Immigration Bill Gives Competitive Advantage to American Firms

In a previous post, I outlined how America’s proposed new immigration regulations (Senate Immigration Reform Bill S. 744) restrict visa availability and increase costs for large employers.  In this post, I outline how “Outplacement” restrictions in the bill will strengthen U.S.-centric third party providers at the expense of India-centric third party providers, and will benefit captive providers as compared to either type of third party outsourcer.

The proposed “Outplacement” restrictions will prohibit companies where H1-B holders make up more than 15% employees from placing, outsourcing, leasing, or otherwise contracting for the services or placement of their H1-B visa holders.  Non-profits and healthcare worker employers are exempt; employers with fewer than 50 employees are allowed a higher percentage of H-1Bs; and some employees with pending immigrant visas (i.e. permanent resident applications) do not count toward the H1-B limit.  With regard to L visa holders (i.e. affiliated company transferees), outplacement is prohibited unless, among other things, the contracted employer is an affiliate and attests that U.S. workers will not be displaced.

The H1-B rule is clearly designed to disadvantage large India-centric offshore outsourcing providers such as Infosys, Tata Consultancy Services (TCS), Wipro and Cognizant.  In its annual report, TCS shows that, as of March 31, 2012, ~17,000 of its 238,583 employees were outside of India, and, among these, ~16% (~2,700) were in the U.S. According to a ComputerWorld analysis, TCS had at least 1,758 H1-B visas in force during 2011, which is more than 65% of its U.S. staff.  That means that TCS would not be able to staff H1-B visa holders on client projects (assuming some phased implementation).  Nor would TCS be able to staff L-1 visa holders on its client project because of the prohibition against placing L1s at unaffiliated companies.  Other large Indian-centric providers reportedly have analogously high proportions of visa holders among their U.S. staffs.  Pundits of the proposed bill have suggested that India-centric employers will circumvent the H1-B visa outplacement restriction by applying for permanent residence for their H1-B holders.  As proposed, H1-B holders can be removed from the outplacement test calculations merely by their applying for U.S. permanent residence [More on this in a future post].

However, U.S.-centric service providers such as IBM and Accenture benefit significantly from the restriction.  Because of the size of their U.S. workforces, the number of H1-B holders they can staff in the U.S. is much less limited.  IBM’s ~1,000 H1-Bs as a percentage of nearly 100,000 employees is approximately 1%, while Accenture’s 1370 H1-B visas among approximately 30,000 U.S. employees is 4.6% – a business measure to manage, but a huge competitive advantage over the India-centric providers.

Neither the H1-B rule nor the L rule will restrict most captives.  Consider a large bank or technology company in the U.S. that has setup a software development captive in India.  The H1-B outplacement rule will not apply because the U.S. parent company will likely have orders of magnitude more U.S. employees than visa holders.  In addition, because employees from the captive will be working for the parent (i.e. an affiliate) companies will be able to transfer employees using L visas with little restriction.  A potential consequence of the restrictions may, in the long run, change the employer hierarchy among Indian professionals that currently value third party service provider employment above that of captive employment because of the opportunity to transfer high performing employees from captives to parents for meaningful assignments.

The roles that will be most affected are those that depend on skills that are plentiful among Indians, but rare among Americans.  These include the skills to gather global delivery requirements, setup the relevant processes & systems, and subsequently manage the associated engagements and offshore teams. These roles are often held by Indian visa holders who began as offshore team members and were promoted into onshore managers or client partners as a result of their experience with the global delivery model.  A significant part of the reason that visa-holders dominate these positions is the dearth of Americans with experience in each of the onshore, offshore, and management aspects of the global delivery model.  Consequently, providers often deploy H1-B or L visa holders temporarily, on a rotation basis, or as semi-permanent arrangements.

The recommendations in my previous post apply equally to the outplacement regulations, and both buyers and providers need to pay close attention to understand the exact regulations that are enacted and how and in what time period changes will be implemented.

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