Hyderabad: Technology companies, already buffeted by strong headwinds from a worsening economic outlook in key markets, could be in for more trouble as a new anti-outsourcing backlash gathers momentum in the US.
Several states in the US, which accounted for more than 60% of the $40.4 billion (Rs1.76 trillion) India earned in software and service exports in the last fiscal, are proposing legislation that would restrict market access for Indian information technology (IT) firms.
Market concerns: A file photo of the Global Business Park call centre in Gurgaon. The proposed move in some US states to restrict companies from offshoring their services could mean less business for Indian IT firms. Photograph: S Burmaula / HT
Industry and policy analysts are concerned that rising focus on economic recession and unemployment could boost the anti-outsourcing campaign by legislators following this year’s US presidential election. That would be a repeat of what happened after the presidential election in 2004.
“Detractors of off-shoring, whose tribe has been shrinking, could fuel opinions by putting forth apparent notions of job losses in the forefront to deal with socio-political problems,” says Srinivas Vadlamani, chief financial officer at Satyam Computer Services Ltd, the country’s fourth largest software services firm.
During 2003-04, as many as 200 Bills were introduced to prevent American jobs from being off-shored. Following that, states such as New Jersey, Indiana, North Carolina, Tennessee, Alabama, California, Colorado, Illinois, Maine and Maryland have put in place laws that restrict outsourcing.
According to a report, Anti-Outsourcing Efforts Down but not Out, released in April 2007, by a Virgina-based policy research and analysis institute, National Foundation for American Policy (NFAP), 191 anti-outsourcing Bills were introduced in 2005-06 in various states and 41 such Bills were moved in 2007. NFAP executive director Stuart Anderson, in an email response to a Mint questionnaire, confirmed that these Bills are pending at various stages.
“These types of Bills may force Indian companies to adjust their business practices and could raise the cost of doing business,” says Anderson.
Some states such as Arizona, Colorado, Connecticut, New York, Pennsylvania, Vermont and Virginia have pending Bills to restrict government agencies from purchasing goods or services from outside the US. Others such as Georgia, Massachusetts, Minnesota, Nevada, North Carolina and Oklahoma have pending Bills that would restrict offshore call centre operations.
Relatively low labour costs and a vast pool of engineers have enabled IT firms to win work from clients in the US and other countries, gaining India a reputation as the world’s back office over the past decade. Typically, after they win an outsourcing contract, Indian firms tend to send the bulk of the work to low-cost destinations such as their own home base.
Efforts by Indian IT firms to combat the anti-outsourcing backlash by near-shoring (having delivery centres in or near the customers’ operational base) were constrained by high costs and lack of availabilty of skilled professionals.
Policy analysts at NFAP pick out two Bills they say have a good chance of becoming law—House Bill 1127 in Indiana, which would restrict sending certain medical-related information outside the US, and House Bill 4100 in Michigan, which requires reporting of goods or services purchased by the state from outside the US.
The New York state senate in June passed a Bill that would require all utility firms supplying electricity, gas and municipal services to locate their customer call centres within the state. It will become law after the state governor’s signature.
India’s business process outsourcing (BPO) industry, which last year earned $10.9 billion in revenue, will be hurt by such legislation.
Most of the pending anti-outsourcing legislation relates to preferential treatment—through tax breaks and incentives—to the US firms that create jobs in their respective states or across the US. Some Bills also seek to ensure that only US citizens are authorized to work on data pertaining to the identity of US citizens.
Indian companies are likely to miss out on huge public sector contracts and risk losing business even with private entities that have business relations with governments. Several Indian IT firms act as sub-contractors to large US firms.
In their 2008 annual reports submitted to the US Securities and Exchange Commission, Bangalore-based Infosys Technologies Ltd and Hyderabad-based Satyam Computer Services acknowledged that with increasing political and media attention on the growth of outsourcing and unemployment in the US, there is a risk of change in existing laws or enactment of new legislation that restricts outsourcing.
Infosys chief financial officer V. Balakrishnan is hoping that the impact on the company will be minimal because of its low exposure to US government contracts.
“Most of the large US companies are lobbying for greater access to the global pool of talent as there is a tremendous short supply of high quality people required for this industry,” he added.
Because of the election, some sections are focusing on the “perceived negatives of off-shoring”, said Satyam’s Vadlamani, adding that such efforts are not likely to succeed.
Outsourcing is no longer just a way for US firms to save on costs by sending work to low-cost destinations such as India, but also a way of overcoming a shortage of sufficient talent at home, says Som Mittal, president of the National Assocaition of Software and Service Companies.
“If the US does not have sufficient skilled human resources, then they have to get their work done in countries where there is sufficient resources,” he said. “Further, studies have shown that outsourcing has only increased economic activity in the US.”
The Indian IT industry has weathered such efforts in the past, especially during 2003-04, and the pending legislation isn’t likely to have “any significant impact”, Mittal said.
Viral Thakker, director of sourcing advisory services at audit and consultancy firm KPMG India, links the posturing against outsourcing to the upcoming presidential election.
“However, assuming everybody understands the business reality, it is unlikely that new legislation with significant impact on global sourcing will be enacted.” Thakker said. “But such laws could pose hurdles for Indian companies to requiring them to restructure their businesses to work around market restrictions.”