Yesterday, a television channel carried news about Citibank's plan to launch a 10-year IT outsourcing contract worth US$1 billion with a 90 percent on-site requirement. This means 90 percent of the employees involved in supporting the contract would have to be hired locally. Only 10 percent can be hired offshore or from India, mainly, for front-end work.
Another news report on Tuesday outlined the proposed overhaul of the U.S. immigration law. Together, the two reports indicate tougher times ahead for the Indian IT industry.
Let's first look at the Citibank development. While on-site mandates are not new to the Indian IT industry, they were restricted mainly to U.K. government contracts. This is the first time a large financial player has included this stipulation.
According to the news report, the Citibank contract will entail application development, analytics, and mobility services for the bank's global operations. "Bidding for the contract has already begun and players like TCS, HCL Technologies, Infosys, Wipro, and Cognizant have put in their bids. Global players like IBM, Accenture, and Dell are also involved in the race," the TV report said.
Citibank is likely to announce the name of contract winner in July or August this year.
Typically, the average ratio for a financial services contract is 50:50, thus, equally divided between offshore and on-site. The Citibank contract indicates a trend where offshoring is gradually disappearing and increased amount of local hiring is taking place.
This will undoubtedly increase the cost for Indian IT companies and immediately impact their margins. Going forward, other banks and companies in other sectors as well could begin including demands for a higher on-site support.
U.S. immigration changes a big blow
The Indian outsourcing industry's long-held fears of a backlash are close to being realized. Provisions in an overhaul of U.S. immigration law will close loopholes that allow outsourcing companies, Indian and American, to pay guest workers in the U.S. at rates often below wages for equivalently-skilled Americans.
Indian outsourcing companies now use more than one-third of the 65,000 high-skill visas allowed under U.S. regulations.
The proposed changes are in line with U.S. president Barack Obama's vows to make it tougher for American companies to replace American workers with cheaper labor abroad--either by opening factories overseas or by subcontracting their work to outsourcing companies.
"The cost to the Indian companies, which do everything from running call centers to managing the massive amounts of transactional data generated by banks, could run into several hundred million dollars in lost profits," a report in The Economic Times said on Tuesday.
"At issue in the U.S. are high-skill worker visas, called H-1B, that have been dubbed the 'outsourcing visa' by critics who say the system allows companies to bring in cheaper tech workers from abroad instead of hiring Americans," the report added.
The immigration bill, the larger point of which is aimed at boosting border security and providing a path to citizenship for 11 million people living illegally in the U.S., would impose steep fees for companies such as Indian outsourcers that have more than half their U.S. staff on the permits and also require them to pay higher salaries.
The Indian government and the country's outsourcing industry are gearing up for a fight during the debate on the bill, which could take weeks or months due to its other contentious issues. The draft law is now in hearings before the U.S. Senate Judiciary Committee.
Indian outsourcing companies now use more than one-third of the 65,000 high-skill visas allowed under U.S. regulations. The U.S. branch offices of Indian outsourcers rely on bringing in their own tech experts from home, saying they are most familiar with the software and other technology developed in India to streamline American companies' payrolls, record-keeping, and other outsourced functions.
The proposed new visa regulations, hammered out in negotiations among eight U.S. senators who drafted the bill, would raise the H-1B cap from 65,000 to 110,000 initially to satisfy technology companies which argue they need the foreign workers.
"However, seeking to prevent undercutting American salaries, the bill would require those foreign workers to be paid more than under current law, impose steep fees of US$10,000 per visa on big companies with more than half of their staff under such visas, and, starting in 2014, completely ban new H-1B visas for large firms with more than 75 percent of staff as guest workers," The Economic Times report said.