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Summary

Proposed reforms to immigration laws governing the "work permit" – the visa category most commonly utilized by Indian outsourcers to bring resources onshore – in both the US and UK will have a substantial impact on the profit margins of major Indian outsourcers.

Immigration reforms will be a setback in the near term, but clients and vendors need to find opportunities to rebound

In December 2015, the US government announced major changes to the laws governing the H1B and L1 visa categories and increased visa fees by $4,000 and $4,500, respectively, for the two categories and imposed additional fees on companies using these visas. This essentially more than doubles the cost of the visas from approximately $2,000–$3,000 to $8,000–$10,000 (including attorney fees), making it harder for foreign companies to bring in cheaper labor.

In a move that mirrors the US reforms, the UK government has announced proposals to raise minimum wages for intra-company transfers (called ICT) from an average of around £25,000 to £41,500, as well as imposing an annual charge of £1,000 per ICT, which will be used to fund skill enhancement classes for UK citizens. By these measures, the UK government plans to cut the number of incoming skilled professionals by about 27,600 over the next few years.

The actions of both governments highlight increasing concern over overseas labor eating into the employment opportunities for local populations, and will have a major impact on the profit margins of outsourcers that rely on importing foreign workers. However, both governments fail to acknowledge the serious gaps in the education standards and skills in their respective economies that make foreign labor attractive. Though some of the additional fees will be diverted into providing skill-based training for domestic citizens, it will be several years before substantial impact will be noticeable in the workforce. Until then, wage inflation in technology professions will increase considerably, making outsourcing even more attractive, thereby effectively negating the proposed impact of the reforms.

Though the immigration reforms in two of the main markets for outsourcers is bound to hit vendors hard, at least in the near term, the increasing demand for digital and transformational services are likely to be the saving grace. In the meantime, vendors will seek to make further investments in automation and digital services that do not require a large number of resources to be based onshore, as they try to maintain control on both cost and profitability. However, it will take a little time for vendors to recalibrate their market trajectories and strategies as they adjust to the change in status quo. In the meantime, clients need to consider longer-term partnerships which should involve investment around co-innovation, building new capabilities, and change management initiatives to enable the shift to digital and automation over the near term, or face the prospect of moving more work offshore.

Appendix

Further reading

Managing and Scaling Digital Practices to Transform the Enterprise, IT0019-003524 (January 2016)

India IT Services Vendor Quarterly, 3Q15, IT0019-003514 (December 2015)

2016 Trends to Watch: Application Services, IT0019-003506 (October 2015)

Digital Transformation: Defining, Benchmarking, and Prioritizing for the Journey, IT0019-003488 (September 2015)

Author

Hansa Iyengar, Analyst, IT Services

hansa.iyengar@ovum.com

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