Visa Reform Act Promises to Disrupt Pricing Models for Foreign Operators

It seems almost certain that immigration legislation making its way through the United States Congress, if adopted in its current form, will increase costs for those buyers dependant on India-centric providers deemed visa dependent. Known formally as the H1-B and L-1 Visa Reform Act of 2013, part of the Border Security, Economic Opportunity, and Immigration Modernization Act, the bill proposes an increase in H1-B visa fees to approximately $5,000 per application, as well as outplacement and numerical restrictions.

“Any company with more than 15% of its people on temporary visas will be considered visa dependent,” says Sandra Notardonato, Research VP & Invest Analyst with Gartner. “From that perspective, most if not all India-centric service providers would fit in that category.”

After passage by the Senate, the earliest House vote won’t be until later this summer. Should the legislation pass, it would then become law in early 2014.

Gartner has tracked those companies with higher exposure to a North American revenue base, equating that to greater risk. With that in mind, according to Gartner the companies with the highest exposure are TCS, Cognizant, Infosys, and Wipro.

“Our modelling for those providers who are visa dependent is a billing increase of 5% to 15%,” says Notardonato. “But there are variables. This is a very fluid situation. The bill could be diluted, and it also depends on each vendor’s solution.”

Nonetheless, enterprises will likely experience service disruption. Amongst the big players, IT outsourcing and Implementation will be hardest hit, though TCS also has significant exposure to Business Process Outsourcing (BPO). With employers mandated to have at least 25% of staff as local hires by 2014, with that number upping to 50% by 2016, increased bill rates are a near certainty.

“Not all companies are going to be able to execute to the major changes to their operating models,” says Notardonato, adding that vendors have already confirmed that some costs will be passed on to buyers.

Not all doom and gloom

Not all observers of the coming changes have a negative outlook for India-centric providers. Market intelligence and advisory firm Information Services Group (ISG) believes that the legislation could incent Indian firms to invest more in the U.S., thus strengthening their presence.

Specifically, Sid Pai, Partner and President of ISG Asia Pacific has indicated that though there could be a short term negative impact, over the longer term “the provisions could encourage Indian firms to expand their U.S. presence” by upping local hiring and even buying U.S.-based companies.

Pai doesn’t deny the extent or seriousness of the potential impact to India-heritage firms. ISG quotes industry estimates that put U.S.-based employees of Indian companies on H1-B or L1 visas at between 50% – 80%. But he argues that “this legislation could provide the impetus the Indian IT companies need to tweak their existing business models and become more global,” which in turn could “have the unintended consequence of making the Indian-heritage firms stronger competitors in the U.S. market.”

When looking at revenue exposure, Cognizant gets 79% of its revenue from North America, Infosys 63%, Wipro 55%, and TCS 52%. One response suggested by both ISG and Gartner is that firms put more reliance on their global delivery centers. Cognizant is well positioned in this regard given that, although the company is US-headquartered, the majority of its 162,700 employees are in India.

“We continue to make solid progress developing emerging offerings in new markets, new SMAC [e.g. ‘social, mobile, analytics, cloud’] technologies, and new non-linear solutions and services,” said Francisco D’Souza, Cognizant’s CEO, when announcing last month that the company was on track for full-year revenue growth of at least 17%.

These are big changes, and the fallout could be widespread.

Cognizant was also in the news recently when, along with TCS, it was announced that the two firms were on the winning bid for a 350 million pound IT infrastructure deal for UK-based Network Rail. To get the job done, the companies will have to leverage off of their global delivery centers.

Overall, the H1-B and L-1 Visa Reform Act could then be seen as only one part of a global phenomenon pushing India-centric providers to diversify while also keeping an eye on local requirements. “Providers will have to hire and train more locals, and move work to proximity centers and nearshore locations,” says Notardonato. “They will need to embrace a more diversified global delivery model, use more technology, and perhaps make acquisitions to meet visa requirements.”

Staying ahead of the curve

But if the long term view is not so dire, with the possibility of a multi-pronged strategy as well as global diversification by Indian providers, Gartner has found that the short term prospects remain worrisome, and has put forth recommendations to buyers in order to reduce their risk.

First up is a recommendation for an official meeting with service providers to formally address four areas of concern: the three year vendor exposure level; scenario planning for risk mitigation; summary of planning items and resource allocation; and proposed contract clauses.

“Without this a buyer could get surprise in the middle of a three year contract, with news that their prices are going up,” says Notardonato. “It’s really important to stay ahead of this. This isn’t only about navigating the change. This is also about confidence levels and change management – not always a strength for India-centric providers.”

There will be more clarity in the months to come, but Gartner sees the biggest risk in the 15% litmus test, which will hammer onsite staff availability – though it is unclear if the provisions are for future staff, or if they would apply to current staff as well. As well, those employers with more than 50 employees, of which 50% or more are on H-1B or L-1 visas, must pay a $10,000 fee per additional worker.

These are big changes, and the fallout could be widespread.

“Even companies like IBM that don’t fall under the 15% litmus test will find themselves in a talent war,” says Notardonato.

How ready are the India-centric providers? Gartner interviewed 15 providers, and most had done some scenario planning, but only with a few key people. There has been virtually no wider communication with account managers – not a good sign. That means there has been no preparation for triggering events, or for how these issues will be addressed when contract renewals come up.

According to Gartner, the answer so far from Indian vendors has been “I’ll get back to you.” In effect, they are hoping this problem will simply go away. However, if the 15% provision passes there will be no easy answers, with the ripple effect felt throughout the outsourcing community.