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The high-flying Indian IT outsourcing industry has withstood several challenges in the past. However, a recent obstacle has sent the industry into a tailspin, as these firms scurry around to identify strategies to work around the hindrance.
The industry &mdash; valued at over $150 billion and comprising companies such as Wipro Limited (ADR) (NYSE: <a class="ticker" href="/stock/wit#NYSE">WIT</a>), Cognizant Technology Solutions Corp (NASDAQ: <a class="ticker" href="/stock/ctsh#NASDAQ">CTSH</a>), Infosys Ltd ADR (NYSE: <a class="ticker" href="/stock/infy#NYSE">INFY</a>) and Tata Consultancy Services &mdash; has thus far been competing effectively on certain unique selling propositions such as low-cost technology skills and high quality manpower.
Indian IT outsourcing was thriving on labor arbitrage, a concept that refers to the shifting of jobs where labor and the cost of doing business is inexpensive due to the reduction or removal of barriers to international trade. However, geopolitical developments across the globe, such as ongoing Brexit concerns, and radical industry shifts to new technologies like cloud computing have sounded out some warning signals to these firms.
<h3>Souring Indian Dreams</h3>
The most recent threat has come from a nation that has thus far accounted for over half of the industry's revenues. U.S. President Donald Trump's purported intention to clamp down on immigration and H-1B visas, which allows firms to bring in skilled foreign workers to the U.S. done with the intention of protecting the interest of American workers, signal trouble in paradise for these firms.

<h3>Some Statistics On The IT Outsourcing Industry</h3>
<ul>
<li>NASSCOM, the industry body, said in a recent strategic review report, that India continues to be the world's No.1 sourcing destination, with a 55 percent share.</li>
<li>The size of the Indian outsourcing industry is $108 billion.</li>
<li>It accounts for roughly 5 percent of India's <a href="https://www.ibef.org/industry/information-technology-india.aspx"> GDP. </a> </li>
<li>The industry employs over 3.7 million people.</li>
<li>U.S., the biggest market for Indian outsourcers, fetches these firms about 60 percent of their total revenues.</li>
<li>U.S. was the second largest source of remittance for India in 2015, accounting for $10.96 billion or about 16 percent of the total inflows, according to a CNBC report quoting Sonal Varma, chief Indian economists at Nomura.</li>
<li>85 percent of the H-1B visas offered to the technology industry are given to Indian.</li>
</ul>
<img src="/files/u101977/it_3.jpg" width="520" height="296" alt="it_3.jpg" /> 
<h3>How H-1B Visas Work</h3>
H-1B visas are an employment-based, non-immigrant visa for temporary workers offered a job by an employer. In order to obtain the visa, one has to have at least a bachelors' degree. The filing for the coming fiscal year starts in April of the current year, and if the quota of 65,000 is filled, a lottery system would be enacted for allotment.
An additional 20,000 filings are allowed for qualified individuals who have completed their masters' program in the U.S.
<h3>What Trump Intends To Do With The Visa Clamp Down?</h3>
On April 18, <a href="https://www.benzinga.com/news/17/04/9312004/trump-to-sign-order-directing-tighter-enforcement-of-foreign-work-visas"> Trump, </a> through an executive order, ordered an interdepartmental review of the H-1B visa program with the intention of making changes to the program, either by way of regulation or by asking Congress to pass a bill.
The new administration has tried to project the H-1B program as a means used by business owners to hire cheap foreign labor and in the process denying jobs to qualified U.S. workers, thus substantiating its call for an overhaul.
A saving grace thus far has been the president's expressed views that the visa program should include only the most skilled and highest-paid applicants and should never aim at replacing American workers.
As baby steps toward a radical overhaul, the Trump administration announced the suspension of a practice that allowed visa processing within six weeks, if a higher fee is paid. It normally takes several months for the process to be complete. It was also hinted on the day visa applications opened for 2018 that the government would come down heavily on employers for hiring foreign workers to fill in jobs Americans can do.
Experts believe additional regulatory actions following the review could include raising salary thresholds and awarding visas to the most highly-educated and skilled applicants among those who qualify.
A Business Standard report, quoting Nomura Securities, said in July ahead of the U.S. presidential elections, "An H-1B crackdown under Donald Trump would lower the profitability of Indian IT companies (due to higher wage costs) while potential restrictions on business process outsourcing (BPO) could also hurt revenues."
<h3>Indian IT Majors Stare At Multiple Threats</h3>
Apart from the political threat, Indian IT giants are pressured by automation, making jobs redundant, and a shift in spending to newer areas such as digital and cloud computing. 
Cloud computing, which allows accessing software and services through the internet, rather than on local networks, has helped to trim IT budgets of firms. <a href="http://www.ccserve.com/cloud-affecting-india-outsourcing/">CCServe</a> said in a report that such a move could hurt profit growth at even India's most sophisticated software companies, as firms, government and consumers increase their computing on the cloud.
"It is only going to get cheaper and easier for companies to switch to the cloud, outsource providers need to get ready for the storm and modify their business models and move with the digital times," said Craig Ashmole, founding partner of London-based IT Consulting CCServe Ltd.
Meanwhile, automation has made labor arbitrage redundant on the lower end.
However, all these technologies prove to be a double-edged sword. When companies embrace them, they help to improve productivity and lower costs. At the same time, client-end adoption of the technologies introduces the risk of the companies' losing business.
<h3> Feeling The Pinch...Financially</h3>
Infosys recently reported its fiscal year fourth-quarter results, which showed a mere 0.9-percent sequential dollar revenue growth and it issued below-consensus dollar revenue growth guidance for the fiscal year 2018. The company's U.S. revenues were up a mere 1.2 percent. Peer TCS reported disappointing results for its March quarter, as growth and profitability suffered amid intense pricing pressure seen in commoditized outsourcing contracts.
<a href="https://www.benzinga.com/news/earnings/17/05/9409687/earnings-scheduled-for-may-5-2017"> Cognizant's </a> fiscal year first-quarter profit and revenues exceeded estimates; however, it issued a soft revenue guidance for the June quarter, traditionally its strongest.
The companies find it tough to manage the pressure on margins, given that they are forced to deploy the more skilled people at the client end, with the adoption of protectionists policies by countries.
The industry has been living with single-digit revenue growth for some time now and is unable to kick-start growth in a big way amid the global macroeconomic and political uncertainties.
<img src="/files/u101977/58541416.jpg" width="800" height="507" alt="58541416.jpg" />
<h3>Countering The Encircling Threat</h3>
Some of these companies have announced local hiring to keep the Trump-threat at bay. Infosys said following the release of its March quarter results that it would hire about 10,000 people in the U.S. over the next two years. The company plans to open four innovation center hubs in the U.S.
Such an announcement is a blatant attempt to appease the Trump administration, given that the company is not in the habit of divulging information on countrywide hiring. 
An <a href="http://indiatoday.intoday.in/technology/story/every-american-infosys-hires-in-us-will-lead-to-loss-of-4-jobs-in-india-report/1/946539.html"> report </a> in India Today, quoting Head Hunters India founder K. Lakshmikanth, said Infosys might have to let go four of its Indian employees for hiring one person in the U.S., as the latter would bloat the costs. This is despite the company's assertion that jobs of Indians will be preserved.
Giving the economics, Lakshmikanth said, "All said and done, according to me, Infosys will take time to ramp up local hiring as it is very costly. The company needs to pay a minimum of $80,000 (Rs 52 lakh) per year to a skilled American techie."
"For the same amount, it can hire four software engineers in India for its offshore development work."
Even as this announcement from Infosys created a furor over its potential implication for jobs in India, Cognizant said recently it will rationalize its cost structure by bringing the employee base in line with demand. The company said on the earnings call it intends to ramp up hiring in the U.S., while at the same time reduce dependence on the H-1B visas.
The statement seems to explain the steep drop in the visa applications by the company this year.
Incidentally, the company also offered a voluntary severance scheme for its senior management, including directors and senior VPs, giving them the option of parting with a severance package of either six or nine months' pay, depending on the category.
In retaliation, some employees have taken up cudgels against the company's move to ease them out by lodging complaint with the local Labor Department. 
Indian firms were not underprepared for the eventuality, if we go by a report in <a href="https://qz.com/901292/indian-it-firms-like-wipro-tcs-and-infosys-have-been-preparing-for-changes-in-h1b-visa-laws-and-donald-trumps-america-for-several-years/"> Quartz India. </a>
Expecting things to come to this, companies have been trimming the number of H-1B visas they apply.
According to <a href="http://www.myvisajobs.com/Reports/2017-H1B-Visa-Sponsor.aspx"> Myvisajobs,</a> Infosys topped the list for the number of H-1B visa applications filed in fiscal year 2016, having filed 25,504 Labor Conditions Applications. This is down from the 33,289 LCAs it filed in the previous year. TCS also scaled back notably its LCA filings to 13,134 from 16,553.
A senior executive of a top Indian IT firm told Benzinga, on the condition of anonymity, that Indian companies have been bracing for an eventual tightening in visa norms by gradually increasing their local hiring over the recent years. However, on the cost front, the companies have to cough up three times the amount on salaries, although quality-wise there is very little difference in skill sets, except the slight edge local hires have in communication.
This communication advantage is seen to counterbalance the flexibility element the Indian workforce offers.
This, according, to the executive, would continue to hurt margins, and they have no recourse but to go back to their clients to hike the billings rates to preserve margins or alleviating margin pressure.
<h3>Near-Off Shore Sites: The 'In' Thing</h3>
Indian IT outsourcing firms are also exploring other options, including setting up near-shore centers or facilities closer to the U.S. 
The executive said most companies have invested in near-offshore facilities, with Mexico being the most-sought-after center. Apart from the option helping to face the challenges of a protectionists environment in the U.S., the cost of doing business also comes down by roughly 50 percent.
<h3>Will Automation Ease Pressure?</h3>
Automation, according to the executive who spoke to Benzinga, could obviate some base levels positions, especially in business process outsourcing, with 15&ndash;20 percent jobs falling under this category. That said, the process of automation itself would require manpower, helping to offset the loss of jobs on the execution front.
All said and done, the Indian IT outsourcing industry is at a crossroads, working on efforts to shore up flat-lining revenue growth and shrinking margins, which are the offshoot of pricing pressure and rising costs. Towering on them is the challenge of upgrading to the next level of technology, the non-adoption of which could render them useless to clients. 
On top of all these fundamental challenges, the protectionist policies being pursued in developed nations are also taking the wind out of their sails. The companies need to act fast in countering these challenges by changing their business models or face the risk of going into oblivion.
Related Links:
<a href="https://www.benzinga.com/trading-ideas/long-ideas/17/04/9337441/a-fundamental-case-for-india-etfs"> A Fundamental Case For India ETFs </a> 
<a href="https://www.benzinga.com/news/17/04/9336179/exposure-to-india-is-helping-this-hedge-fund-reach-all-time-highs"> Exposure To India Is Helping This Hedge Fund Reach All-Time Highs </a>

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Indian IT Outsourcing Giants At Crossroads As Trump Tightens Screws On Immigration

Rumors of impending layoffs at AOL India (NYSE: <a class="ticker" href="/stock/aol#NYSE">AOL</a>) have been confirmed, and indications suggest that the layoffs have already begun. AOL CEO Tim Armstrong was questioned about layoffs at a conference last week, to which he responded, "there's no way around it, but we'll do it thoughtfully." News of the layoffs comes on the tail of a $315 million acquisition of the Huffington Post. The layoffs seem to come as a result of the need to restructure the company because of a $20 million cost overlap in 2011.

The layoffs seem to have already started, as some teams have been informed by management that their units would be shutting down. Thus far, the plans are to lay off engineering, editorial and operations positions.

According to an AOL press release, the company will lay off a total of 500 employees. The intended plan details 100 employees to be laid off in both March and April, followed by 150 employees in both May and June. The current organization employs approximately 700 people.

The Tech Operations team will be merged into an outside company, still serving AOL as an outsourced service. Even with this move, some of this team's employees will still be left without a job. Current bidders on this acquisition include Infosys (NASDAQ: <a class="ticker" href="/stock/infy#NASDAQ">INFY</a>), MindTree, TCS and ITC (NYSE: <a class="ticker" href="/stock/itc#NYSE">ITC</a>), which are all India-based IT companies. There have been talks to consider merging other teams from AOL India into other companies to cut costs and minimize the number of jobs lost.

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Layoffs Begin At AOL India (AOL, INFY, ITC)

At a news conference last week, AOL (NYSE: <a class="ticker" href="/stock/aol#NYSE">AOL</a>) CEO Tim Armstrong admitted that, following the company's $315 million <a href="http://www.benzinga.com/news/11/02/837827/aol-to-acquire-huffington-post-for-315-million">acquisition</a> of the Huffington Post, layoffs are inevitable. "There's no way around it," said Armstrong, "but we'll do it thoughtfully."

Armstrong's apparent compassion stems from the fact that his father had once been laid off, though just how "thoughtfully" a person can be laid off remains to be seen. AOL India certainly hasn't wasted any time, with the <a href="http://timesofindia.indiatimes.com/business/india-business/AOL-India-starts-laying-off-staff/articleshow/7644307.cms">Times of India</a> reporting that some managers have already told their team that their units will be shutting down, and that as much as 60-70% of AOL India's workforce of 1,000 will be let go. So while Armstrong's regret is refreshing, it will come as no comfort to the staff at AOL India, especially when AOL is so openly celebrating the FTC's approval of the Huffington Post acquisition while simultaneously announcing that the purchase will result in "restructuring charges" due to "cost overlap" to total $20 million in 2011.

Further, it is probable that the AOL tech operations team in India will merge with a successful bidder. Infosys, MindTree, TCS and ITC Infotech are all in the frame.

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No Way Around India Layoffs, Says AOL

Wipro, Ltd. (NYSE: <a class="ticker" href="/stock/wit#NYSE">WIT</a>) has been successful in driving up its fixed price, ramping up non-linearity, drawing level with Infosys on pricing, and registering industry-leading EBIT margins in BPO, winning and executing integrated outsourcing deals in emerging markets and early, credible positioning in cloud computing, according to JP Morgan.
A bolder go-to market strategy is needed, JP Morgan believes, for Wipro to face the downturn, where Wipro has not broken ground in creating distinctive offers with promising market potential or adopting a differentiated client engagement approach. 
JP Morgan maintains its Overweight rating and price target of Rs456.00, with the expectations that Wipro's growth will be less than that of Infosys/TCS in FY2011.
Wipro, Ltd. closed yesterday at Rs411.65.

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