Buy US Clause Seen in Contracts

Bangalore: Indian information technology (IT) services firms could see business slowing from US banks and financial institutions that have been bailed out by that country’s government, which has also become increasingly protectionist as it tries to protect jobs in the world’s biggest economy.

At least two people familiar with the matter said they have recently seen IT outsourcing tenders with so-called “buy American” or work-onsite clauses that ensure that the business goes to an American firm or to one operating on American soil.

“I have seen some ‘buy American’ inserts in a small number of requests for proposal, but this doesn’t seem to be enforceable,” said Phil Fersht, research director for global business and outsourcing services at AMR Research, an IT advisory firm.

According to Fersht, one of these was for a health care firm, and a few others for financial services firms that had been bailed out by the government.

According to the fine print of the final stimulus Bill, passed in the US, troubled assets regulation programme (TARP) recipients cannot outsource call centre work to foreign firms and can hire only a limited number of foreign workers on H-1B visas.

The second person, an executive at an Indian IT services company who did not want to be identified also said that some US firms that had usually been comfortable with moving work offshore were becoming risk averse in the current environment. “They (customers) insist that critical work should be retained within the US,” added the executive who said this measure wasn’t protectionist, but a possible reaction to economic uncertainty.

Nasscom, the Indian software industry’s lobby group, said the US government had to do this to tackle an economy on a downswing. “The fact of the matter is that they are giving funds to TARP. They have to look at generating employment locally. We will see some of these kinds of small issues rising. We are confident that better sense will prevail,” said Ameet Nivasarkar, vice-president of Nasscom.

The US, the world’s biggest spender on technology is in a recession, triggered by a crisis in its financial system, which has seen several firms going bankrupt and several others being wholly or partly taken over by the federal government. The world’s largest economy has shed 4.4 million jobs since December 2007 with nearly half of those losses coming in the last three months, prompting President Barack Obama to announce plans to cut tax breaks for firms that move jobs to foreign shores.

Indian IT services firms such as Infosys Technologies Ltd and Tata Consultancy Services Ltd (TCS) derive a significant portion of their revenue from companies in businesses such as banking, financial services, and insurance. Such firms contributed almost 41% of the $40.4 billion (Rs2.09 trillion) revenue of Indian IT services firms in the year to March 2008. As business slows from US firms, Nasscom forecasts that growth for the IT firms will halve to 16% in the year to March.

An analyst said outsourcing firms could also face subtler constraints. “At least those programmes are overt,” said Peter Redshaw, vice-president for research in banking and finance services at Gartner Inc., a technology research firm, referring to the US legislations. “A second issue is the rise in ‘soft constraints’ where governments, central banks and regulators put pressure on banks (such as greater scrutiny or a need for higher transparency) that may inhibit decisions to go offshore.”

“So, banks may in some cases be prohibited from going offshore or they may need to be more politically sensitive and risk averse in their operations,” Redshaw added.
India’s two largest IT firms, however, said they were yet to encounter TARP-related constraints. TCS and Infosys Technologies said that they haven’t seen any impact due to these measures. “Currently, we are not seeing any such impact from any of our clients,” said V. Balakrishnan, chief financial officer at Infosys.

Still, the legislations itself were passed only last month and it is likely it will take a while before Indian firms feel the fallout.

Analysts say that a bigger impact on offshoring would, however, be felt if Obama goes ahead with his plan to cut tax breaks for companies that offshore work.

“However, I would expect clauses to be put into contracts that allow for work to be pulled back onshore in the event of tax changes that impact offshoring,” said Fersht of AMR.