Cognizant Technology Solutions has blown the whistle on what many have merely whispered about on receding cost arbitrage of H1B workers versus locals onsite.
In a departure from niceties on the global outsourcing model pioneered by Indian IT giants, Cognizant CFO Karen McLoughlin said the gap in the price tag dangling on an H1B worker and a local American techie is now next to nothing.
The remarks came when Cognizant, which competes with TCS and Infosys, had an hour-long earnings call Friday, and the CFO was asked about the 13.5-billion IT giant’s cost base.
“In terms of the onsite cost, if we are hiring people with the same skill sets — a local worker versus someone who comes on an H1B visa, there really is no significant cost difference when you consider the cost of wages and relocation etc versus the compensation we are paying… And with the H1B visa, you have to remember that there is a prevailing wage that sets the salaries and those are set at market rate, so there is no signifinant difference as you shift the workforce. The real issue to find the right talent. If we can find the talent here or in Europe, we go there, but if the talent is not available. As for the issue of moving work offshore, if we don’t find the talent here, then the issue there too is about finding talent,” McLoughlin stated.
Straight talk like this confirms US president Donald Trump case for an assault on H1B in the interest of American jobs.
Last week, Infosys became the first Indian IT giant to go all in and announce 10,000 US hires for its “zero distance” model from the client.
Now Cognizant is admitting the cost difference between an onsite worker, H1B worker and offshore techie has narrowed so much it does not matter anymore.
What’s in short supply and significantly more important, in all situations, is finding the right people for the job.
As the CFO, McLoughlin, who oversees a wide sweep of Cognizant’s crucial worldwide financial planning and analysis, owns the company’s balance sheet details. She confesses to a “drop in realisations” because of the rash of hiring last year.
Friday’s earnings call, accessed by ncrbrokers, puts an official stamp to what was mere water cooler talk.
At Tape Counter 47:00 of the earnings call, McLoughlin explains how the cost difference that was celebrated in the early years of the (Indian) IT boom has been upgraded to irrelevance.
Reproduced is the most crucial part for H1B junkies:
Question from Bank of Montreal analyst: Karen, is there a way to think about how your cost base is changing? What I mean by that what I mean is you’re applying for less visas but you’re adding more onshore labour, so your cost per head count is going up…Is there any way to quantify how that’s changing your cost base? Are your costs going up by five percent or 10 percent as you increase your on shore head count? How much more can you move mix to be offshore? With the H1 issues that are arising, it seems like clients are more willing to move work offshore… How much more room is there to move work offshore to mitigate the effects of higher cost of onshore labour?
Karen McLoughlin: “On a like-on-like basis, in terms of the onsite cost, if we are hiring people with the same skill sets — a local worker versus someone who comes on an H1B visa, there really is no significant cost difference when you consider the cost of wages and relocation etc versus the compensation we are paying… And with the H1B visa, you have to remember that there is a prevailing wage that sets the salaries and those are set at market rate, so there is no significant difference as you shift the workforce. The real issue to find the right talent. If we can find the talent here or in Europe, we go there. As for the issue of moving work offshore, if we don’t find the talent here, then the issue there too is about finding talent.”
So, in her answer, McLoughlin addresses all the three models:
-Onsite local worker, say American in this case
-Offshore worker, say, in India.
“Yes, the bubble has burst. It was a long time coming. We all knew this all along, it’s no secret within the industry,” a New Jersey-based Cognizant contractor said, confirming the CFO’s point and requesting not to be named.
Hidden away in McLaughlin’s reply is a decade of shifts in how Indian IT outsourcing companies have bid for and gained from large projects.
Whether its a fixed bid, competitive bid or pure time and material projects where bodies are given for hourly rates or capacity contracts (so many people on site for so many months) which are renewable every year with minor variations like cost of living adjustments, there is always a rate card that supports these contracts and those rate cards in turn have many layers to pay for the staffing from juniormost to seniormost broken up into hourly or daily basis.
These rate cards don’t typically vary too much between IT companies and these rates are not the basis on which projects are won or lost, unlike say in civil construction tenders. “In the current market, TCS rates are lower than Cognizant, Accenture often is among the highest followed closely by Capgemini and management consulting firms,” illustrates a New York-based banking industry client.
IT workers we spoke to in the New York area tend to agree that the “fight is never on wage rates because the cost structure is mostly the same everywhere. The fight is who has the better people, better facilities and delivery model.”
TCS, Cognizant and Accenture tend to win on these parameters is the client side view.
The size of the pie has not increased much, it’s the same players trying to bite off a bigger chunk of the same size pie rather than increase revenue because the customer is spending more.
In 2000-2001, the rate for a junior programmer sitting in Bangalore or Hyderabad was between $19-23 an hour offshore. Today that rate card for offshore is between $37-42 per hour. In the last half decade or so, Cognizant, TCS in particular got their ‘nearshoring’ act together within the US and Mexico in less pricey locations where they’re offering the same junior developer at around the same $45 per hour rates, so the differential between Bengaluru and say, Texas is almost nil.
Clients naturally prefer nearshore to offshore because they’re in the same time zone. A large banking client in New York prefers to send its people to its nearshore centre in Tampa, Florida rather than deal with a Chennai offshore or Hyderabad. All this hits the margins that CFO McLoughlin spoke about in the earnings call.
In the mid-2000s, there was an unofficial rule of thumb many IT companies followed while bidding for projects – a gross margin of 60 percent. What does that mean? Coming back to the example of the junior programmer offshore who’s paid around $27 per hour, the cost to company may be $9-10 so the gross margin could very well be 100 percent for low end resources and 40 percent for senior level people, so the overall fixed bid project margin mix used to be around 60 percent. “Less than 50 percent, you don’t propose for it.”
As overheads drag IT company profits down, the overall margin that has now become realistic is barely 10 to 15 percent if you start at 60 percent.
What are these overheads?
“There’s a cost to having a bench, there’s a cost to not having a bench – you lose business. Cognizant seems to have perfected the art of the perfect bench, their marketing guys get the business and trusting in them, the company keeps the bench ready,” says Ananth Shankar, an H1B worker who works closely with Cognizant contractors.
From the company’s point of view, it’s the overall mix of revenues that matters more than being hung up on the H1B, onsite, offshore, near shore or hiring local.
When Infosys’ Vishal Sikka announced plans to hire 10,000 American workers, big data, AI-led work etc in Indiana, a lot of punditry followed thick and fast. Taking what Karen McLoughlin said in the CTS earning call and putting the pieces together, the writing is on the wall.
Welcome to the asset light, Uber version of outsourcing. New York, Texas, San Jose or Hyderabad makes no difference.
That said, Cognizant is handing out severances — the company calls them “performance reviews” — with one estimate putting job losses at 1,000.
Some sources who have spoken on H1B have not been named in the interest of confidentiality