The Challenge for Indian IT Firms: Showcasing Offshoring as a Value-creating Proposition

Tata Consultancy Services (TCS), India’s largest information technology firm and part of the US$84 billion Tata Group, is the latest in a line of Indian IT companies to come under the scrutiny of the U.S. legal system. A court in California recently granted class action status to a lawsuit filed against the Mumbai-headquartered US$8 billion-plus firm. The case against TCS was filed by two employees in 2006 and relates to tax refunds and payment of full wages. TCS has been accused of breaching employment contracts and violation of the California Labor Code. Indian employees of TCS who were working in California from 2002 to 2005 are eligible to join the lawsuit.

TCS is in a silent period until the end of the month when its earnings announcement will be made. In an official statement the company has said: “We have received the order of the U.S. District Court. This is an order only on one procedural matter and does not address the merits of this case. TCS continues to believe that when this matter concludes, the court will find that the plaintiff’s claims are without any merit.” If the case were to be decided against TCS, it could result in significant damage to the company — not just in financial terms, but also with respect to its brand equity.

Another Indian firm facing legal struggles in America is L&T Infotech, which belongs to the engineering and construction conglomerate Larsen & Toubro (L&T). An employee of the firm recently filed a case in a New Jersey court accusing the Indian company of violating immigration laws and fabricating documents. There is also an earlier charge of gender discrimination filed against the company in U.S. courts.

Last year, Infosys Technologies was the first big IT firm from India to come under the American legal radar. The case created shock waves back in the home country: Infosys, which is highly regarded by many for its transparency, ethics and corporate governance, was accused by an American employee of misusing H1B visas. The case is due to come up for a hearing in August this year.

In an interview with India Knowledge@Wharton in May 2011, Infosys chairman emeritus N.R. Narayana Murthy did not elaborate too much on the issue. All Murthy said was: “That is under investigation right now. We have hired a well-known legal enterprise in the U.S. It is work in progress. We don’t know the details and whether there is any issue at all. So at this point of time, I am not able to comment.”

According to New York-based Cyrus Mehta, immigration lawyer and founder of Cyrus D. Mehta & Associates, the litigation doesn’t have anything to do with anti-India sentiments in the U.S. Lawyers, he says, are always looking at ways of bringing novel legal claims on behalf of employees. In a report in the business daily The Economic Times, Mehta said: “Indian firms seem to have become easy targets. This is because tax and visa rules involving foreign workers on temporary visas, who are also employees of IT firms in India, are amorphous and subject to varying interpretation.”

T.V. Mohandas Pai, former head of human resources at Infosys, suggests that it is the success of Indian IT firms that is attracting attention. “I see it as symptomatic of what happens to successful companies in America,” he says. “So far, Indian firms have been below the radar. But now that they are bigger, and also visible thanks to the politicians going after them, the lawyers are moving in.” Pai does not see the lawsuits as being racially motivated, however. “This could happen to any company from any country.”

Given the growth of the Indian IT industry, Pai expects more Indian firms to attract legal attention in the future. “They will face the heat on job discrimination, gender discrimination and age discrimination. They will face the heat on everything possible. Indian firms are now getting exposed to the pressures of doing business in America. This sort of thing does not happen so much in Europe.”

Assessing Impact

Meanwhile, the National Association of Software and Services Companies (Nasscom), an industry association of IT-BPO firms in India, is on a lobbying drive. In a move to counter the popular perception in the U.S. that Indian firms are taking jobs away from Americans, Nasscom recently released a report in Washington showcasing the Indian IT-BPO industry’s contributions to the U.S. economy.

According to the report, titled “India’s Tech Industry in the U.S.,” Indian IT-BPO firms have created around 280,000 jobs in the U.S. Three out of every four of these jobs are held by U.S. residents, the report said, the firms have invested more than US$5 billion through 128 acquisitions, and have also contributed more than US$15 billion to the U.S. Treasury. The report notes that while the overall unemployment rate in the U.S. is at 9%, it is 4% for the tech sector. During the recession, instead of reducing headcount, Indian firms were able to add jobs and hire locals in the U.S. The report also highlights the CSR activities of Indian firms.

Som Mittal, chairman of Nasscom, explains that over the years, the Indian tech industry’s business model has evolved significantly. He notes that in addition to providing speedy service and cost savings, Indian firms are now adding more value to clients in terms of transforming their businesses. Providing such services requires contextual data, domain expertise and employees working in the same time zone as their clients. Indian firms have been developing this capability locally, both organically and through acquisitions. “There is always a lot of noise about offshoring,” Mittal adds. “Through this report we wanted to share our perspective and let people know how this industry also contributes to the American economy and society.”

In the India IT market, American companies play a huge role and have very large market shares, Mittal adds. Some of the largest outsourcing deals have gone to the multinationals. “We don’t make an issue about it. It has to be a two-way street,” says Mittal.

Amneet Singh, vice president of global sourcing at advisory and research firm Everest Group, says releasing the report was a positive move by Nasscom. “This is an integral part of Nasscom’s role as an industry body. Such measures to influence policy makers are common by industry organizations in the U.S. Hopefully this will make the policy makers think of offshoring more broadly rather than as just a role substitution.” Pai points out that “America is a democracy made up of competitive lobbies,” noting that “it doesn’t matter how good or bad you are. What matters is how well you lobby.” Pai adds that although the report is a step in the right direction, much more needs to be done on this front by both Nasscom and Indian IT firms.

A Varied Response

According to Ravi Aron, a professor at the Johns Hopkins Carey Business School, when senior executives in American organizations offshore jobs, they face considerable resistance and political pressure from the rank and file including, but not limited to, unionized workers. “This report could provide some cover for them in blunting that resistance and social pressure,” Aron says. However, regarding the impact of Nasscom’s report on policy makers, Aron points out that they fall into several categories and the impact will depend on which category they belong to.

Aron notes that non-politically affiliated academic economists do not need convincing about the benefits of free trade. They will acknowledge that trade redistributes jobs and that Indian companies do hire Americans and create some jobs abroad. Economists affiliated with organized labor or representing labor industries, however, will not buy the argument that Indian companies hire Americans abroad, Aron notes. They will point out that there was more than ten-fold growth in the number of technical workers employed by Indian companies between 1982 and 2012. They will also contend that at least 40% of these workers had direct U.S. counterparts and that their jobs were moved to India to benefit from wage arbitrage. A few labor economists will advocate the direct imposition of protectionist tariffs, while others will advocate measures that indirectly raise the cost of offshoring.

Most U.S. politicians need no persuasion that trade and low cost manufacturing or services benefit the U.S. economy, Aron says. Where they are concerned about job losses, they will be far more concerned about China than India. A few politicians who are pro-labor will point out that the jobs lost to India are far greater in number than the jobs created in the U.S. by Indian companies. Aaron adds that a few politicians who are socially conservative will oppose trade simply because it involves deep engagements with “foreigners” and the movement of “foreign” goods into the U.S.

According to Aron, there are very few significant efforts to curtail the offshoring of jobs by the U.S. He points out that while politicians may ratchet up the volume and indulge in fiery rhetoric, “the facts on the ground are that the U.S. does not interfere in the running of corporations in the private sector and it has no legislation that dampens offshoring.” Aron further notes that: “The U.S. has not imposed duties; it does not interfere with India’s currency regime and in general has not imposed any regulatory fetters on trade with India. Far greater damage to the prospects of Indian firms exporting and competing with their global counterparts is being done by the government of India and its policies.”

Amberish Dasgupta, executive director for consulting at PricewaterhouseCoopers offers another perspective. He says that the Nasscom report is not likely to have any information that is not known by U.S. policy makers or industry captains. “Their own research would be far more detailed so I don’t see it having any significant impact.” Dasgupta adds, though, that the report could have an impact on other countries. “Looking at the contribution that Indian IT-BPO firms have made in the U.S., other countries may be attracted to invite them.”

According to Dasgupta, Indian IT firms in the U.S. need to focus a lot more on solving the complex business problems of their clients and moving further up the value chain. “They need to bring in larger business benefits to the U.S. corporations and thereby to the country’s economy. That will be a much better story to showcase,” he states. Pai disagrees. He points out that while it is true that Indian firms can do more high-value-addition work, the companies are already on that path. “Indian IT firms have been bringing benefits to American firms for the past 15-20 years by reducing their costs substantially,” he adds.

The biggest shortcoming of Indian firms is that they have not made adequate investments in acquiring a deep local presence and hiring senior American executives with strong standing in the community, Pai notes. “The Japanese automobile companies went through the same problem many years ago,” Pai says. “They sent Japanese expats to the U.S. and they all got butchered. It’s very important when you go to another country that the leadership team is localized and that they are able to speak up for you.”

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