Protectionism and Outsourcing: Brace for Impact

Consider 3 factors: Risk, Automation and Power of Social Media

The new U.S. administration has made it clear that protectionist policies and immigration reform are important priorities. As a result, organizations dealing with strategies regarding the use of offshore resources have been carefully watching what transpires, from campaign promises and press conferences to the President’s tweets. The question is, what do these potential policy changes mean for organizations using third-party services, particularly third-party offshore service providers? What are some of the fundamental things they should be thinking about as they try to plot out what they should be doing over the next 6-18 months?

For one thing, the new administration’s efforts related to limitations for H-1B visas, which allow U.S. employers to temporarily employ foreign workers in specialty occupations, has already impacted offshore outsourcing providers, says Dave Brown, Global Lead for KPMG’s Shared Services & Outsourcing Advisory practice. “It really limits them in being able to place qualified resources into the U.S. job market and to build out their capabilities with a quality solution,” he says.

In addition, there is the issue of a minimum threshold or salary for H-1B visas — increasing it drives up the cost base for service providers. “It puts pricing pressure on them when they’re trying to sell more business to U.S. companies,” says Brown.

Protectionist-based tax reform, where products developed outside the U.S. and imported may face heavy taxes, are also being closely observed, since there is a concern that third-party outsourcers providing services back to the U.S. for large corporations will be part of a “next wave” of new taxes. “Companies need to be aware of their outsourcing contracts and what impacts those services taxes could have,” says Brown.

Finally, as immigration laws change, not only does the restriction of H-1B visas have an impact on service providers sending employees to the U.S., but also the service providers themselves use the ability to leverage an H-1B visa to attract employees into their company. “Potential employees expect they can join the firm in an offshore location and be relocated to the U.S. for a period of time to increase their skills, to broaden their knowledge base and to provide them with an experience of working in the U.S.,” says Brown. 

In this age of outsourcing uncertainty, Brown cites three important areas that organizations should investigate and be aware of as they develop their outsourcing strategies and policies:

1. The service provider’s global sourcing model and risk profile.

Organizations should look carefully at their outsourcing contracts, to identify whether there are termination rights for partial opportunities, for example, or what happens if automation is applied, says Brown. “If the scope of the work does decrease due to policy changes, what impact that does have on the contractual term?” The business needs to look at the resource mix and consider any tax implications that may come by setting up some of these contractual agreements with service providers. In addition, it’s important to assess the risk profile of the outsourcing provider to get a better handle on the potential impacts on the organization’s sustainability if some of these immigration and tax rules come through. 

2. Automation opportunities related to outsourcing contract work.

Automation may increase in popularity based on changes in protectionist policies, says Brown, since it may affect what you may already have outsourced to a third party — by eliminating some or all of the work altogether. “The benefits of the original contract to move work to a third party may have been that they were moving it to offshore locations and applying some labor arbitrage savings, but automation kind of negates that so it almost becomes a wash” says Brown. “So why wouldn’t you take the remaining resources and bring them back onshore and build out a better succession plan, retool, reskill the individuals so that you can actually take advantage of creating jobs in the U.S. and really leveraging the automation tools that are there?”

3. The power of social media.

As organizations continue to follow President Trump’s comments and others around social media related to changes protectionist and immigration policies, there is clearly a ripple effect and reaction across marketplaces. This means being prepared for anything since things can change at any moment, says Brown. “Companies need to consider what this all means to them and remain aware, because at some point some of the words floating around in social media will make it into legislation and potentially become a bill,” he explains. “If that does happen, by that time if you react it’s going to be too late.”

Businesses should prepare their outsourcing strategies now

“Be prepared” is not simply a Boy Scout motto. It should be a motto for all organizations looking to react appropriately to changes in immigration and tax legislation as they affect outsourcing contracts, says Brown. However, many companies are not putting themselves in a position to deal with changes in an agile way. “Firms are in a position to see that there will be an impact, but they’re not necessarily preparing themselves and creating a strategy,” he says.

For example, there are unaddressed issues, such as if businesses do need to bring jobs back to the U.S., how will they be able to find the resources to do that? “We talk about the war for talent and how challenging it is, and it’s always in our top five concerns of companies to find the right talent,” says Brown. “I think companies aren’t prepared for the ability to find these resources if they were to bring them back onshore. There is an opportunity to do so but I don’t think they realize the full breadth of what it means to bring jobs back from a third party.”

When doing this kind of talent assessment, he adds, it’s essential to look at the supply pool and to make sure the organization is comfortable not only attracting the talent they need but retaining them and continuing to build a career path for them. “That would be what I’d consider the biggest gap in the analysis we’re seeing today,” says Brown.