Clarifying the Chucky chop shop issue: what should the US government do?


The US government: importing the right talent

I received a ton of email and blog comments this week from various people airing their views on Senator Schumer’s visa-fee hike.   They tended to be in the form of one of the following:

  • “Right on – this guy is all about protectionism and has little idea how to create jobs”
  • “The policy is so toothless, it’s barely worth talking about”
  • “It’s only targeting firms who excessively use H1B staff, so what’s wrong with that?”
  • “We have to protect American jobs”
  • “I never knew you were a Republican”

All fair comments – except the last one.  Firstly, my politics have always been left-of-center – I am merely a global realist and believe in intelligent, informed debate on these tough issues.  Secondly, it never ceases to amaze me how polarized people in the US are when it comes to politics.  You’re either Democrat or Republican – there’s now common ground on anything.  And thirdly, I’m not American anyway, so it’s a moot point.

The other major point that needs to be made, is that this policy does nothing to create American jobs – it’s merely political grandstanding from the protectionist lobby.  As we pointed out, the visa-hike will only encourage further offshoring, and the inflated fee is not enough to have any meaningful impact on altering current dynamics.  Moreover, it’s pretty hard to couch these political actions as anything but protecti0nist politics when the Senator in the driving seat brands one of the leading Indian IT services firms a “chop shop” (detracted, or whatever – he said it).

What options, then, could the US government consider, if it wants to “stop” Indian IT services firms bringing temporary IT  staff over to the US, and create an environment for fostering onshore technology employment and innovation?

1) Give Indian services firms tax-incentives that would sufficiently motivate them to hire and train US IT employees.  Many of these firms provide a great training ground for new IT talent – now let’s ensure they are motivated to train and develop talent in the US and not just offshore staff.  Many leading Indian firms have proved extremely good at training, developing and motivating young IT talent, so why not get us a piece of the action?

2) Give US enterprises tax-incentives for creating new onshore IT jobs.  This won’t be any harder to administer that call center tariff etc.

3) Establish an oversight committee that will devise an immigration strategy to encourage top talent into the country and ensure it stays here.  Ensure immigration policies are focused on developing the talent pool in the country and not open to abuse;

4) Establish more dynamic partnerships between academic institutions and businesses.   We don’t see enough involvement from the academic sectors in the global sourcing industry today – a few firms, such as Systems In Motion, are pushing the agenda, but these firms need  a lot more investment to get anything like the scale and execution capability to be effective in the global market place. 

We live in  global economy and we need to focus on being competitive for a larger piece of the pie, not trying to protect limply the dwindling one we have left.  The Chinese economy is the new powerhouse – we need to ensure we have the innovators, thinkers and operators to compete effectively.  Countries with developing talent, such as India, can help us be competitive, as long as we create smart entrepreneurial environments to work with them.

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  1. To a politician the solution might always seem to be let’s incentivize an industry (Handouts if your a Democrat, tax breaks if your a Republican). But the problem with foreign IT is more fundamental than this.

    Some Foreign IT outsourcing companies discriminate against U.S. citizens as an ethnic class.

    The public statements of Vineet Nayar, that U.S. citizens are “unemployable”, shines a light on this discrimination.

    This ad,

    (Which has been up for months) is for a Java programming job in New York City, USA. The company is only accepting resumes from people who can use an H-1b visa (that means foreign workers-only).

    Why can’t U.S. citizens apply for this Java programming job, in New York City, USA?

    Looks like “U.S. Citizen” is not the correct “ethnic origin” to do “Java Programming” in New York City, U.S.A.

    Just like the problems at the border, what we need is enforcement of our rights as U.S. Citizens. Our right to equally be able to compete for jobs located in the United States.

    Foreign IT outsourcing companies are using H-1b and L-1 to bypass the Equal Opportunity hiring requirements of many jobs. Because there is no enforcement, or even a requirement, to actually try to look for local U.S. talent before using the H-1b visa.

    The H-1b law, only requires that companies hire local under a very narrow set of circumstances. The L-1 visa law has no requirement to find local talent.

    Further with L-1, companies skirt all kinds of U.S. income taxes.

    Every working U.S. citizen carries a National Debt of around $118,000. The service on this debt is greater than the salary of a 3rd world engineer in the United States on an L-1 visa.

    This tax-loophole greatly incentivizes companies to not hire locally and instead to hoard L-1 visas. Instead to fill actual U.S. jobs, with extremely low paid (far below even the minimum wage), workers. This is ridiculous, and it has to stop.

    Further enforcement of the U.S. border isn’t cheap, and it’s time that every company doing business in the United States pays its fair share for this infrastructure cost. The recently passed, and signed bill, is a step (a small one), in the right direction.

  2. The problem is longer term, and won’t be solved by not watching antics at the Jersey Shore. Currently, manufacturing in the US accounts for about 11% of employment, and agriculture another 1.5% or so. That leaves an awful lot of folks to deal with. The societal issue is “how do all of us earn a living in a meaningful manner, even as worldwide employment in traditional types of fields continues to decrease”.

    Imagine whats going to happen in both India and China when they are no longer the low cost producers (Africa is next) and they have 2 billion more people to deal with than the US does.

    This trend has been going on for most of the past two centuries in the US and Europe, and other parts of the world are catching up. China is now the single largest auto market in the world, and it simply doesn’t take that many people to make a car (or anything else) than it used to.

    The two major growth fields in the US are education and health care. I suspect that entertainment is a third, although I’ve seen no hard data on that. It would be interesting to look at the types of work that require people, and can’t be easily automated. Things like performing arts, graphic arts, field/site work of any sort, things that require specific site or location analysis, anything subject to abstract interpretation are all possible. There are undoubtedly other things that I’ve omitted.

    Once we get some grip on this, the Visa issue and all the rest will start to take care of themselves.

    Raymond Mignogna

  3. Phil,

    Very good points here. The issue is macro, not micro, and penalizing foreign firms from exploiting our system clearly isn’t the answer (and if we are going to penalize, at least do it so it has some impact).

    We need long-term proactive solutions that keep us in front of industry, when it comes to innovation. Encouraging talent to come to our shores – the right talent – has worked for us for many decades, and we need to focus on what made is great in the past, and how it can make us great once more.

    We’ve become complacent and lazy over recent years, and protecting what we once had won’t being back the innovation – only making changes to our working culture and education system will do that. It concerns me that some of our senior politicians are focusing their energy on the wrong issues…

    Al Goldman

  4. Hi Phil —

    The surest answer to maintaining jobs (and not just tech jobs) onshore is a complete revamping of the tax code.

    Businesses will do what they need to do to remain competitive in a global economy. That means cost containment. Three major components of cost are labor, raw materials, and taxes.

    Let’s hold labor constant, assuming that Americans want jobs onshore, but aren’t eager (or even willing) to cut the price they charge for labor to retain them. That leaves raw materials and taxes.

    Right now businesses pay about 23% “embedded taxation” in the costs of raw materials, plus the direct cost they pay in taxes themselves, ~15%. Assume for a moment those taxes go away entirely. Suddenly American business sees a dramatic reduction in cost of goods sold which, in a competitive environment is mostly but not entirely given to customers in the form of lower prices (the result of the inevitable market share war inherent in the common reduction of cost of goods sold for all American companies in the industry). Now American goods are competitive relative to foreign markets, with wages staying as they were. That whoosh you hear is foreign and domestic investment rushing in to capitalize on a newly competitive domestic environment. Jobs, jobs, jobs.

    So what about the federal revenues “lost” due to the elimination of all corporate income taxation? Well, we institute a consumption tax for end-use consumption, only on original purchase. This replaces the personal income tax. Consumers pay the “sales tax” on both domestic and import goods and services, so the relative advantage to domestically produced goods and services remains the same. The tax revenue “lost” at time of production is recovered at time of consumption. And, we have many more Americans working, so the tax base skyrockets, allowing for lower rates to retain revenue neutrality. Everybody gets a little tax cut, businesses become competitive, and Americans go back to work. Win-win.

    Here’s why it’ll never happen. Politicians use the tax code to shape behavior and to buy votes. If we take income taxes out of the equation, and allow Americans to have control over their own taxes in the form of self-regulated consumption, consumers gain power and politicians lose power.

    Also, the need for spending on tax compliance including the IRS goes away. If you are simply paying a “sales tax” at the time of purchase, the retailing organizations become the tax collecting arm of the government, just as they are today with state sales taxes. Since the “stimulus” and “jobs creation” strategy of the federal government almost always relies on hiring more IRS agents, they lose this option as well. Hard to swallow.

    Anyway, that’s the real answer. The engine of this economy goes into overdrive if we ever convert from an income tax to a consumption tax. And really, isn’t taxing productive behavior (income) stupid public policy on it’s face?

    One last point. Turning our tax system on it’s head makes remarkable sense. So naturally the current congress and administration is seeking to do exactly the opposite by increasing taxes on corporations (making them less competitive), and perhaps even installing a value added tax (VAT). If it’s true that you get more of what you subsidize and less of what you tax, do you really want to join Europe in taxing the addition of value to the goods and services we consume? You’ll just get less of it. As the EU has for years. Check the relative GDPs.

    Andy Avery

  5. Clarifying the Chucky chop shop issue: what should the US government do? – Horses for Sources (blog) says:

    […] Horses for Sources (blog) […]

  6. Another strategy for reducing visa abuses would be for outsourcing buyers to specifically include appropriate use of US-based staff onsite as part of their selection criteria. Buyers could insist that engagements are designed with a certain percentage of onsite staff, and that X% of that onsite staff be locally-hired employees, with a smaller percentage coming from India on a rotating basis to support knowledge transfer and team coherence (obviously, they could rotate US-based staff to India to achieve those goals, too). Corporate buyers then could promote this element of their outsourcing model as part of their overall commitment to corporate social responsibility, by outsourcing in a way that brings jobs and benefits to both the developed and developing economies. If enough corporate buyers look for this, providers will soon start to market their responsible engagement design with US-based staff.

    For an interesting discussion about why local hiring is low among Indian providers, check out by
    Basab Pradhan. One of the points he makes is that a higher level of local hiring will become an increasingly important competitive advantage, to build client relationships, provide a high level of domain expertise, and to reduce their political risk in the buyers’ countries. Both outsourcing buyers and providers would be smart to heed this suggestion, and perhaps fend off further regulations from Shumer and his ilk.

  7. What about copying the German model which is currently booming like crazy? Germany is a net exporter (unlike the U.S.) with a healthy manufacturing base (unlike the U.S) and one of the highest-paid employees in the world (unlike the U.S.) even though the employees get 6-weeks of vacation and universal insurance among other goodies (unlike the U.S.)

    How do they do that? Severely restrict immigration, impose VAT for foreign outsourcing services that is performed outside of the European Union, and a focus on the education of their citizens including on-the-job training for their youngsters. Without the immigration of the so-called pseudo best-and-brightest, Germany still beats the U.S. in so many technical areas.

    The same thing can be said about Japan with a similar policy. People loves to talk about how Japan is facing a crisis. Yes, that’s true. But even in the worst economic crisis, Japan only has less than 5% of unemployment rate whereas in the best of times in the 1980s when they challenged U.S. supremacy, they only have 1% unemployment rate. Whereas in the U.S., even in the best of times of the late 1990s, the U.S. unemployment rate was still around 5%.

    There is a lot to learn from Japan and Germany — our economic competitors. They don’t need hordes of cheap slave labor from 3rd world but they still beat the U.S. in so many high-tech areas. As a matter of fact, because they don’t have the slave labor problems of educated-professionals, they actually fare much better than the U.S. because the natives know that they are valued and treated with respect. Whereas in the U.S., due to outsourcing and the H-1B, American professionals feel like they are being treated like thrown-away. American students look at their older professionals and they are horrified at what they see. They decide to stay away from the scientific and science careers in drove.

  8. Phil, come on, this whole thing is about profits. Big business has been hiring Indians because they will work for 1/3 to 1/2 the price of and American. There is no shortage of tech workers in the USA. That’s a lie to get more of these cheap workers.

  9. Holy cow. I have never seen such an assemblage of intelligent remarks to accompany any article on the H-1B visa. That’s probably because only 2 of the comments here are from the familiar “the curry-heads, they took our jobs” polemical trolls.

    It’s amazing how many fresh ideas can flow once you have stopped making a big deal of a mythical monster that you’re determined is the root of all problems.

    The visa bill is a bit of a joke as it won’t change any of the economics. It sadly signals enough protectionism that Corporate America will want to outsource even more.

    I want to applaud USCIS on some of the other things they have done to ensure sensible immigration. Did you know that a move titled the “Neufeld memo” earlier this year threw a real spanner in the works of the true wage arbitrageurs (IT bodyshops, that Schumer mischaracterized as “chop shops”). The impact has been a far lower demand in H-1B from this quarter. These were the guys that faked resumes and undercut American IT guys by taking 35 bucks an hour for jobs that had long since paid 70 bucks an hour. Their economic output was probably the equivalent of 60 bucks an hour as contrasted with 100 bucks an hour by the American IT guy still making it a better deal for the corporation.

    Very recently, the USCIS has stiffened rules on who can qualify for an employment based greencard. Once that goes into effect (google I-140 memo; I-140 is a key step in the greencard process), a lot of beneficiaries who were exploiting loopholes in 2 employment classes (EB1C and EB2) would now be left with no option to immigrate to the US. This will further tighten the noose around those crowding the IT skill market with dubious resumes and academic records.

    Even though I’m a wannabe immigrant that will have to jump through even more hoops to become a US pemanent resident one day, I am pleased that I will either do so while competing in a system with higher standards or will have to return home having not made the mark. That beats getting passed by relative clowns that have exploited the system for more than decade now to sneak into the US and join the white collar workforce.

  10. the $2,000 fee is not nearly high enough to remove the enormous advantages to employers of hiring indentured labor. The H1B gives employers the ability to immediately deport any H1B employee. This amount of power over employees represents a violation of the 13th Amendment to the U.S. Constitution (the amendment that freed the slaves):

    “Section 1. Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.

    Section 2. Congress shall have power to enforce this article by appropriate legislation.”

    Some claim that the H-1B program helps to create American jobs, but it is currently being used by some companies to outsource American jobs to foreign countries. Under current law, an outsourcing company can use American workers to train H-1B guest-workers, fire the American workers and outsource the H-1B workers to a foreign country where they will do the same job for a much lower wage. In fact, Indian Commerce Minister Kamal Nath has referred to the H-1B as “the outsourcing visa.”

    Employers can legally discriminate against qualified Americans by firing them without cause and recruiting only H-1B guest-workers to replace them. The U.S. Department of Labor (DOL) has said: “H-1B workers may be hired even when a qualified U.S. worker wants the job, and a U.S. worker can be displaced from the job in favor of a foreign worker.” Some companies that discriminate against American workers are so brazen that their job advertisements say “H-1B visa holders only.” And some companies in the United States have workforces that consist almost entirely of H-1B guest-workers.

  11. @BB: whatever one thngs about H1Bs, there’s not doubt this fee-hike is toothless, only highlights that Schumer and co are only really interested in protectionism – and can’t even push through a protectionist action that will have any effect. The whole approach makes me uncomfortable – either do something definitive, or don’t bother wasting our time or taxpayer’s money to enforce toothless, useless, ineffective policies.


  12. Phil,

    I disagree with Senator Schumer, but for different reasons.

    We should open the doors for skilled and professional workers who want H1-B visas (assuming they pass security vetting), but slam those same doors to the unskilled.

    America will thrive when we have the technical and engineering skills we need to build those new and green techniologies we keep hearing about. Technological advantage will result in increased job opportunities for all American citizens and legal residents.

    To those tempted to restrict and H1-B visas: encourage your children to study science, math and engineering.

    “Offshoring” is a different issue. If we had the right skills in the US, offshoring wouldn’t happen.

    Dean Ekman

  13. @RP_Joe: In terms of offshore rates, you are correct. In terms of H1B-rates, the Indian immigrant workers tend to be 50-80% of the US cost, which is typical for most H1B types (I was once an H1B research analyst being imported from the UK on 75% of an average US salary for the job). Everyone exploits immigration visas to get talent at cheaper rates – it’s typical corporate behavior across all industries and academia.


  14. Study after study after study have demonstrated that tax reductions, exemptions or credits are crude tools for economic development. They are generally a windfall for the corporation; not a determinant for long-term employment. They are a net loss to the taxpayers.

  15. Hello All,

    I have very simple question? how many jobs are we talking about in with these IT servces H1Bs? barely 10000 – 15000 jobs..? I feel this hike is only to defocus us from our core issues. If the Unemployment is in 7 % to 10 % range ( millions of people ), how does the H1 B really matter? The core issues need to be addressed – this only a eye wash. even if you do not have H1 B system at all, I am sure it will have miminal effect on the real employment issues in the US. we need to solve to he main problem, not get carried away by these political tricks.

  16. Dean, I will encourage my children NOT to study science, math, or engineering as a career field UNLESS they are pursuing a field where their physical presence is absolutely required (for example: Surgeon). I want them to be able to be able to have at least some security and to comfortably support themselves and their children.

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