Will New Immigration Legislation Impact "Landed" Outsourcing Rates?

by Pillsbury Global Sourcing Practice

Many years ago, I walked through a client's IT development organization where all the "Onshore" resources from the client's ADM provider sat in a sea of cubicles. I was there to identify the causes of some issues that had been troubling the relationship and recommend solutions. Having reviewed the contract before the walkthrough, I wasn't surprised to see a large supplier team present at the client. What did surprise me was how all of the "Onshore" resources appeared to be from the same offshore location where the supplier was based.

Prior to this encounter, my previous experience was that "Onshore" rates typically applied to the client's former US-based, rebadged resources or other U.S. based employees assigned to the client's account by the supplier. But something was different this time. It turned out to be my first introduction to "Landed" resources - foreign workers performing onsite work under short term visas.

Given the cost of transportation, visas and temporary living arrangements, I assumed that in order to compete with U.S. Based resources, the supplier must be paying a lot less for these resources. Otherwise, why would 100% of the resources be from offshore? When I asked about the salary cost differential, the supplier said that there wasn't any and that "by law" they had to pay a prevailing comparable salary.

Fast forward many years and the idea of Landed resources is well recognized (though probably no less controversial). Outsourcing suppliers do it all the time. "Onshore" and "Landed" have become interchangeable terms for many suppliers.

Some suppliers have implicitly acknowledged that the cost of their Landed resources really is lower than U.S. Based resources as they offer their clients a three tiered rate structure: U.S. Based, Landed and Offshore. The rate differential between the U.S. Based and Landed resources can be significant. For example, it is not unusual to see hourly rates for U.S. Based developers offered at $80 to $90 or even over $100, while the same supplier provides Landed developers in the $60 to $70 range.

Now, according to an article by Peter Wallesten in The Washington Post, a bipartisan group of eight senators working on the immigration bill have "tentatively agreed to impose stiff fees on some outsourcing companies that hire H1B workers." Further, the article goes on to say that while there was a push "to increase the lowest wage levels permitted by the visa program, it's likely that only certain firms would be required to pay more."

Perhaps that means the rate differential between U.S. Based resources and Landed resources is about to come to an end and that could result in outsourcing customers that have benefited from the three tier rate structure seeing their costs move up as the rate gap closes.

Some outsourcing firms could benefit from changes that put Landed and U.S. Based resources on the same footing. Those firms that really do pay their Landed offshore resources compensation equal to their U.S. Based peers could face less rate pressure compared to those suppliers who today offer the lower Landed rate structure.

One can debate the real merits of using offshore resources to do work in the U.S., but outsourcing customers that currently benefit from Landed resource pricing should be aware of the potential changes coming.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Pillsbury Global Sourcing Practice

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