in 2016. Similarly, artificial intelligence, cognitive computing and robotics will soon begin to pervade the enterprise portfolio and will eventually become mainstream in sourcing landscape.

Talent Requirements Are Shifting

The increasing adoption of digital strategies is changing the workforce skills that enterprises seek, and, in turn, forcing sourcing professionals to revamp their location portfolios in the midst of a dynamic landscape. Location options for traditional global sourcing continue to expand, and new locations are emerging for unique talent demands, such as digital capabilities.

Geopolitical Disruption Adds Complexity

Sourcing professionals also must anticipate and react to numerous geopolitical disruptions that keep the sourcing landscape shifting like windblown sand. In the past year, for example, we have seen a significant decrease in demand from the United Kingdom given the uncertainty with Brexit; uncertainty about healthcare legislation in the US has dampened the healthcare sourcing market; and the uncertainty due to visa reforms has led to increased local hiring and onshoring in the U.S.

The Provider Landscape is Constantly Changing

Sourcing professionals also are challenged to stay abreast of changes in the provider landscape. Mergers and acquisitions are on the rise, and leading providers are making fundamental changes to their talent and service delivery models. Between April of 2016 and March of this year, Everest Group witnessed 40 acquisitions to expand digital capabilities, 140 alliances between providers and technology providers or startups, and the setup of 35 new centers and digital pods to help clients rethink their digital strategies.

Data for Sound Decision-Making

In the midst of this complexity, buyers of global services are tasked with making critical decisions. Recompeting an outsourcing contract, selecting a location for a global in-house center, or contracting for new tech services—these are the types of decisions that can significantly impact an organization’s performance and an executive’s career.

That’s why Everest Group has announced that it is doubling down on its commitment to provide fact-based comparative assessments. We’re consolidating our comparative analysis offerings – previously offered under a variety of product names – under our flagship PEAK Matrix brand, which will now evaluate services, solutions, products and locations. Additionally, we’ll be expanding the market segments addressed to include new functions, processes and industry verticals. Read more about it here.

In the midst of all the complexity and change that sourcing professionals face, one thing remains the same: Everest Group is your source for the fact-based analyses you need to make informed decisions that deliver high-impact results.

Is Mexico Losing its Luster as a Nearshore Delivery Location? | Sherpas in Blue Shirts

Over the years, Mexico has become an attractive nearshore delivery location for U.S. enterprises and service providers. But two significant potential challenges may impact its popularity.

NAFTA

To boost economic ties, Mexico, Canada, and the United States entered the North American Free Trade Agreement (NAFTA) in 1993. However, NAFTA critics argue that it has resulted in job losses and suppressed wages in the U.S., and encouraged illegal migration of workers from Mexico into the U.S. The Trump administration is considering withdrawing the U.S. from NAFTA due to ‘protectionist’ measures, i.e., those that are in the interest of U.S. domestic market.

The proposed outsourcing tax/Border Adjustment Tax (BAT)

To further promote and create jobs in the U.S., President Trump has proposed incentivizing companies to make goods domestically by adding a tax – an outsourcing, or border adjustment tax (BAT) – on companies that import goods and services from other countries. He has floated the idea of 20-30 percent BAT on imports.

While the actual impact of impending renegotiations on NAFTA and potential implementation of the BAT on Mexico as a nearshore service delivery location is yet to be seen, Everest Group conducted research to determine the likely short-term effect of these developments on the IT-BP industry in Mexico. Following are snapshot findings from our study.

everestnew1

 

Further, while there are multiple alternative locations in Latin America available to U.S. enterprises, very few offer a significantly better cost-talent proposition than Mexico. Thus, even in the likely scenario of NAFTA revocation, Mexico is not likely to lose its sheen as an attractive nearshore location for IT-BP service delivery for U.S.-based organizations.
Although there are no favorable indicators in the short-term, there have been no knee-jerk reactions from firms leveraging Mexico for service delivery. We believe the country’s medium- to long-term outlook continues to remain positive for IT-BP services delivery.

For more detailed findings, please read our report: “Mexico IT-BP Services Viewpoint.”

The Dichotomy of Current and Future Offshore/Nearshore Delivery Locations | Sherpas in Blue Shirts

An interesting offshore/nearshore locations strategy dichotomy is emerging for today’s major third-party service providers and enterprise firms, as well as their GICs. On one hand, they are continuing to set up delivery centers in new and unexplored locations due to increasing competition, business continuity planning, and risk diversification. On the other hand, the pressure of new disruptive technologies, changing consumer demands, and need to maintain points of parity with competitors is pushing them to consolidate their footprint in the top 10 locations.

Growing Oligopoly of Offshore/Nearshore Locations Driven by the “Digital Winds of Change”

 

Offshore, NearShore

Top-10 offshore/nearshore locations include – India, Poland, Republic of Ireland, the Philippines, Costa Rica, Singapore, Romania, Malaysia, Mexico, and China

In the past few quarters, new center setups in the top-10 locations have jumped by ~10 percent, from 60 percent in 2015 to 70 percent in 2016. The key driver of this change has been availability of talent; only selective locations currently have the capability to support complex digital services. Thus, both external providers and GICs are leveraging these locations for digital services centers and setting up relevant centers of excellence. While several other non-top-10 locations are also investing in building digital talent, they are still not considered a viable option for digital delivery.

  • The major gainers from this shift have been India, Poland, Singapore, the Republic of Ireland, Romania, and Costa Rica. Analytics and cloud are the leading digital services segments in these offshore locations, primarily core software-based analytics. Both types of providers are also building centers in these locations for mobility, social, IoT, and cyber security.
  • The major losers from this shift towards digital have been China and Brazil, given providers’ caution around language constraints and political uncertainty, respectively.

Going Forward, Concentration and Diversification

While most firms are investing in the emerging technologies/digital space, they are still in the nascent stages of building capability. As they mature, they will start diversifying and distinctively leveraging different locations for supporting elements of digital, thus driving a uniform distribution amongst top-10 locations in the next three to six years.

Following are highlights of our research on the future of digital services delivery destinations:

  • India and Singapore will be large scale offshore hubs. Analytics, cloud, and mobility will continue to hold strong, while other technologies, (e.g., IoT, cybersecurity, and blockchain,) will, ultimately, be broadly and deeply supported
  • Nearshore locations such as Ireland, Poland, Mexico, and Costa Rica will support real-time innovation and product development, and provide multilingual service delivery for social media and mobility services
  • Offshore locations such as Tel Aviv, Cairo, and the Baltic states are currently the ”dark horses” in the race towards the top-10, and will gain momentum in the future. Look for them to deliver regional content contextualization, especially for mobility and social and interactive segments. Some of them will deliver digital technology R&D as well.

To learn how locations activity spanned in 2016, please refer to Everest Group’s report titled Market Vista™: 2016 Year in Review: Global Services Industry Facing “Winds of Change.”

Marginal Margin Impact from H1-B Visa Reforms? Maybe Not | Sherpas in Blue Shirts

On 25 April 2017, U.S. President Donald Trump moved one step closer to instituting new regulations for granting H-1B visas. At the same time, many IT service providers – especially those of Indian-heritage –moved one step closer to realizing their worst fears! The threat of visa reforms became real when President Trump ordered an inter-departmental review of the H-1B visa program, which would ensure formulation of regulations for hiring only the most skilled or the most highly-paid professionals and “would never replace American jobs.”

While it is universally acknowledged that a stricter visa regime will negatively impact most service providers’ onshore margins, particularly the offshore-centric providers that follow the “landed” resource model (i.e., a delivery model that hires resources from offshore centers to work in the U.S.,) it is important to examine the true nature of this impact. The exhibit below indicates the possible impact on onshore margins under various visa reform scenarios.

Scenario-based H1-B visa reform impact assessment on onshore (U.S.) margins

H1-B Visa Reform impacts onshore and offshore margins

Even in a situation where the visa reforms do not translate into full-fledged regulation (the most ideal scenario for Indian-heritage service providers) we expect far greater scrutiny of H1-B visa applications, leading to fewer visa grants. Even in this scenario, we expect more onshore hiring by IT service providers to meet their talent requirements, leading to reduction of service provider margins by 2-4 percentage points.

The probability of the above happening has become more dubious, given recent developments, and it is highly likely that visas will be granted based on either skills/merit or minimum wage requirements of US$130,000. In either case, service providers will need to hire a much higher share of local resources. This further complicates the situation for Indian-heritage providers, as they have a smaller foothold in the U.S. talent market than do the global providers. Whether Indian-heritage or global, hiring landed resources at some/all levels of the delivery pyramid at the minimum salary levels of US$130,000 could drop service provider margins by as much as 14-16 percentage points, resulting in negative returns on onshore deals, at least in the short-term.

While none of the scenarios paint a rosy picture for service providers, the impending visa reforms may act as a catalyst for them to develop more automation solutions and front-end technology products and restructure their talent hiring and value proposition. Interestingly, while onshore resources will increase in U.S.-based contracts, the overall portfolio-level offshore ratios may also marginally increase with providers pushing the offshoring lever to protect their overall margins.

Everest Group has simulated the potential impact on onshore margins using key input variables around existing cost structures, rate cards, staffing pyramid, and onshore-offshore resource mix. Please see our viewpoint on the above topic: “Impact of Changes to H-1B Visa Program on Service Provider Margins” for more details.

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