Most people I speak with acknowledge the H1-B system is a hot mess. Once touted as a way of back filling skills shortfalls, the lottery system that underpins it is open to all manner of shenanigans.
For example, the practice of applying for multiples of the number of workers actually needed has been cast as borderline illegal. The fact median salaries under H1-B were surveyed at $88,000pa in 2016 (depending upon who you wish to listen to, that number varies) is taken as evidence of firms underpaying to the detriment of Americans. In turn these factors create a false market where there is a constant need to replenish the workforce as those coming in under H1-B quickly find better opportunities.
The US response is elegantly simple – double the minimum salary requirement for an H1-B employee from $65,000 a year to $130,000. It was that doubling up which gave pause for thought to Indian heritage vendors TCS, Wipro, Cognizant and Infosys, all of which have dramatically scaled back their H1-B plans.
The Indian outsourcers have known the system is broken for a long time but had not found a way to resolve the conundrum of hiring enough cheap labor to keep BPO prices within acceptable bounds while at the same time managing relatively high rates of employee churn. Given they all operate a similar business model for low level outsourced processes, there was no real incentive to change.
The last few years have recalibrated the optics. All outsourcers realize that the days of labor arbitrage as a business model driving outsourcing growth are over.
Employees who regularly skipped from job to job, increasing their pay along the way, created a ridiculously competitive and high churn market, especially in India, but increasingly in the US.
That was all well and good when growth rates were in the double digits but as HfS Research has shown, the last few years have seen a dramatic reduction in perceived value, which in turn impacts growth.
If there was ever one home-banker benefit from outsourcing, it was always the ability to take 30%+ off the bottom line cost of running a process or set of processes.
The VPs and below are those who are managing the engagements – and not even a third of them view their engagements as being very effective at driving out significant cost or making their operations more flexible and scalable. Their bosses are slightly less cynical, but still the vast majority is underwhelmed.
It’s not the case that budgets have shrunk but that customers want more for the same. Customers want the most efficient and cost effective delivery models for low level services while at the same time demanding higher order process outsourced skills.
For outsourcers to remain competitive while maintaining margins requires - among other things - process automation on a scale not previously seen nor envisaged. That work has been ongoing the last few years but progress has hardly been rapid or earth shaking although there is always the promise of jam tomorrow. The proposed changes in the H1B regime add a sense of urgency to the need for automation.
Right now, the outsourcers are not saying too much about their plans but it has to be obvious that short of large cost increases both at home and in customer markets, the only way to remain competitive is through automation as a replacement for low level manual processing.
I’ve heard talk of customers being forced to pay more but I can’t see that hiding up for much of the outsourced work. Why would you pay more for a service that can be automated at the same or less cost? Why would you allow a supplier to arbitrarily pass on perceived cost increases that arise out of actions over which the customer has no control?
The good news is that by paying attention to a higher pay requirement, the outsourcers should be encouraged to invest in the staff they already have alongside the push to automation. They should now offer staff a genuine career path rather than seeing staff as cheap cannon fodder that can be incentivized by the prospect of participating in the next US intake.
In an earlier take on this Stuart Lauchlan quoted Vishal Sikka, CEO Infosys who, at the time said:
The more that we can bring local talent to work closely with clients, bring the contextual sense of innovation to their work, and bolster that with deep global expertise coming in from the outside the better. We are deeply committed to the US economy growth in there and so forth.
Depending on the nature of the policy that is adopted, we will take the necessary measures and that might have some impact in the near term, which we will see depending on the nature of the policy. But ultimately, the solution here is better local hiring, more strength in the local economies and local markets. And there is strong long-term focus on innovation and software-led the delivery of value.
Some have argued that the changes will encourage non-US technical centers to offer attractive terms for employees wishing to work and settle outside India. Germany and the UK are two markets that are often heard in conversations. I see the potential of cost advantages in swapping Austin and Silicon Valley for Thames Valley Park or Berlin but I wonder whether potential hires will have the same enthusiasm. I’m dubious about that.
In the meantime, the US administration sends confused messages. Most recently, it has tried to signal a ‘not much change’ message but given the chaotic state of current American politics, it would be a very brave company that placed bets based upon those noises.
Instead, I anticipate that Indian outsourcers with a sizeable employee base in the US working to both accelerate automation while ensuring that their staff have sufficient knowledge and experience upon which to build a higher order, sustainable business, both in delivery and consulting.
Whether that is realistic is another matter.