Why Chuck needs to get the chop

Chuck (center) and his selfless buddies strategizing how to stimulate the US economy

Senator Charles E. Schumer, not content with ludicrous attempts to tax the US consumer for taking an offshore call, has continued his personal tirade against the use of offshore services, by pushing through legislation to add a further $2,000 tax for an H-1B visa application, and $2,250 more for an L-1 visa application.  This CIO Magazine article by journalist Stephanie Overby does an excellent job discussing the situation.

You have to wonder about the motives of a US senator, who describes Infosys as a “chop shop” and pushes through legislation that is deigned to antagonize service providers, as opposed to what he should be doing: helping to make US service providers become more competitive, and US IT / BPO workers more attractive to be hired than those offshore. 

In terms of creating more US IT jobs, this is a further backward step in trying to re-energize the US IT industry for the following reasons:

1)      Indian IT services providers will attempt to conduct more IT work offshore / outside of the US, whereas in the past they would have conducted the work locally with either a US employee, or an Indian visa holder in the US.  Impact:  more work moves offshore as opposed to onshore work being created

2)      Indian IT service providers have been investing heavily in hiring onshore staff, and have been creating local employment.  However, the new visa taxes will only help to accelerate the movement of more complex IT work offshore. The Indian providers have a proven successful strategy of taking on complex IT projects and “learning on the job” with their offshore personnel.  This new fee will only encourage them to take bolder steps to take more work offshore.  Impact:  more work moves offshore as opposed to onshore work being created

3)      When Obama was elected and voiced potential moves to slowdown offshoring, several Indian IT providers made investments in locations such as Canada (especially Ontatio) and Latin America.  They will now look to leverage these investments more aggressively.  This is great news for the developing nearshore IT services markets.  Impact:  more work moves offshore and nearshore, as opposed to onshore work being created

4)      With the global IT services industry poised for consolidation, this may encourage several of the leading Indian IT giants to acquire onshore US firms, now they have more financial incentive to do so – which would likely have further negative ramifications for the US  IT job market.  When Indian firms acquire US IT services firms, they will seek to rationalize the existing onshore staff to support their offshore operations, while keeping salary costs at a minimum.  Impact:  more work moves offshore as opposed to onshore work being created

5)      The US IT and hi-tech industries grew up on bringing talent into the country that added new skills and ability – and was often more affordable.  By further discouraging bring the talent to the states, Schumer and co are driving the next wave of IT development out of the country.  Impact:  innovation moves offshore, and more vacant office-lots in Silicon Valley.

President Obama has set out to be a transformative president, who can elevate US competitiveness in a global economy and create jobs by intelligent fiscal stimulus.  He needs to drive policies that will stimulate employment, and stimulate innovation.  The economic wonder that became America, was centered on an immigrant society, and attracting talent to these shores.  My fear is that policies like Schumer’s are moving the US further away from the very principals with made its economy what it once was.  The imperative word here is “was”…

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28 Comments

  1. Steve
    Posted August 17, 2010 at 11:05 am | Permalink

    To be clear, this proposed legistation, as outlined in the Speech on Aug 12, 2010 by Senator Schumer was quite limited in its pending scope:

    “Visa fees will only increase for companies with more than 50 workers who continue to employ more than 50 percent of their employees through the H-1B program. Congress does not want the H-1B visa program to be a vehicle for creating multinational temp agencies where workers do not know what projects they will be working on—or what cities they will be working in—when they enter the country.”

    Thus, for many, if not most companies who rely on H1B visa, and even those individuals now working on H1B visas, this legislation will have little effect. Hence, your interpretation of what may happen may be skewed. If, however, you could provide any data on how many companies employ more than 50% of their labour force with H1B visa holders then your arguments might be well placed.

    Just wanted to ensure people were clear about what has been said and what was proposed.

  2. Mel
    Posted August 17, 2010 at 11:06 am | Permalink

    The basic issue is that the US never valued knowledge/knowledge workers as an asset, and therefore taxed that asset. If the asset were taxed, the “drift” to overseas would have been noticeable right away. There are tons of studies that show how financially valuable college education is to an individual. However, is that still true in America if knowledge jobs are migrated offshore and those same college educated individuals can no longer find similar jobs. The total return on investment goes down significantly.

    I’ve seen the results of this in my own children and their friends. Increasing numbers are choosing not to pursue higher education because they’ve seen their college educated parents and families around them financially ravaged by the migration of jobs overseas. Although what I’ve personally seen is merely anecdotal, I wonder what recent statistics would bear out.

    I’m not sure of the answer, but I certainly appreciate the sheer size and complexity of the problem. Is the right answer to make knowledge a balance sheet item, so that people and training are no longer treated as an expense. I proposed this to the CFO of our company, but until tax laws recognize it, it will not be a priority with companies.

  3. Posted August 17, 2010 at 11:21 am | Permalink

    @Steve – the legislation is particularly targeted at the large Indian IT services firms, which bring a lot of their more skilled staff over to the US to help manage their US clients. While it’s intentions are to deter this behavior, all it’s doing is driving more work offshore – or to “nearshore” locations such as Canada. Ontario’s government can’t get enough skilled immigrants to show up!

    PF

  4. Loose canon
    Posted August 17, 2010 at 11:26 am | Permalink

    Phil:

    This is the same ******* that prematurely said Indy Mac Bank was going under and expedited its demise – costing me and thousands of other people substantial sums of money due to uninsured deposits. Mine was a case of the principal on an IRA being insured but the $15,000 or so interest that had been earned exceeded the limit and was lost. The bank failures that came later were purchased by other institutions and depositor money was not lost. By jumping the gun he caused Indy Mac’s failure months before it would have happened and precluded protecting all depositors. He is a dangerous loose cannon and/or the pawn of special interests.

  5. Raymond Mignogna
    Posted August 17, 2010 at 12:30 pm | Permalink

    Sorry guys, I disagree. I’d raise the H1-B Visa by at least $10,000, and tax the daylights out of anyone who moves an American job offshore. We ARE our brothers keepers, and those brothers are our fellow Americans. With over 16,000,000 people either un- or underemployed right here, bringing additional foreign nationals to the US right now is a terrible idea. I don’t care how bright they are. There are plenty of really intelligent US citizens who need a job, or a chance. When every American is gainfully employed to the maximum of his or her potential, then give someone else a visa. We need to take care of our own first.

    Raymond Mignogna

  6. Doug Lambert
    Posted August 17, 2010 at 1:02 pm | Permalink

    Chuck is a part of a much bigger problem. Is it just me or are the democrats waking up to the fact their party has been and is being hijacked?

    It looks like ethics and transparency are yet again taking a back seat at the Obama White House, this time with the little-noticed news that the president’s ‘ethics’ czar, Norm Eisen, is leaving to become a foreign ambassador and will not be replaced.

    Instead, his responsibilities (which included oversight of transparency and accountability, among others) are being handed over to White House counsel Bob Bauer. According to the Huffington Post, critics say Bauer is not the kind of guy one would want in charge of ensuring good, ethical government,

    Doug Lambert

  7. Cliff Bullock
    Posted August 17, 2010 at 1:32 pm | Permalink

    Chuckie needs to be called out for a lot of things. Weaken his party in November and you weaken his power.

  8. Hubertus
    Posted August 17, 2010 at 1:51 pm | Permalink

    Well, I think it is clear that Chuck’s initiative rightly target’s mainly the Indian offshore companies (as pointed out in the first comment). The general offshoring in the US does only try to reduce the cost of internal labor – very little else is accomplished! The impact of going for the lowest cost a la Wal Mart is now very well to see in the US – a recovery that came to a crawl, maybe even a full stop – as the consumer is left out by all this US cost cutting …. the end in sight – as the new Tea Party Messiahs are at the door and miraculously the US will blossom in believe of greatness.

  9. Posted August 17, 2010 at 4:08 pm | Permalink

    So let me get this straight. You are in a round about way basically saying that we should not raise the H-1B application fee, targeted at firms like Tata, and others, because it would damper their efforts to bring more jobs to American workers? That’s a good one, alright.

  10. Posted August 17, 2010 at 4:36 pm | Permalink

    @Marty – by penalizing Indian providers from bringing in H1B staff, you’re simply encouraging them to be more selective about bring workers to the US, and encouraging them to look at other locations. It would be more productive to offer Indian IT firms tax breaks to hire local american workers.

  11. Posted August 17, 2010 at 6:47 pm | Permalink

    We need to get things in perspective.

    Outsourcing / off shoring is not some isolated phenomenon or a limited, relatively unimportant blip on the economic radar screen. It is a real and accelerating trend and it reflects longer-term changes in the global economy of which the US is an intrinsic and integral part. So recalcitrant Americans can push against it all they want, it isn’t going away.

    Companies all over the world are looking to gain competitive advantage through outsourcing and/or off shoring

    Furthermore companies Us or otherwise have a fiduciary obligation to shareholders to reduce costs, increase efficiency and improve customer service. Off shoring/ out sourcing allows them in part to meet these obligations.

    Companies may initially go off shore for the price, but stay for the quality and the benefits. Its true that the labor savings for companies from out sourcing can be compelling, but its small potatoes compared to the enormous gains in efficiency, productivity, quality, and revenues that can be achieved by fully leveraging offshore talent.That all flows into cheaper retail prices.The corollary is that any country that imposes legislation that restricts the free flow of trade in effect imposes a tax on its citizens.

    It is worth bearing in mind the balance of payments between India and the USA is very heavily in favor of the USA. In the long run, all nations benefit from the shifting of work from overseas. In any given nation, the gains of the winners from free trade will exceed the losses of the losers.

    Another argument that naysayers regularly trot out is the whole ‘sweatshop’ scenario. I have personally visited many Asian BPO facilities. They are about as far removed from the “Black holes of Calcutta “image as one could imagine. In fact because they are operating for first world (US) clients with all of the necessary requirements that that involves, that they actually look more like the flight deck on the star ship Enterprise with all of the creature comforts one could imagine. Interestingly enough most of them are brisling with American made technology. So someone is growing because of them!

  12. Posted August 17, 2010 at 8:07 pm | Permalink

    Interesting analysis Phil, but I think this is likely to have minimal effects.
    When you look at the costs of bringing an Indian national in any of the big firms to the US, the Visa costs are only a small part. Let’s say they have a 12 mo tour of duty – quite usual. Salary: $80-100K; Relocation: $4,000; Travels: $5,000++; Living away from Home allowance: $50,000 (and higher if they have kids)…
    Of course the companies will not want to have the additional impost, but I don’t think it is significant. The clients will end up paying the extra 1% or so.
    This is based on my experience with a big US IT outsourcing company’s operations where their Indian subsidiary was bringing numerous people into the US for the onshore component of the work. Of course, they would not have 50% of their US workforce on Visas unless you only looked at the subsidiary… which raises all sorts of questions about how this legislation could work fairly.

  13. Posted August 18, 2010 at 2:04 am | Permalink

    This increase in the visa fee is the same as an increase in the import duty on material goods. It’s protectionism, clear and simple. No wonder India is thinking of taking this to the WTO.

    Why doesn’t the administration have the nerve (I could have used a better word there) to squeeze China, who has taken away all the manufacturing jobs? Simple: because China holds $844 billion in US treasury bonds!(http://www.ustreas.gov/tic/mfh.txt)

  14. Posted August 18, 2010 at 5:32 am | Permalink

    @andrew: not sure about the $50K “living away from home” allowance. Most H1-Bs I’ve met tend to me at the lower-end scale of this – $60-70K. However, you are right that the net effect is pretty toothless, and purely negative all-round. All-in-all, the fee hikes achieve very little – and what about the cost of paying all these politicians to debate and administer this :)

  15. Dr.P.
    Posted August 18, 2010 at 8:28 am | Permalink

    This article mixes some truths with some maybe facts and opinions. If Infosys is referred to as a ‘chop shop’ this seems to reflect the idea that overseas outsourcing is all about low wages which result in lower prices – and that is often a common marketing pitch. As to ‘antagonizing’ service providers – surely they have much more pressing concerns. The fundamental facts regarding outsourcing and creating US IT jobs are: IT Outsourcing –whether domestic or overseas – is driven by economics. Can the provider do IT work more cheaply than their customer – can it give the same or better quality and quantity for less dollars?

    Despite the concerns they raise, Senator Schumer’s visas are just a small part of the picture as Andrew (8:07PM) and Phil (5:32AM) note. Steve, Ray and Marty raise other interesting points, but Martin addresses the economics. THE REAL ISSUE IS ECONOMICS – what are the overall costs both immediate and future, e.g.: what costs must be analyzed, who calculates, how are they calculated, how do we add in factors such as changes in end customer quantity and quality needs, what about potential changes in the service end products, how to estimate future IT costs and likely savings to the customer with improved technology, what about immediate and future costs for managing cultural and management differences, what are the costs of possible time delays at the vendor (flood, political, cable breaks, etc.), and how does one factor in risks to the customer especially in working with overseas providers who live under different legal systems.

  16. Posted August 18, 2010 at 9:43 am | Permalink

    Not all companies work the same way, or have the same policies. The company I worked for was fairly generous and had a need to maintain a level of parity with salaries between H1-Bs and local staff.
    They also tended toward sending more senior folks for the onsite element of the onsite/offshore model – PMs, architects, business analysts…
    Of course the H1-Bs wouldn’t necessarily spend the allowances. They might send it home to India and so appear poorer than they really were.

  17. John80224
    Posted August 18, 2010 at 10:31 am | Permalink

    I have to agree with Mr. Conboy about this bill specifically. It’s more catalyst to debate and populist move. I see H1-B supporters making claims as wild as suggesting India should bar all US products. I am glad to possibly have found a forum with more thought out points.

    On the IT portion of the broader topic, I personally do want more controls on the visa programs. Note that I say controls and not, “Send ‘em all home! USA! USA! USA!” Had American business been more forthright about their motivations, I would be more open to their protestations to increase or remove quotas, etc. But when they base their case on the lie of shortages where none exist, it makes me suspicious of any support they do lend to the idea. Similarly, the track record of US business watching out for anything more than its own short term gains does not inspire me to blindly follow their recommendations.

    As to any move against this resulting in nothing but more jobs offshore and even fewer here, there are clearly some potentials for that. But there’s no mention of what else could happen, particularly if congress made smarter moves than ham-handed fees.

    To a few specific points:

    “Indian IT service providers have been investing heavily in hiring onshore staff, and have been creating local employment.” I just don’t buy it. The numbers I’ve seen (and sorry, no I don’t have the links) indicate something like 10% of their onshore workforce, representing closer to 1% of their total is local. I do not deny there’s any such investment, but I suspect what would be “heavy” for me is more “token” in relation to their total revenues. However, were the climate somehow made more amenable to letting the model hold, but having the onshore work done by locals, this could be a more positive twist on curbing the H1-B than “everything goes offshore, then.”

    “The US IT and hi-tech industries grew up on bringing talent in… – and was often more affordable.” Thank you for acknowledging the true driver of the H1-B in these industries. While I’m thanking you, for omission of the tired “best and brightest” farce, I thank you as well.

    My personal impacts were brought on by companies that simply do not care about talent. They are instead only interested in knowing that marginally verified skill in similar arenas can be had for less. I know that the hardships I’ve seen are modest in comparison to what others in other nations are gaining. But I still have some basic challenges with the government that supposedly represents me participating in the taking.

    And there is some question around what we stand for as a nation. Are we to toss aside the fair labor and discrimination laws that have helped make the US such a coveted place? Many of these companies do indeed have no problem with working their people 60-90 hours as a matter of course. Many of those brought here on more temporary terms in the past have become the managers not only laying off existing workers but being highly discriminatory in their subsequent hiring practices.

  18. Robert Poulk
    Posted August 18, 2010 at 7:55 pm | Permalink

    I don’t need to wonder about Sen. Schumer’s motives at all. His job is to participate on behalf of the people who elected him in the business of managing this country, and part of that job is to make sure they keep a little of the hard-earned prosperity the “global economy” is stripping away. His methods will either please them and he’ll be re-elected, or not and he won’t.

    On the subject of his blunt characterization of Infosys, the company was founded and incorporated in India, is headquartered in India and is one of the largest IT employers in India. It is completely unreasonable to expect them to place the interests of US citizens above those of the citizens of India, especially since offshoring is all about emerging economies like India benefitting from the global economy. Sen. Schumer is (again) doing his job by calling multinational corporations like Infosys out into the bright light of public debate and ensuring that the interests of US citizens aren’t overlooked in the rush to “become more competitive”. The fact that he used irritating language to do it shouldn’t surprise anybody who has spent any time at all in New York (or Boston, for that matter).

    Which brings me to my last point. Schumer is a Senator from New York. What’s up with someone from Massachusetts trying to tell New York voters who they can and can’t elect? You already have a couple of Senators of your own there in Mass whose cages you should be rattling if you think you aren’t being well served. John Kerry’s been a Senator for 30 years and used to be Ted Kennedy’s partner –that’s a lot of horsepower, if you ask me. If he can’t get Schumer to behave, maybe you need to replace HIM..

    OK. I’m done.

    Peace,
    Robert

  19. Posted August 18, 2010 at 10:40 pm | Permalink

    This fee adds a very small amount to the hourly overhead of the talent. This is pure political posturing by the Senator.

    There is a bigger issue impacting the rural onshoring industry.

    The elephant in the room is the “guest worker program” created by companies hiring 1,000s of talent in USA on student visas very, very cheaply and offering their services at rates undercutting the IT labor market.

  20. Posted August 18, 2010 at 11:42 pm | Permalink

    @christopher: while I – like you – don’t like they way these programs are being exploited, I still think it’s much more preferable for the US economy to have US firms runs these services onshore than have them move to Canada / Latam / UK / Philipppines / India etc. Schumer’s antics are just spoiling any attempts the government should be pursuing to stimulate more local employment development and push through some sensible legislation to prevent exploitation of the visa process. Plus comments such as “chop shop” kinda give away what his real “motives” are here…

    PF

  21. Yaseen Khan
    Posted August 19, 2010 at 11:56 am | Permalink

    You will get mixed answers to this given the economic climate. Nothing will change wrt to offshoring as people will send more jobs out there. US needs to focus on making ourselves more competitive than battling out cheap low cost providers. Its more about us than about raising fee for them.

    I would like to hear the senators plans for us.

    Yaseen Khan

  22. Posted August 20, 2010 at 1:57 am | Permalink

    Phil,

    He apparently didn’t learn anything from the Great Depression. As much as the Left loves to ignore the truth and tout FDR as a great President who brought us out of the Depression, it is accepted that his policies, along with the protectionist policies that imposed tariffs etc. to protect US jobs, the Depression lasted years longer than it may have, until WWII came along.
    But, as we know, the Democrats never miss an opporunity to tax, especially when it comes to taxing business, in the name of the people. Maybe if they cripple enough business, then everyone will work for the government. Oh wait, that would be socialism. We are not supposed to mention that word in association with Democrats or Obama, elsewise we will be labeled extreme and reactionary…so nevermind!

    Michael Gardner

  23. Wallace Jackson
    Posted August 20, 2010 at 10:58 am | Permalink

    If we all want to have a global economy we must allow unfettered competition,

    Wallace

  24. Posted August 21, 2010 at 2:33 am | Permalink

    One fails to see why India should pay for US domestic necessities such as border security. That said, and in the interests of good karma for the US, India should derive benefit for what it is paying for. One idea is to outsource the detention centers for border transgressors to India.

  25. Posted August 21, 2010 at 8:16 am | Permalink

    @Lucky: now there’s an idea ;)

  26. Posted August 21, 2010 at 11:59 am | Permalink

    I inherently disagree with Sentor Schumer (and some of the respondents here) on the approach, and I agree with your approach in the article. It would be appropriate for the United States to study the effect of isolationist & protectionist policies on location industry, but looking at the challenges of local indian industries as India libralized through the 90′s. Ugly & painful comes to mind. If that is the effect we would like, let’s go ahead. By the way, none of this did anything for India unemployment rate – which even today is immesurable!

    Ashutosh Mankar

  27. Charles Smith
    Posted August 22, 2010 at 2:04 pm | Permalink

    I’ve been working as a developer in the SF Bay Area since ’86 and I have seen the wave of offshoring come and now go, as far as IT is concerned. This is closing the barn door long after the horses are gone – and have died of old age. Everything that could go to India pretty much has already gone.

    The real issue for America is the other business services fields, such as Finance, Accounting and Law that are now under the full force of global wage arbitrage.

    I think that this law is only the first of many to come as more and more White Collar professions find that they are now to be subjected to the shoddy treatment that their IT co-workers received. The tide will really change when the first politician wins an election because he or she sponsored one of these new laws.

    I think that this law is great in that it starts to tack on some of the costs that these free-rider Indian firms have not been paying, and which I have been paying for years.

  28. Posted August 22, 2010 at 2:33 pm | Permalink

    @Charles: the onshore requirements in transactional accounting and legal support are much less than those of IT, when those engagements are in play – most the “administrative” deals today are 90% offshore (or more) with a small number required onshore. As you point out, this new tariff (whatever we think of its effectiveness) is too little too late for the bread-and-butter development and support work, and the only recourse for the onshore IT business is to focus on the next wave of development, i.e. Cloud, middleware/infrastruture support. For other BPO professional areas where onshore support can add more context and value (i.e. customer service, strategic sourcing) – these are increasingly staying onshore.

    PF

3 Trackbacks

  1. [...] received a ton of email and blog comments this week from various people airing their views on Senator Schumer’s visa-fee hike.   They [...]

  2. [...] these visas are sometimes abused, this law doesn’t seem likely to prevent those abuses (see here and here), and sends a very unwelcoming message to Indian companies and foreign students and [...]

  3. By Innovation starts at the… cube farm on January 21, 2014 at 11:09 am

    [...] end up with is the bottom of the barrel choice of talent and more “chop shop” comments from Chuckie Schumer.  And, once you’ve run out of floor space and your company is too cheap [...]

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