A wave of change is sweeping over the IT outsourcing industry. Fast-advancing technologies such as machine learning...
and artificial intelligence are making it possible to automate work that was typically outsourced -- and providers are now being challenged to integrate cloud and open source technologies.
"Faster change is reducing customers' willingness to enter into long-term contracts that traditionally allowed outsourcers to recover large initial investments," said Dan Masur, a partner in Chicago-based international law firm Mayer Brown. In outsourcing contracts, terms are being added "to handle services delivered using digital instead of human labor."
Trump administration policies are another part of that change, Masur said. Since his presidency began last January, Donald Trump's promises to protect U.S. jobs with changes to tax policy, corporate regulations and visa restrictions "have had and will have a direct and potentially profound impact" on outsourcing in the 21st century.
In fact, Masur said, "political uncertainty" surrounding such policies will accelerate companies' move to the cloud, as-a-service offerings and other IT arrangements that offer cost-savings but are "not based on offshore labor arbitrage" -- that is, a reliance on cheap foreign labor.
In a teleconference earlier this month, Masur covered the Trump administration policies companies should watch in 2018.
Trump tax law and outsourcing
The cut in the corporate tax rate from 35% to 21% was a widely reported piece of the Tax Cuts and Jobs Act, which Trump signed in December. Drawing much less attention were changes that will alter the "economics and structure" of outsourcing and cloud services arrangements, Masur said. Now is the time for outsourcing and cloud providers and their customers to evaluate existing and planned arrangements "to determine whether you can take advantage of these changes."
Dan Masurpartner, Mayer Brown
First, adjustments in the rules governing "the deductibility of asset purchases" allow companies to deduct 100% of the cost of items such as computer and networking equipment from their taxes, according to a note Mayer Brown attorneys posted earlier this month. The deduction could benefit customers or service providers buying hardware or software for their business.
"As a result, it may drive changes in co-location deals, hosting deals, outsourced managed services deals and even cloud arrangements," the document read.
The tax law is also peppered with new acronyms. For example, GILTI, which stands for global intangible low-taxed income, is a tax on foreign earnings; FDII, foreign-derived intangible income, is a deduction for companies selling services abroad; and BEAT, or base erosion and anti-abuse tax, is a tariff on U.S. companies making payments to foreign affiliates.
These concepts may reshape "how sourcing transactions are structured, the extent to which services are delivered from U.S. or offshore locations, how services are delivered to a customer's non-U.S. affiliates and the way charges are invoiced and paid," Masur said on the call.
The attorney warned that the tax law is complex and will "vary from deal to deal and company to company." So companies seeking guidance should consult with their tax specialists.
H-1B visa program reform
Proposed changes to rules governing H-1B visas, which allow U.S. employers to hire foreign workers, would limit visas to people the president has called "the best and brightest." If implemented, the changes will have an impact on technology service providers, Masur said, which rely on a stream of Indian workers coming into the U.S. using the visa program.
In the past, Indian IT professionals with university STEM degrees could apply for and obtain H-1B visas fairly easily, Masur said. That's changing.
"They are likely to be denied in the future if the candidate is making entry-level wages or has a degree that is not clearly related to the precise occupational category" he or she is applying for, he said.
The administration wants to reform the H-1B visa program lottery process, awarding visas based on applicants' individual merits instead of randomly selecting winners. A bill proposed by Sens. Orrin Hatch (R-Utah) and Jeff Flake (R-Ariz.) on Thursday fits the contours of Trump's merit-based schema: H-1B visa candidates with master's degrees or higher or STEM degrees earned from U.S. universities would have priority over others. The bill aims to increase the annual quota for visas from 65,000 to 85,000.
Under current Trump administration policies, it's harder for employers to keep workers on H-1B visas, Masur said. The government now requires employers to directly supervise day-to-day activity of visa holders. "Failure to do so can result not only in the denial of visas but in fraud investigations and potential debarment from the H-1B visa program," Masur said.
To get law firm Mayer Brown's take on tech trends and how they're affecting tech contracting in 2018, read this SearchCIO report.