On 31 January 2017, an announcement impacting H-1B visa programme has been made by the US House of Representatives making it difficult for companies in the US to employ skilled foreign workers. Among other things, the minimum wage requirement of H-1B visa holders has been more than doubled to USD 130,000. At Greyhound Research we believe this is a significant announcement by the newly appointed Trump administration. While changes were expected under the new President, the suddenness and the order of the announcement has surely caught IT Services Providers across the globe by surprise.
At Greyhound Research we double-clicked on the announcement and below are what we believe the key short, mid and long-term implications of this announcement.
Ramifications will be for both sides, the IT Services Providers and the US economy. Skilled foreign workers who come to work in the United States by the route of H1-B visas don’t just directly supplement the US IT industry with specialised skill sets, they also contribute indirectly to other industries in the US. Often H-1B workers bring their families along and thereby bring additional business for other industries like Real Estate, Banking, Hospitality to name a few. At Greyhound Research we believe the effects of this announcement will impact the GDP and the overall business and economic growth of US. While 20% of H-1B visa quotas have been set aside for start-ups and small employers with 50 or fewer employees, there is no denying that this will be a dampener to the spirit of innovation and entrepreneurship.
Skills not Salary should have been the basis of this change. Using wage as it’s only pivot, the announcement has more than doubled the minimum wage requirement of H-1B visa holders from USD 60,000 to USD 130,000. There is no mention of any skills-based criteria/requirement. In addition, the High-Skilled Integrity and Fairness Act of 2017 prioritises market-based quota of H1-B visas to companies willing to pay 200% of a fixed wage. At Greyhound Research we believe that in light of the STEM (Science, Technology, Engineering and Math) skills gap currently prevailing in the US, a thorough on-the-ground study of multiple factors, with skills being the primary factor, should have been the foundation of this announcement.
Most US-based Fortune 500 organisations are deeply invested and dependent on IT Services Providers using H-1B visas to source skills. In midst of all this, it’s critical to remember that most US-based companies (including many Fortune 500s) are highly dependent on IT Services Providers. These companies actively outsource for both skills and cost advantages – important to note, it’s not just the latter that drives the decisions. Changes in the H-1B visa arrangement will add immense cost pressures on these companies. Hence, neither they nor the Trump administration are in a position to make any drastic changes right away.
Minimum salary requirement Of USD 130,000 is not too far from the current average and hence not a prohibitive figure to match. Per Greyhound Research estimates, the current average salary of a skilled foreign worker employed via H-1B visa is USD 100,000. In lieu, the newly announced minimum salary requirement of USD 130,000 is not prohibitive and can be managed by way of creative salary restructuring and including Per Diems, benefits and other allowances as part of base package. Per Greyhound Research estimates, upon this restructuring, the average margin hit for an IT Services Provider will be in the range of 5-10% YoY depending on the total base of employees currently on H-1B, the existing compensation and need for onsite in near-term. Critical to note, a hit beyond this number will force these firms to either renegotiate contracts with existing clients or else the street will act ruthless and these firms stand to lose potential ground on market capitalisation.
While onshore and nearshore contracts will see a surge, the transition cannot be managed overnight and will give rise to the Coopetition Economy. At Greyhound Research we believe with the prevailing protectionist sentiment and newly imposed restrictions, the US business ecosystem will see a sharp rise in on-shoring and near-shoring arrangements. However, it is critical to remember that these cannot be built overnight and need-based handshake between IT Services Providers and sub-contracting to local IT Services Providers will be the routes most choose to take, giving rise to the Coopetition Economy.
[Update] Why This Matters To Those Currently Using H1B Visas To Source Skills
- Cost and complexity of doing business will increase, expect margins to take a hit. Per Greyhound Research estimates IT Services Providers will shave off margins anywhere in the range of 5-10% YoY.
- Given the increased pressure and scrutiny of US headquartered organisations on outsourcing, IT Services Providers can expect requests from clients to renegotiate existing contracts. This might well mean smaller and more expensive contracts (on the back of increased cost of delivery) here on.
- Given the looming uncertainty in US on regulations that can be potentially cleared over the next few moths, IT Services Providers can expect delayed decision-making and hence even longer sales cycles.
- Aggressive users of H-1B visas including the likes of Infosys, TCS, HCL Technologies, Cognizant, IBM among others can expect increased scrutiny and request for audits on existing contracts and HR practices. At Greyhound Research we believe these firms can also expect to face public shaming – only recently, Donald Trump lashed out at IBM for moving jobs from the US to India.
- Increased need for IT Services Providers to prove incremental investments and local hiring in the US.
- Lastly, for those buying and selling the kool aid of automation being the answer for this puzzle, critical that you keep expectations grounded. Automation that truly delivers requires both time and monetary investment before you can even begin to believe that you can potentially replace that skilled worker on an H1B visa with a line of code.
Sanchit Vir Gogia: Sanchit is the Chief Futurist, Founder & CEO of Greyhound Knowledge Group, a Global, Award-Winning, Digital Transformation Research & Advisory Group. He also serves as Chief Analyst & CEO of Greyhound Research, an Award-Winning, Global, Independent Technology Transformation Research & Advisory firm. To read more about him, click here.
Anshoo Nandwaani: Anshoo serves as a VP and Principal Analyst with Greyhound Research, an Award-Winning, Global, Independent Technology Transformation Research & Advisory firm. She also serves as Chief Human Resources Officer (CHRO) of Greyhound Knowledge Group, a Global, Award-Winning, Digital Transformation Research & Advisory Group. To read more about her, click here.
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