Tag: Visas

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.

U.S. Domestic Locations for IT Services Delivery: Your Trump Card amidst H-1B Uncertainties | Sherpas in Blue Shirts

As part of President Donald Trump’s immigration reform efforts, the recently introduced legislation could make hiring H-1B visa holders significantly more expensive. The legislation calls for more than doubling the minimum salary of H-1B visa holders to $130,000.

The technology sector is the largest consumer of the visa. And about 70 percent of the 85,000 visas issued every year go to Indian workers employed by technology and outsourcing service providers to provide IT services to leading American enterprises.

Such a massive hike in the proposed minimum salary for H-1B visa holders is forcing enterprises and service providers alike to rethink their talent strategy from offshore to onshore. Factors such as adoption of agile methodology and regulatory requirements are also driving up the demand for onsite resources, and those will likely need to be sourced locally from within the U.S. as the landed resource model become challenged.

This increased focus on onshore resources has both enterprises and service providers alike considering the merits of potential U.S. locations. The landscape of IT services delivery from within the U.S. is complex, with more than 150 leverageable locations. The help simplify the view, Everest Group has classified delivery locations in the country into various tiers based on socio-economic status, maturity of IT services delivery, talent availability, and operating costs.

US Domestic Sourcing for IT Services

Deciding on the best location for U.S.-based IT services delivery must be based on a business case that considers multiple factors, and perhaps some trade-offs. For example, Tier-2 locations offer the twin advantage of moderate operating cost and breadth and depth of skills, but you might have difficulty attracting resources with extremely specialized skills to move from a Tier-1 city such as San Francisco to Dallas or Atlanta. And although Tier-3 and 4 locations are suitable for low-cost transactional IT services delivery, they may not be appropriate options if you need, or anticipate needing, more advanced skills.

US Domestic Sourcing for IT Services 2

While the proposed legislation hasn’t yet become law, turbulence and disruption of this potential magnitude demands significant research and pre-planning. As Benjamin Franklin, one of the founding fathers of the United States said, “By failing to prepare, you are preparing to fail.”
For more information on this topic, please read the following Everest Group reports.

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