BANGALORE: Information technology companies are being forced to subcontract more work than ever before in the US, as the measures adopted by that country have made it harder and costlier for Indian software professionals to travel on work to their main market.

For companies such as Tata Consultancy Services and Infosys, the use of staffing firms instead of their own employees for US assignments is resulting in higher costs and lower margins, further eroding their competitive advantage in a weak demand environment. Ironically, they are being forced to subcontract work to temporary consultants when an increasing number of their own software engineers are sitting idle on the bench.

At Infosys, subcontracting costs doubled to 3% of revenue in the first quarter of fiscal 2013, its highest level. For India's largest IT company Tata Consultancy Services, they were at 5%, from less than 3% last year. Analysts expect the higher subcontracting costs to hurt margins at top IT firms by at least 30 basis points.

"We expect the impact to be industry-wide and not restricted to Infosys as the pressure to hire local talent mounts," wrote Shashi Bhushan and Pratik Shah of brokerage Prabhudas Lilladher in a client note.

The US accounts for more than half of the over $70 billion in software exports from India. Under President Barack Obama, in particular, the US has made it increasingly difficult for Indian firms to obtain visas to send employees to work on projects at client locations. Visa fees have soared under Obama's watch and so have rejection rates.

Fewer L-1 visas being approved
This is especially true for L-1 visas for intra-company transfers.

In 2011, approvals for L-1 visas were 28% lower, show data from independent public policy think tank National Foundation for American Policy. On the other hand, such visa approvals rose by 15% for applicants from the rest of the world, leading to concerns that India is being singled out for discrimination.
More than 25,000 Indians travel to the US every year to work on assignments for software companies. Up to 40% of work permits are usually under the L-1 category.

Most people in the software industry believe there is a deliberate policy of discrimination against Indians, but they are wary of voicing their opinions publicly for fear of antagonising the American government, especially when a presidential campaign is on and unemployment is a major theme. Infosys, HCL, TCS and Wipro declined to comment for this report.

Software industry grouping Nasscom said it is "working with" the Indian government and US authorities on the issue of rising visa rejection rates. "While some part of the work gets contracted, some IT firms are now focusing on hiring locals for domain-specific work in the US," said Ameet Nivsarkar, Nasscom's vice-president.

In mid-2010, when the US increased the fee for some types of work visas used by Indian outsourcers, Nasscom had estimated the additional cost burden on Indian IT industry at up to $250 million.

But not everyone is complaining about the turn of events. At staffing firm TeamLease, where over 70,000 employees work on contracted projects for various companies, revenue soared 30% last year due to the increase in subcontracting. Similarly, at Ikya Human Capital Solutions, another global staffing firm, demand from Indian IT firms for subcontracting work in the US rose 8-10% in the past six months.

"Any change in the economic conditions first reflects in the staffing industry. We are a springboard in good times and a shock-board in bad times," said Ashok Reddy, managing director and co-founder of TeamLease.

Source : TOI