After congresswoman Zoe Lofgren introduced the H1B reforms bill in the US House of Representatives, IT executives and investors in India have been worried about its impact on the country’s outsourcing sector, which is highly dependent on H1B visas to provide services at a relatively low cost.
The new minimum wage proposed by the bill could make H1B payscales even higher than local the payscale, making it economical for the companies to hire locally, but denting their margins significantly. More importantly, it’s seen as the begining of a series of protectionist measures that would make getting business from the US increasingly more difficult. (Yet another proposal, Reforming American Immigration for Strong Employment, or Raise Act, seeks to cut legal immigration by half.) What can Indian IT companies do to tide over these tough times? They have at least five levers at hand, which come with varying levels of difficulty.
1. Move more work offshore
Offshoring not only reduces regulatory burden, it is also cheaper. But, moving work offshore will not be easy, especially with new clients. They tend to prefer onsite work to gain confidence before moving work offshore. However, it’s not impossible. Infosys has been bringing onsite component down in the recent quarters. Among the tier one players, Tata Consultancy Services (which stopped sharing this metric after March 2015), Cognizant and Wipro have bigger scope for moving more work offshore.
2. Look Beyond the US
America continues to be the largest market for India-centric outsourcers. While companies have made some progress in expanding their businesses in Europe, the next big market, knowledge of local languages has been a constraint (except for United Kingdom). However, many recognize exploring other markets in Europe, South America and Asia is a key to long term success, and even survival. Visa reforms in the US will push Indian IT firms to move in this direction.
3.Increase utilization rates
IT companies tend to include unbilled employees (people who are assigned to a project, but not charged for) in ongoing projects to provide a cushion, and for projects in the pipeline so they can hit the road running. So, the utilisation of resources is never hundred percent. Utilisation rates, measured as a percentage of total employees, could vary from quarter to quarter depending on hiring season (when IT companies onboard a large number of freshers) and sales targets. However, with a broader base of employees and efficient allocation of resources, it’s still possible for IT companies to improve utilisation rates. It would help in compensating for the higher wages onsite.
4.Increase revenue per employee
Indian tech majors, including TCS and Infosys, have been talking about non-linear revenues for several years now. However, revenue per employee has remained more or less constant. What once seemed like a good thing to purse, increasingly appears to be a necessary thing to do. As in the case of increasing non-American revenues, it cannot be achieved overnight. It would demand more investment in automation, and in products and platforms. Such investments could result in lower margins and demand a higher risk appetite. This is the direction that the management would push their companies going forward.
5.Look for low-cost resources
Recent surveys by Mercer, as well as Willis Towers Watson, indicated that salaries in India are set to increase by 10% in 2017. IT sector, which has paid some of the highest salaries across sectors, has also seen higher than average pay hikes. However, increasingly, IT companies are setting up centres in smaller cities and towns to benefit from lower rents, and to hire employees at lower salaries for specific kinds of work. Salaries account for roughly 70% of cost of sales, and reducing it could have significant impact on margins.