Trump presidency could sound death knell for offshore outsourcing

U.S.-based offshore outsourcing customers should prepare for the effects of a Trump presidency on their IT services deals.

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Donald Trump railed against the shifting of U.S. jobs overseas during his campaign, but it remains to be seen whether the President-elect will make good on his promises to reign in offshore outsourcing. The Indian-dominated offshore IT services market was already struggling to find its place in a market increasingly ruled by smaller and shorter term deals, cloud computing options, increased automation and intense competition.

[ Related: Will Trump cause a Y2K moment for outsourcing? ]

The biggest hit would come in the form of increased restrictions on temporary work visas, such as the H-1B, which Indian and U.S.-based IT services firms use to bring offshore workers on-site stateside. During his campaign, Trump called for raising the minimum salary for H-1B holders to $100,000 per year, from the current threshold of $60,000 per year.

“Any Trump-inspired reform of the U.S. immigration laws will likely make it harder to move employees into the U.S. market,” says Peter Bendor-Samuel, CEO of outsourcing research firm Everest Group. “This will likely take the form of fewer H-1Bs, higher costs for visas, and caps on the number of visas the firms can utilize. That would likely result in IT services firms having to hire more U.S.-based resources, raising operating costs and reducing the labor cost advantages of offshore outsourcing.

[ Related: What will Trump do with the H-1B visa? ]

The hundreds of thousands of workers currently holding temporary work visas and residing in the U.S. could also come under greater scrutiny if Trump upholds one of his signature campaign promises to strengthen the enforcement of immigration regulations. That would threaten not just new IT service deals but existing engagements, says Phil Fersht, CEO of outsourcing research firm HfS Research.

In addition, Senator Chuck Schumer, one of the most active opponents of the use of temporary work visas by IT services firms, has been appointed Senate Minority Leader. “With Trump's aggressive stance on protecting U.S. jobs, massively raising the H1B minimum wage, combined with the determination of Schumer leading the Democrat Party faction, this does not bode well for the future of the offshore business for at least the next four years,” Fersht says.

The U.S. government could also introduce changes to trade laws or tax laws in order to discourage trade. However, it’s unlikely such legislation — if even enacted — would prevent the outsourcing industry from operating in its current structure. “Restricting trade in services is much harder than restricting [trade in] tangible products,” says Bendor-Samuel.

“And Trump's priority seems to be helping the lower-income constituents, which are largely manufacturing-oriented jobs.” “Regarding things like tariffs and taxes to make labor arbitrage less viable and therefore offshoring less economical, it's hard to know what agenda is really going to be put forward,” adds David Rutchik, executive managing director of outsourcing analyst firm Pace Harmon.

However, Indian IT services firms aren’t the only providers of offshore outsourcing. U.S. multinationals are also heavily reliant on offshore resources and temporary work visas as well. Industry observers expect the corporate lobby to push back on populist proposals. “Politics is still very much a money sport,” says Bendor-Samuel. “Trump is likely to quickly find that campaigning and governing are far different, with members of congress being much more concerned about corporate welfare than the average voter.”

How a Trump presidency could impact IT offshore outsourcing

Fersht, however, predicts a more significant impact on the offshore outsourcing industry, saying the election of Trump could be the “death knell” for offshore outsourcing as we know it. Any moves by Trump to curb temporary visa usage or limit trade could further fuel the use of automation and cloud computing options in lieu of traditional offshore outsourcing.

“The FTE [full-time-employee] model dies with the Donald,” Fersht wrote in a recent blog post. “The offshore outsourcing industry must look to develop new generation engagements that do not involved labor-dominant pricing. The surviving service providers will start providing services and not people… The one bright spot, in my view, is that these changes were happening in any case, and Trump's protectionist policies are merely going to accelerate reality.”

Rutchik advises U.S. customers to review their contracts to ensure that they have the requisite protections in areas such as change of laws, migration of service delivery locations, and termination rights in the event their deals become uneconomical. They should also begin to calculate the costs of moving certain functions like their IT help desks onshore. Clients should also accelerate their migration to IT and business process automation options, Fersht adds. “Whatever the likelihood of impact,” Rutchik says, “the result — if it happened — could be devastating. So customers are well-advised to review their risk mitigation and flexibility options.”

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