A new bill in Washington aimed at tightening the rules for companies in the U.S. that hire skilled workers from abroad could threaten the business model for outsourcing firms such as Wipro Technologies (NYSE:WIT - News), Infosys Technologies (NasdaqGS:INFY - News), and Tata Consultancy Services (TCS.BO). Top executives at those firms say the legislation could also escalate into a trade dispute between India and the U.S.
The bill, introduced by Senators Dick Durbin (D-Ill.) and Charles Grassley (R-Iowa), would change many of the rules companies must follow to obtain temporary work visas, known as H-1Bs and L-1s. The most controversial new rule would bar companies with more than 50 U.S. employees from getting any additional work visas if more than 50% of their U.S. workforce is made up of H-1B or L-1 visa holders.
The 50/50 Rule
Grassley says the "50/50" provision would help protect American jobs at a time of rising unemployment. "The original rationale (for the visa program) was that we needed to allow importation of managers and technical people when there weren't enough Americans available," he said in an interview. "It seems to me ridiculous that companies now have more than half of their workers on (these visas) when there are certainly a lot of workers in the U.S. who can fill in some of those positions."
Som Mittal, president of the NASSCOM trade group that represents India's software and services companies, says the Durbin-Grassley bill has some valuable elements, including tougher oversight to prevent visa fraud. But he says the 50/50 provision is misguided and dangerous. If enacted, the legislation would stop virtually all of the major Indian outsourcing firms from bringing new employees into the U.S., jeopardizing their work for American clients. "Both U.S. and Indian industry would suffer," says Mittal. "A lot of disruption would happen."
Azim Premji, executive chairman of Wipro, says the Indian government is likely to take action if the legislation passes in its current form. The technology-services sector is critical to India's economy, with software and services together accounting for about a quarter of the country's exports. "There is no way our government can take it lightly," says Premji. "It's a vital piece of the economy." NASSCOM and its member companies are also making their case to American lawmakers and the Obama Administration.
The Indian Outsourcing Model
The work visa program was established nearly 20 years ago to allow U.S. companies to bring workers with rare skills into the country. Among the most active participants are Microsoft (NasdaqGS:MSFT - News) and IBM (NYSE:IBM - News), as well as Wipro, Infosys, and Tata. But American tech companies tend to use work visas differently than Indian outsourcers. While companies like Microsoft and Google (NasdaqGS:GOOG - News) often use the temporary visas as a stepping stone to permanent residency for talented workers, outsourcing firms typically post visa workers in the U.S. on a short-term basis, in many cases about 18 months. The workers then return to India, where they continue to work for the outsourcer on behalf of U.S. clients.
The outsourcing firms' business model, developed over the past decade, has worked well for them and their American clients. When they win contracts to manage the technology, accounting, or other operations for U.S. corporations, the Indian firms typically handle the work with about 20% to 30% of the employees in the U.S. and 70% to 80% offshore. The mix allows the companies to benefit from the lower wage rates offshore, while doing the most critical work, such as testing software applications, on-site. In the past several years, offshore outsourcing firms, particularly from India, have dominated the list of companies awarded H-1B visas.
Mittal says outsourcing firms and visa workers have helped American companies -- and by extension the U.S. economy. "They have added to the competitiveness of the U.S.," he says. "They are extremely important to U.S. companies seeking to lower costs."
But U.S. tech worker groups say this arrangement allows outsourcers to displace American workers both while the visa holders are in the U.S. and when they return home. They say the visas depress wages in the U.S. by increasing the supply of workers. An April 2009 report written by Prasanna Tambe of New York University's Stern School of Business and Lorin Hitt of the Wharton School at the University of Pennsylvania estimates that H-1B admissions at the current levels are associated with a 5% to 6% drop in wages for computer programmers and systems analysts over time. Durbin and Grassley say their legislation is aimed at halting the use of U.S. work visas to send jobs overseas and lower wages.
Options for Outsourcers
If the bill were to pass in its current form, outsourcing firms could change their practices in several ways to reduce the ratio of visa holders to total employees in the U.S. Options include hiring more American workers, creating more jobs overseas, acquiring other companies to dilute visa holder ratios, or some combination of these moves. Infosys CEO Kris Gopalakrishnan says that if the bill passes, his company will pursue a mixed strategy: "We will have to increase our recruitment in the U.S., and some work that's now done on-site will have to shift to offshore locations." Gopalakrishnan says that while the business model would change, he is confident that the bill wouldn't affect the company's financials in the long term.
Wipro's Premji says that passage of the bill would mean "transition periods during which business will suffer". Like Gopalakrishnan, his strategy would be a combination of more U.S. hiring with more hiring offshore. His company would likely reduce its onshore staff for U.S. work from 25% to between 10% and 12%. He says that in anticipation of visa law changes, Wipro has already started hiring more Americans at its centers in Atlanta and Troy, Mich. Other outsourcing firms may follow suit: An analyst report by UBS (NYSE:UBS - News) estimates that Cognizant Technology Solutions (NasdaqGS:CTSH - News) would need to hire 4,300 to 6,500 additional American employees to meet the legislation's requirement.
There is no guarantee that the Durbin-Grassley bill will become law. It is likely to be considered in Congress alongside proposals for comprehensive immigration reform. The bill would still need to pass the Senate and the House, and it could be modified along the way. However, its chances of passing likely will increase if the unemployment rate in the U.S. continues to rise. Executives at the outsourcing firms vow to fight the legislation and particularly the 50/50 provision, which they say is an unfair restriction of Indian companies' ability to compete in the U.S. "It certainly does surprise us that the U.S., being so capitalist, is now going in the opposite direction," says Natarajan Chandrashekaran, chief operating officer of Tata Consultancy. "We certainly have to be watchful."
