by Stephanie Overby

Immigration Reform Bill Takes Aim at Indian IT Outsourcing Companies

News Analysis
May 23, 20136 mins
GovernmentH-1B VisasOutsourcing

India's application development and maintenance business will take a hit if a provision of the U.S. Senate immigration bill becomes law, and some experts say the restrictions will drive more outsourcing offshore.

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.

Immigration Reform Bill

The bill, which cleared the Senate Judiciary Committee Tuesday, relaxed requirements related to layoffs and recruiting for companies for whom skilled visa holders make up a smaller percentage of their staffs, like American outsourcing giants IBM and Accenture, while subjecting those businesses deemed “H-1B dependent”, like India’s IT service providers, to much more stringent conditions.

“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.

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.

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“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.”

If Indian providers were forced to hire American-born employees to work at client sites, it could also slow their growth as they try to make those staffing shifts.

“They’ve not got a good record of being able to hire U.S. nationals, although certain firms have done better than others,” says Bendor-Samuel. “They are Indian firms run by Indians in India. They’re very good organizations, but their culture is just not as attractive to U.S. citizens.”

Restrictions on L-1 visa placement also made it through committee. Employers with 15 percent or more of their U.S. workforce in L-1 status would be prohibited from outsourcing those workers.

Those with less than 15 percent L-1s on staff would have to pay a $500 fee and get its customer to attest to not laying off its American workers for 90 days before and after the L-1 placement. The bill would also grant the Department of Homeland Security new powers to investigate L-1 compliance.

The Senate bill also imposes $5,000 filing fees for employers with 30 percent or more of their U.S. workforce in H-1B or L-1 status. And companies would be banned from employing more than 75 percent of their workers in 2015, 65 percent in 2016, and 50 percent in 2017 and beyond.

A Win for U.S Tech Companies?

The bill could be a boon for American technology providers. The H-1B visa cap would increase to 110,000 for the fiscal year in which the bill is enacted, rising as high as 180,000 in future years based on unemployment trends and demand for foreign labor.

“Quite frankly, the U.S. companies get everything they wanted–more visas and a larger share of the visas,” says Bendor-Samuel. And, adds Virtue, “as is true under current law, such companies need not attest to the fact that they have not laid off workers in the last 90 days in order to secure an H-1B visa.”

Offshore outsourcing customers, however, aren’t rallying to the support of their Indian vendors. “They’re not particularly concerned,” says Bendor-Sameul, who says Indian outsourcers are unlikely to pass on their margin losses to their customers.

It’s unclear what the final version of an immigration reform bill will look like. “The [House of Representatives] version is likely to be less onerous,” says Bendor-Samuel. “But what will happen in committee? It’s a bit of a crap shoot.”

But the specter of sweeping visa changes is already having an effect, says Rutchik. “It’s created a lot of uncertainty, particularly among non-U.S. outsourcing providers,” he says.

“Additionally it has fostered a dynamic where providers are finding ways to do more work offshore because they don’t have enough of a comfort level to bring offshore resources onboard to fill onshore roles. Ultimately it has had a reverse effect with fewer roles going to people onshore, even with respect to visa holders.”

“In reality, most enterprises will simply do more offshore and work around the impact to their service delivery quality,” says Fersht of HfS Research. “This legislation is unlikely to benefit more onshore employment in IT-which only has 3 percent unemployment in any case. If anything, it will drive more work outside of the country.”

Stephanie Overby is regular contributor to’s IT Outsourcing section. Follow everything from on Twitter @CIOonline, Facebook, Google + and LinkedIn.