With H-1B Rejection Rates Approaching 40%, Indian IT Will Urgently Need A New Service Delivery Model

Anti-immigrant ads target tech workers along San Fransisco commute The ads are part of the overall attempt to safeguard the interests of the American tech worker and strangulate the foreign worker H-1B visa, even though a peek at the most successful and globally dominant American tech companies show they are stocked with immigrant founders and senior management.

President Donald Trump's onslaught against the H-1B has had a drastic effect on the business models of Indian IT firms.

Rejection rates for the top 6 (TCS, Wipro, Infosys, Tech Mahindra, Cognizant, and HCL Technologies) hovered around just 4% on average in 2015. However, between September 2018 and April 2019, that rate skyrocketed to 36%. Even global IT firms such as Accenture and Deloitte with built-in offshoring models have been hit for their reliance on H-1Bs.

Almost overnight, the redefinition of criteria used to dole out H-1Bs, the hyper-scrutiny of candidates and their qualifications, and targeted site visits, all which have contributed to the dramatic reduction in visas to Indian origin firms and global US-origin ones have forced IT majors to grapple with how best to cater to their clients in the US (where 60% to 70% of their business comes from) and win business deals. One positive development for the US tech labour force is that it has forced IT firms to begin actively training and recruiting Americans. Almost all of them have started innovation centres and campuses and hired tens of thousands of candidates, making them one of the largest tech employers in the US.

But that still doesn't address filling in the talent gap at the middle and senior levels. Quartz mentioned a report from Kotak Institutional Equities Research, which said that "entry-level talent is available but cannot be used for knowledge transfer phase or initiation of projects." In other words, mid-level to senior talent needed to land deals, especially those who are seasoned engineer-consultants in 'design think' and who can lead agile teams, is simply not available in the numbers that are currently required.

One immediate stop-gap option is to hop across both borders to Canada and Mexico to leverage tech talent there -- by opening 'delivery centres' in the form of a 'nearshoring' model. For instance, Tech Mahindra has announced this year to set up a centre of excellence in Canada at an investment of 100 million Canadian dollars. Similarly, mid-sized IT company Hexaware has said it would use its Mexico centre to service the US clients.

Nearshoring isn't light on the company's operating expenditures, but it is the next best option to outsourcing from India. Plus, the TN visa -- for nonimmigrant NAFTA professionals -- is a valuable tool with which companies can send employees to client sites. TN visas has no cap and has nowhere near the onerous demands that the H-1B does in terms of qualifying criteria.

There are limitations here, though. "Even though nearshore centres give one proximity to the clients, there are limited advantages as they (engineers who are sent to the US from these centres on a business visa) are not allowed to render any profitable work in the US," said Hansa Iyengar, senior analyst at London-based Ovum Research, in the Business Standard article. So, in other words, not a feasible long-term solution to the current crisis.

Which means that, for now, IT firms that have relied on offshoring work and bringing in H-1Bs for project implementation have to start looking at new ways of conducting business. Indeed, the slow demise of infrastructure maintenance and app development that has given way to a digital future across Social, Mobile, Analytics and Cloud (SMAC) requiring consultative chops and flexible, agile and highly responsive teams is pushing IT in that direction anyway. Yet, the model still relies on a heavy offshore component for even leaders in this space as Accenture has shown. The question is, for how long will IT's opex structure be able to support soaring costs associated with such a high degree of H-1B rejections without compromising service delivery.

Veteran technology analyst Viju George of JP Morgan suggested in Mint newspaper that such risks will materialize if rejection rates for H-1B visa extensions approach 45%. At the pace that rejections are being doled out, George says that the threshold level will be reached in less than two years, which, you would imagine, is a dire enough prognostication to get those panic buttons flashing.

Meanwhile, IT firms will have to work furiously to develop other ways of servicing clients that dispense with a reliance on H-1Bs altogether.