Five reasons why legislation to limit outsourcing fails

Outsourcers can adapt to laws looking to cut H-1B use; trade and exports are key economic issues for state, federal leaders

Congress headed home this week to focus on mid-term election campaigns, and offshore outsourcing is certain to be a topic of interest to many voters.

A just released NBC News/Wall Street Journal Poll of 1,000 people illustrates the strong interest in offshore outsourcing issues this year.

For instance, the poll asked whether respondents agreed with the statement: "U.S. companies are outsourcing much of their production and manufacturing work to foreign countries where wages are lower." The result: 68% strongly agreed; 18% somewhat agreed; 12% disagreed; 2% were unsure.

But despite the growing public anger and calls for action in Washington, few bills that impact IT offshoring are ever passed by Congress, and those few that are generally accomplish little.

Here's a list of reasons why such proposals and legislation do little to change the status quo.

One: Offshore firms can manage the risk of new laws.

Congress recently approved a bill that hikes H-1B application fees by $2,000 for companies where visa holders make up at least half of the total workforce.

U.S. Senator Chuck Schumer the H-1B fee increase is aimed primarily at "a handful of foreign controlled companies," including Wipro Technologies, Tata Consultancy Services and Infosys Technologies.

Indian officials denounced the bill and called it protectionist. But it isn't likely to change the H-1B strategies of the targeted Indian companies.

Infosys CFO V. Balakrishnan may have summed up the offshore industry's view when he told investors that the visa fee increase, which could cost his company between $15 and $20 million a year, "is manageable." Infosys is one of the largest users of H-1B visas : in 2008, it was approved for about 4,500 visas, up from 440 a year earlier.

Two: Congress hasn't acted, and isn't expected to act soon, on the bill offshore outsourcers fear most.

The legislation most feared overseas is a bipartisan proposal from U.S. Sens. Charles Grassley (R-Iowa) and Dick Durbin (D-Ill.) that includes a so-called "50-50" rule that would limit the number of workers on H-1B or L-1 visas to half of a firm's total U.S. headcount.

Democratic leaders, so far, haven't pushed this bill, which remains in limbo.

Visa proponents in the U.S. and in India argue that the "50-50" restriction would prompt companies to send more work offshore, not less, though some offshore vendors are telling investors something different.

Wipro recently said that it plans to increase the percentage of locals in its U.S. workforce to 50% in the next two years. The company's Atlanta Development Center now has 500 employees. The new strategy would "reduce the overall dependence" on visas, Sabbudha Deb, Wirpo's chief global delivery officer, said in a recent conference call with investors.

Moreover, Wipro officials believe that hiring local workers could cut costs, because it eliminates the transportation, visa and other expenses associated with hiring Indian workers holding H-1B visas.

Infosys's Balakrishnan called the "50-50" rule a "worst case option. If you don't have more than 50% locals, then you won't get any new visas," he told investors. Passage of the bill would probable lead the firm "to look at accelerating our local hiring," said Balakrishnan.

Three: Exports and trade matter to state and federal government officials.

Ohio's Gov. Ted Strickland is a study in contrast.

In July, the Ohio governor signed an agreement with Exhibitions India Group for up to $108,000 to promote the state "as a premier location" for direct investment and "an excellent place to do business," according to the contract provided to Computerworld by state development officials.

In August, Strickland banned offshore outsourcing by state agencies and received a mountain of bad press in India for his trouble.

It's worth pointing out that Strickland's hiring of an offshore firm to promote Ohio was exempted from his executive order.

When asked by U.S. Trade Rep. Ron Kirk to explain Ohio's position, Strickland said in a letter that "we are very well aware of the importance of trade and we highly value our trading partners. Ohio firms sold $381 million in goods, principally machinery, aircraft, and medical equipment, to Indian markets last year."

Nonetheless, Strickland is also taking on outsourcers during a difficult re-election campaign against Republican challenger John Kasich. Strickland has accused his opponent of being too close to Wall Street and a supporter of outsourcing.

Four: No legislation is likely to change the overall trend toward outsourcing.

The offshore industry generally adapts well to legislative changes that raise their costs. For example, some respond by increasing the hiring of workers in less costly countries, as well as in cities in India.

At the same time the big offshore firms continue to grow at a phenomenal rate.

Tata Consultancy Services' latest plan calls for adding some 40,000 new employees during its current fiscal year -- 10,000 more than in its previous estimate. Tata, which now employs about 160,000 workers, said its revenues in the June, 2010 quarter increeased by 6.4% sequentially and 21.2% year to year. Rival Infosys reported that its revenues in the same period grew by 4.8% sequentially, and 21% year to year.

Outsourcing firms in the U.S., such as Teaneck, N.J.-based Cognizant Technology Solutions, which uses offshore labor, are also doing well. In August, Cognizant reported second quarter revenue that was up 15% sequentially and 42% from the year ago quarter.

Five: As Congress debates laws, federal government officials work on trade agreements.

Indian and U.S. negotiators have been meeting in advance of President Obama's visit to India, which is scheduled for right after November election.

The negotiating teams are working toward a totalization agreement , which would exempt Indian firms from having to pay Social Security and Medicare taxes on temporary visa workers.. H-1B visas workers who pay these taxes will never receive any benefit from them unless they become permanent residents. Such a law could cut the firms' H-1B labor costs by up to 14%

The U.S. has similar totalization agreements with mostly other countries, mostly in Europe. The Indian government has also reached agreements with European nations, and expects to sign one soon with Canada. If a similar tax break agreement is reached with the U.S., the overall benefit from this program may more than offset the cost of any increase H-1B visas fees.

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Tags governmentoutsourcingregulationserviceswiproGov't LegislationGov't Legislation/RegulationGovernment/Industries

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Patrick Thibodeau

Computerworld (US)
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