The Immigration Reform Bill is likely to have a significant impact on the Technology sector, and especially for Indian IT Services.

The Bill is being discussed and debated in the Senate; various amendments and the bill itself would likely be voted on in the coming days.  If it does go through Senate, the House will be forced to act, perhaps.  The Speaker of the House has said he wants to get a bill through Congress by August.  If everything progresses as expected, some kind of reform may be passed before the end of the year.  However, as we all know by now, they rarely go as expected.  Therefore, it is a wait-and-watch as to whether the Bill passes, and whether the provisions survive in their current form.  We believe all the concerned stakeholders — Service Providers, Customers, and Employees — should however assess the impact of the provisions contained in the 1000+ page bill (in its current form) and prepare their contingency plans.

In  our preliminary assessment we have looked at 5 Key Provisions in the Immigration Reform Bill:

  • Increase in H-1B Visa Limits
  • Higher Wages for employees on H-1B Visa
  • Outplacement Provision
  • Establishment of Threshold Percentages for Visas
  • Increase in Visa Filing Fee (for H-1B and L-1 visas)

1.         Increase in H-1B Visa Limits

The annual cap on H-1B visas will be increased from 65,000 to 115,000 and can go up to 180,000.

Impact:

  • This is great news for currently offshore employees who are looking for opportunities to come to the U.S. on work visas.
  • This is also great news for companies that can take advantage of the higher limits, and bring currently offshore employees onsite.  Given the heavy demand for H-1B visas, the earlier limit of 65,000 was easily exhausted.  Therefore, some companies were precluded from getting employees on visas.  Going forward, we expect the heavy users of H-1B visas – the large Tier 1 India-centric Service Providers – will likely start reducing their dependency on H-1Bs (to be in compliance with more stringent provisions to be discussed below). This combination of higher limits and the lower demand from the Tier 1s will automatically make it a lot easier for those seeking to take advantage of this provision to bring more employees onsite.  Several Product and non-India-centric Service Providers (Microsoft, IBM etc.) will benefit from this.
  • The India-centric Service Providers (Cognizant, Infosys, TCS, HCL, Wipro, Igate, etc.) will not be able to benefit (in the short-term) from this increased Visa Limits provision.

2.         Establishment of Threshold Percentages for visas (Percentage of H-1B+L-1 visa holders in a company’s U.S. workforce):

  • Year 1 (Oct 1, 2014-Sep 30, 2015): 75%
  • Year 2 (Oct 1, 2015-Sep 30, 2016): 65%
  • Year 3 (Oct 1, 2016-Sep 30, 2017) and beyond: 50%

If a company is above these thresholds, the bill (in its current form) mandates bringing down the ratio of visa holders to levels below these thresholds in the stipulated time.  Until such time, companies cannot apply for new visas.

Below these thresholds, companies can apply for new visas, but will still have to pay higher visa fees, and will still have to comply with other stringent restrictions (See Outplacement provisions).

Impact:

Most of the large Tier 1 Service Providers are expected to be above these thresholds, and will therefore have to start ramping down their ratios. They may therefore attempt a combination of the following:

  • Relocate some of these visa holders offshore
  • Resort to subcontracting (which hitherto has not been a large portion of their business, and not one that is preferred by them for various operational reasons)
  • Acquire U.S. companies having pre-dominantly U.S. workers (green cards and citizens)
  • Aggressively hire green card holders and citizens in the U.S.
  • Aggressively go after contracts requiring Rebadging.

3.         Outplacement Provision

Companies that fall in one of the 3 below categories (“H-1B-dependent employer”) will be impacted.

  1. 25 or fewer U.S. employees, and employs more than 7 H-1B nonimmigrants
  2. 26-50 U.S. employees and employs more than 12 H-1B nonimmigrants
  3. 51 and over U.S. employees and employs 15% H-1B nonimmigrants

Read the clause below:

An H-1B-dependent employer may not place, outsource, lease, or otherwise contract for the services or placement of an H-1B nonimmigrant employee.

Impact:

Some believe that if the Service Provider falls in any of the above 3 categories, this clause will only prohibit them from placing H-1B visa holders at clients’ sites.

We however have a stricter interpretation, and believe that this provision will effectively prevent meaningful provision of any services at all, leveraging H-1B visa holders (by those Service Providers in any of the above 3 categories). 

A similar provision pertaining to Service Providers with L-1 visas is even more stringent.

Our interpretation is that T&M or Staff Augmentation work cannot be provided by L-1 visa holders even below the 15% threshold (as L-1 visa holders are not allowed to provide “Labor for hire”)

This Outplacement Provision will perhaps have the biggest impact of all on the Indian IT Services industry.

4.         Increase in Visa Filing Fee

Starting October 1, 2014 (Oct 1, 2013 for L-1), the application fee will substantially rise.  The fees will be as follows:

  • $5,000 for applicants that employ 50 or more employees in the United States if more than 30 percent and less than 50 percent of the applicant’s employees are H-1B or L-1 visas.
  • $10,000 for applicants that employ 50 or more employees in the United States if more than 50 percent and less than 75 percent of the applicant’s employees are H-1B or L-1 visas.

This is up from approx. 4,325 per visa application earlier.

Impact:

While some have argued that this will drastically increase the expenses for Tier-1 India-centric providers, paradoxically, this may not have a material impact as the Service Providers will be applying for far fewer visas than in the past (if they apply at all), as they will be required to cut down the total number of visa holders, per the other provisions in the Bill. (We have looked at the scenario where all the provisions survive.  If however some of the other provisions do not survive, and this provision survives, it may lead to higher costs).

Some employers require employees to bear all or some of the costs pertaining to filing of visas.  To that extent, some employees may be impacted.

In some T&M contracts, customers pay for the costs of bringing someone onsite (usually clubbed under Travel & Visa fees or structured into the hourly rate).  In such cases, Service Providers may re-negotiate, and try to pass on the costs to customers.

5.         Higher Wages. The bill stipulates higher wages for H-1B visa holders to the extent of roughly 20-25% over current rates. 

Per our interpretation, this will apply to new and existing H-1B visa holders (some believe this will only apply to new visas).

Language in the specific provision

“…if the employer is an H-1B-dependent employer, is offering and will offer to H-1B nonimmigrants, during the period of authorized employment for each H-1B nonimmigrant, wages that are not less than the level 2 wages set out in subsection (p);…”

Impact:

  • Employees ought to be very happy, with this provision.  It has always been their biggest grouse that they are paid significantly lower than citizens and green card holders with comparable skills and experience.  With the new provisions, companies may have to pay higher wages to its employees with visa, and perhaps even apply for Green cards to comply with other provisions.  This provision may help bring better overall parity, and lower the dissatisfaction levels amongst employees with visas.
  • However, this provision (in conjunction with other provisions) may cause India-centric Service Providers to perhaps restructure their contracts from T&M contracts to Managed Services/ Outcomes contracts, and to optimize onsite-offshore ratios.  This would result in some employees with visas being sent back offshore.
  • If this restructuring and optimization is purely motivated by financial/ commercial considerations, it may have the effect of lower customer satisfaction and lower customer intimacy, hurting them in the long-term.
  • Overall, customers may get impacted as follows:
    • Some Service Providers may invoke clauses where a regulatory change could trigger a commercial re-consideration/ negotiation (depends on how many contracts included this provision), or suggest reconsideration if the contract did not specifically disallow commercial re-consideration for regulatory/ legal changes.  (Some Managed Services contracts may explicitly disallow any commercial negotiations, and require compliance with existing and new laws at Providers’ own cost.  In such cases, customers may not be financially impacted.)
    • Replacing H-1B visa holders with citizens/ green card holders may impact continuity and client satisfaction, and even require re-training etc.
    • Relocating onsite workers offshore will also likely lower customer satisfaction and customer intimacy in most cases.
    • Customers may get cautious especially with respect to new Outsourcing contracts as:
      • They will have to assess disruption to their operations over the course of the contract.
      • They may have additional questions with respect to the Service Providers’ compliance with respect to visa holders on U.S. payroll
  • Service Providers may have to resort to increased subcontracting (which hitherto has not been a big component of their operations).  Customers usually have a say with respect to Subcontracting, and they may assess the consequence of such subcontracting to the quality of work.
  • If compliance to laws requires Service Provider to relocate personnel offshore, there may be an implicit conflict of interest (which Client gets priority).  Using a bad analogy, a squeaky wheel gets the grease.  Clients should therefore be proactive, and request commitments with respect to personnel.
  • Clients can invoke Key Service Provider Personnel clause to ensure continuity, and non-relocation of their staff offshore.
  • Some companies may choose to bring back the outsourced work in-house through their Captive centers in India, or even re-bid the work in the context of new provisions.
  • The MNC Service Providers (Accenture, IBM etc.) are sure to use this impending law to their advantage and to the detriment of the Indian Service providers.
  • No matter what, this will require a careful review of the contract, and understanding all of the options available, and knowledge of Service Provider’s operations, current standing with respect to percentage of employees with visas etc.  This will likely not be a pleasant discussion for either the Customer or Service Provider.

Overall Impact to different Stakeholder groups:

While it is difficult to assess the probability of the Bill passing, it seems unlikely that the stocks of Tier 1 companies are fully factoring the likely impact.  Investors will be well advised to stay cautious.

Further, most analysts and experts are only looking at the impact of this reform on Service Providers and perhaps customers to some extent.  We are perhaps the only ones to have assessed its impact on another important group of stakeholders, namely employees.

Customers

As Indian Service Providers themselves will be adversely impacted, the companies that have outsourced work to them, will have to likely address the consequent risks and any disruption to their operations that may likely happen.  They have to start mitigating risk (discussed earlier), by doing any or all of the below:

  • Review all their contracts to assess impact
  • Seek answers from those impacted about actions to be taken, and risk mitigation steps, and put together a proactive action plan in conjunction with Service Provider.

Service Providers

While a number of analysts have focused on the cost aspect, we believe the adverse impact on the Service Providers’ business model itself is more significant and has to be studied in greater detail.

We have earlier alluded to some of the following strategies Service Providers will deploy with immediate effect, perhaps even proactively.

  • Relocate some of these visa holders offshore
  • Resort to subcontracting (which hitherto has not been a large portion of their business, and not one that is preferred by them for various operational reasons)
  • Acquire U.S. companies having pre-dominantly U.S. workers (green cards and citizens)
  • Aggressively hire green card holders and citizens in the U.S.
  • Aggressively go after contracts requiring Rebadging.

While they can and should certainly employ/ deploy some or all of the above, most India-centric Service Providers are averse to aggressively deploying them given the perceived risks.  It is inconsistent with their culture and/or business model as discussed below:

  • A very high offshoring percentage will result in lower quality, lower customer intimacy, and lower revenues.
  • Subcontracting has a number of operational issues.
  • Acquiring U.S. companies is easier said than done due to cultural issues that need to be addressed.
  • Hiring green card holders and citizens entails much higher cost, and requires investment and training in aligning them to offshore processes.
  • India-centric Service Providers have not done too many contracts involving Rebadging, and in the few that they have, it has mostly been selective and somewhat reluctantly with an intent to offshore eventually.  In the new scenario (if this Bill becomes law), they may not be able to move this work offshore without re-assessing impact on compliance with threshold percentages.

We also foresee the number of T&M contracts; especially leveraging H-1B and L-1 visas go dramatically down.  If one can only execute contracts for clients if 15% or less of the U.S. workforce are visa holders, we doubt those “precious few” visa holders will be deployed on hourly T&M work.  They will likely be leveraged for projects and large outsourcing contracts.

Employees

Most analysts and experts have not considered the impact on this group.

Employees of Indian Service Providers are likely to be significantly impacted.  While the Bill provides for increased wages for H-1Bs which is a huge positive for employees, companies may have to incur higher costs and perhaps even apply for Green cards to comply with other provisions.

Some companies may therefore seek to either replace them with US workers or ship their job overseas, so as to be in compliance and to mitigate the cost impact of having them locally.

The Bill provides for another interesting alternative by relaxing the rules for Service Providers “…that has filed immigrant status petitions for not less than 90 percent of current employees who were the beneficiaries of applications for labor certification that were approved…”, and applying for Green cards.  In layman speak, it means that a possible solution is to apply for Green cards for over 90% of your visa holders.  While one leading analyst dismissed this as “not feasible”, we believe this may not only be feasible, but even desired.  While companies may not do it if they take a short-term approach or for purely commercial reasons, we believe this may be a huge positive for not only employees, but for also the other stakeholder groups.  The Service providers will immediately be in compliance, clients will not be adversely impacted, and employees will be happy.  Employee satisfaction and loyalty may go through the roof.  Sure, the Service Provider’s costs may go up in the short term.

In their own self-interest, employees should be aggressively demanding answers to the following questions from their employers:

  • What is the Risk Mitigation strategies being contemplated.  (Hoping that the law does not pass in its current form, is not a strategy.  We have seen certain analysts allude to hope as a strategy).
  • Will they apply for Green cards?  If not, why not?

We will continue to study the impact of this bill, and actions companies are taking to mitigate or address the impact.

Please read our Legal Disclaimer here: https://bizofit.com/legal-disclaimer/.  Also, please note, that this is our preliminary assessment, and we will revise the same over the next few days.  In the meanwhile, please feel free to point out any errors/ inaccuracies in our assessment.

      

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