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Immigration reform bill takes aim at Indian IT outsourcing companies

By Stephanie Overby, CIO
May 23, 2013 10:32 AM ET

CIO - As the most recent version of immigration reform heads to the U.S. Senate for a full vote, outsourcing industry watchers have their eyes on several provisions that could drastically alter the way Indian IT service providers do business in the U.S.

"In an effort to address concerns about staff augmentation companies, commonly referred to as 'job shops,' the unnecessarily broad restrictions on the outplacement of H-1B and L-1 workers would virtually put the Indian IT firms out of business," says Paul W. Virtue, partner in Baker & McKenzie's Global Immigration & Mobility Practice Group.

[ IN DEPTH: H-1B reform debate pits tech firms against veteran IT workers ]

Going Nuclear on the H-1B Dependent

Specifically, Indian outsourcers would no longer be able to place its foreign-born employees at client sites. The senate bill states that H-1B dependent employers--those with 15 to 28 percent its skilled workforce on a temporary skilled worker visa, depending on the size of their employee base-"may not place, outsource, lease, or otherwise contract for the services or placement" of its H-1B holders. Companies "less dependent" on skilled worker visas would have to pay $500 to use foreign-born workers at client sites.

[Related: How India's IT Outsourcing Leaders Can Stay on Top]

"It's the so-called 'nuclear option'--the most devastating option [for Indian providers], and it's buried in the language of the bill," says Peter Bendor-Samuel, CEO of outsourcing consultancy and research firm Everest Group. "If that's still intact and the bill goes through, Indian firms will have to change their in-country landed worker model to use a much greater proportion of non-H-1Bs. This isn't going to affect any other firms than Indian firms."

If that clause becomes law, Indian IT service providers could see their gross margins shrink as much as 30 percent, says Bendor-Samuel, as they'd be forced to hire more expensive U.S. IT professionals for on-site work. "That's a pretty big hit," he says. "It would pretty much level the playing field between them and Accenture and IBM."

[Related: 10 Best (and Worst) IT Offshoring Options for English Proficiency]

Application development and maintenance work will take a hit, says Phil Fersht, founder of outsourcing analyst firm HfS Research. Such work is "highly reliant on sending Indian workers into clients site using H-1B and L1 Visas," Fersht says.

Initial results of an HfS Research survey on the potential effects of the bill indicate that 32 percent of enterprises outsourcing application development and maintenance would be heavily impacted by the ruling, and 20 percent of customer service work will be heavily impacted.

[Related: 7 More IT Outsourcing Lessons From Offshoring Pioneers]

"It will create a competitive disadvantage [for Indian IT services firms] as compared to providers like IBM, Accenture, CSC and other U.S.-based providers that are competing for the non-U.S. labor pool for the top, most capable non-U.S. resources to bring onshore," adds David Rutchik, partner with outsourcing consultancy Pace Harmon."

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