How the Presidential Election Will Impact IT Outsourcing

The issue of offshore outsourcing and its impact on American jobs has been front and center throughout the 2012 U.S. presidential campaign. But as election day draws near, both President Barack Obama and former Massachusetts Governor Mitt Romney are singing more or less the same tune on the subject-offshoring is bad; job creation is good.

But what will be the actual impact of the presidential election on offshoring and outsourcing in general? Will a Romney administration set a different tone on the subject of offshore job creation if he takes office?

Would a second Obama term result in new taxes on offshoring or increased skilled worker visa requirements or restrictions? Will either candidate's policies encourage domestic sourcing? And what's to come for public sector outsourcing at a time when federal, state and local governments are under increasing cost pressures?

We looked at each of four key subjects--offshore outsourcing, domestic sourcing, skilled worker visas, and public sector outsourcing--to see what difference, if any, the man taking the oah of office next year might actually make.

1. Offshore IT Outsourcing

Obama has talked about ending tax breaks for companies that "ship jobs overseas" since his 2008 campaign, namely those parts of the tax code that enable enterprises to write off expenses incurred when moving business operations abroad. While that might affect companies that offshore IT services to themselves--setting up captive operations overseas--it would have no impact on those who outsource offshore to a third-party like IBM or Infosys.

Democrats have been pushing the issue of tax breaks for offshored work, but they've been pushing that since the 2004 election. They won't do anything if they control Congress and the White House next year either. A Romney administration will likely tone down the rhetoric but deliver the same results.

Expect that kind of talk to continue if Obama is elected, says David Rutchik, partner with outsourcing consultancy Pace Harmon. Action, however, may be less likely.

"Offshoring under an Obama administration and Democratic Congress is likely to remain under some pressure, at least with respect to rhetoric," Rutchik says. "The reality, though, is that offshoring is here to stay, and has been utilized significantly under the current Obama regime and will continue to be an important service delivery model for U.S. corporations to compete globally."

"Democrats have been pushing the issue of tax breaks for offshored work, but they've been pushing that since the 2004 election," says Norm Matloff, a professor of computer science at the University of California, Davis.

"Remember, Obama had a Democratic Congress in 2009, and they did nothing on this," says Matloff. They won't do anything if they control Congress and the White House next year either. It's just a phony issue."

A Romney administration will likely tone down the rhetoric, says Rutchik, but deliver the same results.

2. Public Sector IT Outsourcing

Public sector outsourcing is bound to increase regardless of who lives at 1600 Pennsylvania Avenue. According to a September, 2012 survey of public sector finance executives conducting by outsourcing analyst firm HfS Research, lowering costs and improving efficiency are their two most important objectives.

"Governments--whether state, federal or local--need more levers to reduce costs, and guaranteeing government salaries and corresponding increases, combined with the relative difficulty in enacting labor force reductions, are not the answer," says Pace Harmon's Rutchik.

Both shared services and outsourcing can be part of the short- and long-term solution for reducing the costs of back-office functions while maintaining front-line services, says Phil Searle, research fellow for shared services strategies for HfS Research.

"A Romney administration may be more open about doing this as it's consistent with their messages of smaller government," says Rutchik. "And they are more likely to look at outsourcing than increasing government payrolls."

3. Domestic IT Sourcing

Sourcing IT services closer to home will continue to increase, regardless of politics.

"Based on the current economic climate, the value equation has shifted toward encouraging domestic sourcing in a very natural manner," says Paul Pinto, managing partner with outsourcing consultancy Sylvan Advisory. "India experiencing double-digit growth in salaries and attrition coupled with the U.S. experiencing double-digit decreases in the same key indicators [means that] buyers of services are now able to capture a similar degree of value by electing to use domestic providers." Offshore outsourcing pioneers, including GE and GM have recently announced plans to bring thousands of previously offshore roles stateside.

Incentives, like those that currently exist at some state and local levels--as much as $5,000 per full-time domestic employee used for a period of up ten years in some states--could encourage even more domestic sourcing. Pinto found that a client setting up a 212-person sourcing deal benefitted from $5 million in government incentives over the five-year contract, tilting the scales in favor of sourcing the work in the U.S.

"Should President Obama be re-elected, we envision the existing incentives to continue, thereby encouraging metered growth in domestic sourcing, while continuing to allow outsourcing to play a meaningful role," Pinto says. But Romney's more recent fair trade stances could indicate a desire to encourage domestic sourcing as well, says Pinto.

4. H-1Bs: Skilled Worker Visas

The skilled worker visas used to bring foreign IT professionals to work temporarily at U.S. sites is usually a hot election year topic, in large part because many critics of the programs say they result in lost American jobs. But those visa programs didn't merit a mention in the presidential debates. "I think it's no accident that H-1B didn't come up during the campaign," says Dr. Matloff, a leading critic of the visa program. "Both parties are equally culpable."

Romney has promised to "raise visa caps for highly skilled foreign workers" if elected, presumably a reference to the annual cap on H-1Bs set at 65,000 for the 2013 period. That cap, however, is controlled by Congress.

Obama has said he wants to make it easier for students with advanced degrees to stay and work in the U.S. And both candidates seem to agree that skilled foreign professionals are essential to American innovation.

"A Romney administration and Republican congress is more likely to ease the restrictions [on temporary skilled work visas], which would actually enable more onshore outsourcing as suppliers can bring in lower cost, higher skilled resources to provide onshore support," says Pace Harmon's Rutchik.

In recent years, Congress has raised fees on the H-1B visas, and increased scrutiny to prevent fraud or misuse has led to delays in processing applications<>.

Before either man takes the oath of office in January, Congress could vote on one of the "staple a green card" bills currently in committee during its lame-duck sessions, which would award green cards to diplomas of those earning certain accredited degrees in science, technology, engineering and math.

This story, "How the Presidential Election Will Impact IT Outsourcing" was originally published by CIO.

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