Supplier Risk Monitoring

Protectionism in the Outsourcing Industry

Written by Meena Bose

Protectionism in outsourcing is not new to the industry. It started as early as 2003 when several states in the United States including New Jersey, Maryland, Washington, and Pennsylvania proposed various legislations aiming to restrict offshore outsourcing for government contracts.  During the same year, State Senator Shirley Turner, a New Jersey Democrat, proposed a bill requiring that workers on state contracts be U.S. citizens or legal aliens or have some specialty for which U.S. workers cannot be found. In France, a group called MUNCI (Mouvement pour une Union Nationale des Consultants en Informatique or Movement for a National Union of IT Consultant) in Issy-les-Moulineaux also lobbied for restrictions on offshore outsourcing of IT work during the same period. However, with lack of support from the top leaders, sourcing industry continued to grow at double digit rates over the period.

A decade later, the situation still remains the same, though we observe that the intensity of the emotions has reached a high – unemployment levels in buy side countries increased; low cost countries are not low-cost any more with India and China slowly losing out their attractiveness of “cost-competitiveness”. These aspects are driving the leaders to rethink their stance about outsourcing – call it a political move to retain vote bank or a genuine concern about the country’s youth, the new U.S. administration has made it clear that protectionist policies and immigration reform are important priorities. Similar voices were echoed by other buy side countries as well – with Singapore increasing minimum salary since 2014. As per NASSCOM, since 2016, work permit approvals from Singapore for Indian companies have drastically declined. So is the case with UK – the government decided to increase yearly salary threshold for technology professionals applying for visa by 44% during November 2016. The new rule also brought in tougher language requirements for family members of workers settling in the UK.

Canada had a liberal policy for foreign skilled workers till 2013. However, things changed post 2013, after Royal Bank of Canada was accused of replacing several Canadian workers with temporary foreign employees due to an outsourcing arrangement. The incident led to a huge controversy, post which, the government overhauled the “Temporary Foreign Worker Program” in 2014 by adding more complicated questionnaires and increased the cost (in terms of fees etc.) of bringing in temporary foreign workers. However, burdened by the shortage of skill sets, the country lifted few limitations, though it was primarily applicable to low skilled, low wage foreign workers.

Australia, in November 2016, indicated that it might reduce the list of occupations for skilled migrants under 457 visa scheme. The government also specified that foreign workers in Australia are limited to a 60-day stay in the country after their employment ends. Under previous immigration rules, foreign workers on 457 visas could remain for 90 days. The change limited visa holders’ ability to look for another job or enter informal work arrangements after their official employment had ended.

Indian companies (and other outsourcing locations too) have been preparing for the tightening laws.  For nearly a decade, Tata Consultancy Services (TCS), Infosys, and Wipro and other Tier 1 companies have increasing their efforts to sustain the tightening visa laws. It should be noted that these companies get over 60% of their revenues from the U.S. In 2016, TCS applied for only 4,000 new US visas, as against 14,000 in 2015. As per the management, changes in their business model have helped them to operate in a visa restraint environment.

Additionally, setting up a nearshore facility or increasing hiring activities in the U.S. have helped Tier 1 companies. In 2015, over 100 companies in the U.S. created more than 90,000 jobs.  Wipro has hired over 2,800 Americans over the last 1.5 years. The company plans to total half of its total workforce in the U.S. to be locals by end of this year. Infosys too announced its plans to hire 10,000 U.S. citizens over the next two years. Predictably, layoffs in India are increasing – there is a speculation that top 7 IT companies would be laying off ~60,000 people in 2017, twice the number as 2016.

The IT companies have also been spending on acquisitions in the U.S. to increase local manpower. However, such decisions result in increasing operational costs, which ultimately will be passed on to the clients, albeit in phases.

There are going to be ripples – cost is expected to go up in the coming year, replacement of experienced staff with freshers to save salary cost might affect the process and in some cases, delay the turnaround time as well.

So, how do you mitigate these risks? – a) benchmark rates with similar service providers in the industry before going for a renewal; b) renegotiate contract terms and employ legal advisors to ensure that the contract does not have any terms that would enable them to pass on the increasing cost; c) review with the suppliers about naming “key personnel,” defining which team members are considered critical and what steps are being taken to ensure continuity of work even in an event of high turnover; d) tighten the SLAs further during renewals to ensure that there are no unprecedented delays/reduction in quality.

Alternatively, pushing the suppliers to provide cloud services and increased digitalization and automation would help reduce risks that arise out of business changes. Continue to monitor the suppliers and the government regulations to keep abreast of the current business environment through Supply WisdomSM.

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