Tech

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

It's that time in the U.S. presidential election cycle when outsourcing turns into  "ouchsourcing," and Indian tech companies have to start lobbying in Washington to save their coveted H-1B visa entitlements.

This has been a tradition since at least 2004, when John Kerry's campaign promised to punish "Benedict Arnold CEOs" who destroy American jobs by hiring cheaper Indian techies.

Political temperatures are rising again with Republican presidential candidate Donald Trump's idea of  increasing the "prevailing wage" paid to H-1B foreign guest workers finding expression in a bill co-sponsored by Alabama Senator Jeff Sessions, who reportedly helped shape Trump's immigration plan.

The bill, whose other backer is Florida Democrat Bill Nelson, seeks to cut the annual H-1B entitlements from 85,000 visas now -- including 20,000 reserved for students with advanced degrees from U.S. schools -- to 70,000, and proposes that these visas be given to immigrants with the highest salaries.

That would effectively mean that companies such as Tata Consultancy and Infosys would lose their competitive advantage in deals in which clients want software coders to work on technology projects in their offices rather than take the work to Bangalore. Another piece of legislation, proposed last month by Senators Dick Durbin and Chuck Grassley, seeks to crack down on outsourcing companies that "import large numbers of H-1B workers for short training periods and then send these workers back to their home country to do the work of Americans."

Feeling the Heat
Indian software company shares weaken amid clamor to tighten U.S. guest worker visas
Source: Bloomberg

A lot of this may be the usual pre-election noise, but there's no denying that the spotlight on Indian software companies' immigration practices is shining too brightly for their comfort. A few months ago, the U.S. Labor Department started investigating whether TCS and Infosys had violated H-1B rules in an outsourcing project awarded by the utility Southern California Edison. Infosys said in September that the probe had given it a clean chit. The vendor wasn't so lucky two years ago, when it agreed to pay $34 million to settle Justice Department claims of visa fraud.

The Indian companies' dependence on North America -- source of more than 60 percent of revenue at Infosys -- is unlikely to abate. But that doesn't mean that they are necessarily at the mercy of U.S. presidential hopefuls and lawmakers.

At least, they don't need to be. Technology is presenting the service providers with a viable alternative. As Bloomberg Intelligence analyst Anurag Rana notes, their legacy business model, in which clients hire vendors to customize and deploy enterprise software built by the likes of Oracle or SAP, is fading. It's giving way to smaller projects that embrace emerging technologies such as the cloud, mobile and analytics.

While this shift affects even Accenture and IBM, the U.S. vendors already garner about a quarter of their revenue from so-called digital services, which are less labor-intensive. The figure for Tata Consultancy, the biggest Indian vendor, is just 13 percent.

Narrowing the gap would boost revenue per worker for Indian software companies. Over time, their profit margins will depend less on the number of H-1B visas they manage to land: 

Chasing Higher Productivity
Revenue per employee
Source: Bloomberg

However, boosting revenue per worker could hit a road block: automation. As Jefferies researchers say, if 90 code writers can do the work of 100, it's unlikely clients of Indian software companies will continue to pay them for all 100.

Call it "peak software" -- the profit potential of taking a large pool of cheap code-writing talent to U.S. assignments on H-1B visas, or routing the work to them in Bangalore, is nearing exhaustion. Now the vendors will need to get paid for what they do for clients, and not for how many hours they spend doing it. Even if the U.S. immigration debate quietens down, the disquiet for Indian software companies and their investors may not end.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net