As Offshoring Gets Tougher, Nearshoring Alternatives Shine

U.S. Secretary of State, Hillary Clinton visited India this week. Among the topics addressed with the Indian Prime Minister, Manmohan Singh, was a promise to improve cooperation on high-tech trade between the two countries, even though, Clinton didn´t give specifics about how it will be accomplished.

Why weren’t greater details offered? Perhaps because last May, President Obama announced a series of steps aimed at overhauling the U.S. tax code to detect and pursue U.S. tax evaders and go after their offshore tax shelters.

It is clearly known that many companies in U.S. are offshoring information technology services to India, not only to seek out cheaper labor, but also to avoid the taxes that they are bound to pay in their Country.

In the other hand, the U.S. wants to implement a new law that would set a number of restrictions on overseas firms that need H-1B visas to deliver their services. India´s IT Industry is anxious of the solution that U.S. Congress will give.

Less well known are the benefits that a nearshore location, such as Canada or Mexico has to application development. The India-based providers, such as Tata and Infosys recognize the benefits of working in the same time zone. That´s the reason, that Indian companies are moving operations near to U.S. or even in the U.S.

Now, with new tax policies and visa restrictions it looks that India-based firms may have greater difficulty to deliver their IT services. Companies like Infosys Technologies Ltd. (which on March 31 employed 8,900 people in the U.S. with H-1B visas, and 1,400 with L-1 visas, according to U.S. Securities and Exchange Commission filings) has to face this complicated problem. It is estimated that other Indian companies will suffer a huge negative impact as well. It is recognized that some companies are paying less to people with H-B1 visas than what they would have paid to locally hired US employees. Now with the decrease of visas they would need to hire U.S. workers who earn more and require more benefits. The benefits of offshoring could disappear with this new model.

Companies will continue move services offshore, but with the new tax code announcement of U.S. President, it won´t be so easy. Even while the cost of manpower in India rises (find stats and link), the total cost of engagement including taxes will increase the cost of an application software or IT service.

In light of these new restrictions, outsourcing to Latin America, specifically Mexico, looks even more appealing. NAFTA (North American Free Trade Agreement) protect and ensures the safe treaties and relationships between U.S. and Mexico including protection to Intellectual Property and simplifies trade.