Software Licensing & Master Service Agreements : Chicago Software Licensing Lawyer & Attorney : Sam Conforti Law Firm : Master Service Agreements, Negotiations, Outsourcing : Cook County, Illinois

Paul McDougall reports for Informationweek in their Global CIO Blog that the National Association of Software and Services Companies (“NASSCOM”) predicts the $58.8 billion in India’s outsourcing revenue for the fiscal year ending 2009 will grow to over $225 billion in the next decade. McDougall quote’s Som Mittal, the president of NASSCOM, an association that promotes Indian offshoring, in his article entitled Indian Outsourcing To Increase Fivefold:

“ … the potential for this industry is tremendous and the industry will not be demand constrained”

In order to achieve savings and to stay competitive in the global marketplace, more and more companies are outsourcing their business and technical functions. McDougall confirms in his article that the Obama campaign rhetoric of keeping the existing jobs in the US and preventing jobs from going overseas has not materialized. For further discussion on the Obama campaign rhetoric and the actual affects on outsourcing, see also the following postings in this Blog:

·         No Slowdown in Offshoring for the Foreseeable Future; posted April 20, 2009

·         Obama’s Tax On Outsourcing; posted June 1, 2009

The current trend has tech, financial services, and manufacturing as the core industries making up the bulk of the $58.8 billion in outsourcing revenue. However Mittal suggests that WIPRO, Infosys, and Tata, India’s outsourcing behemoths, foresee healthcare and transportation as the engines for further revenue growth.

With the coming growth an emphasis on infrastructure moves to the forefront. The traditional centers of Hyderabad and Delhi will need to be supplemented by the so-called second-tier centers like Kolkata in West Bengal in order to accommodate the growth.

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Stephanie Overby has written an article for CIO.com entitled “The Truth About Obama’s “Tax on Outsourcing” in an attempt to clear up all the questions that were raised when the President attacked the Tax Code for creating loopholes if a company creates a job overseas. Overby freely admits that she can’t clear up all the mistaken beliefs because the White House may not have been as clear about its objectives as was needed. In addition to identifying the five (5) misconceptions that are circulating, she also provides some necessary definitions of terms which help the reader to better understand the issues and the real targets of any proposed legislation. Those five areas in question are as follows:

        I.            Is “Outsourcing” the same as “Offshoring”?

a.       Outsourcing means contracting to any third party. This could be to a third party within the US.

b.      Offshoring means a NON-US location.

c.       The distinction to be made is: work being done at the US company’s own foreign facility called a “Captive Center”, versus offshore work being done by a third party, in essence offshore outsourcing.

      II.            Will the tax apply to “Offshore Outsourcing”?

a.       This was the point that was not made clear initially by the administration. Overby helps us out and states that the Obama plan will only apply to US companies with “Captive Centers”.

b.      So this will affect the IT Vendors such as IBM Global Services and Accenture AND ALSO Non-IT Vendor companies that maintain a presence abroad.

    III.            Will India’s IT Services Industry suffer the most from the proposed taxation?

a.       No. IT Vendors such as Wipro and Tata will not be affected. The tax is aimed at US Multi-National companies conducting operations in foreign lands.

    IV.            Will this taxation create more US jobs?

a.       Unlikely.

b.      There has been no indication that US companies would lessen their foreign presence due to the tax. In fact “most multi-nationals set up shop overseas to access cheaper labor or new markets”.

c.       Such a tax could cause MORE offshoring to offset any increase in taxation. In fact US IT Vendors may chose to relocate entirely overseas.

      V.            Is this protectionist tax policy certain to pass into law?

a.      Daniel Masur, an outsourcing attorney and partner in the Washington, D.C. office of Mayer Brown states, "It would be viewed by the rest of the world as protectionist and would trigger a wave of retaliatory legislation, and it would be bad for American business."

b.      Masur continues and states, “However, given Congress's propensity in recent months to write major legislation over a weekend and Congress's preoccupation with populist sound bites, such a provision could be buried in the next stimulus or budget bill".

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Orla O’Sullivan reports for Network Computing in an article entitled, Obama Not Impeding Offshoring, TATA Says, that the campaign pledge to slow the flow of work to cheaper labor markets, either by directly employing people abroad or by engaging third-party service providers based outside of the U.S. has not occurred and in fact may be on the upswing. O’Sullivan discussed this matter with one of India’s leading providers of offshoring services, TATA Consultancy Services.

A large portion of TATA’s services are to the financial services industry, and this segment is growing with actual IT Operations taking place as banks and other financial services firms send more and more work offshore. O’Sullivan further reports that back in October of 2008 TATA purchased Citigroup Global Services Limited, Citi’s Indian offshoring services unit providing business process outsourcing. TATA’s next step is to sell its’ banking software products in the US.

As Raymond Strecker, global consulting practice head for TATA North America, describes this current spurt of growth:

“Our infrastructure business is growing the fastest. That is, inside the glass house, or data center: remote server administration, server repair, network monitoring, and various infrastructure services.”

It appears that as banks find the need to cut costs in this current global economic slowdown, that more regulations will just force these institutions to become more creative. If a bank or financial services firm finds it uncomfortable to have operations offshore, there doesn’t seem to be any prohibition from employing onshore service providers who do have operations offshore and thus indirectly reaping the benefits of cost savings.

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