Editor’s note: Automation, not policy, will kill H-1B visas, say Technology Business Research analysts Patrick Heffernan, Bozhidar Hristov and Ryan Blanchard.

HAMPTON, N.H. – If the new U.S. administration’s campaign policies continue to become a reality, the future of the H-1B visa program and the resulting impact on companies remain uncertain.

The dynamics and cost equations regarding labor arbitrage, along with the use of predominately India-based labor to deliver services to U.S.-based clients, will be significantly altered. President Donald Trump and his top advisers made clear prior to Trump’s election that the existing visa program needed dramatic reform to encourage job protection and creation in the U.S.

On March 3, 2016, Trump said, “I will end forever the use of the H-1B as a cheap labor program, and institute an absolute requirement to hire American workers for every visa and immigration program. No exceptions.” Based on Trump’s early weeks in office, we expect follow-through on that promise, resulting in — at a bare minimum — significant hikes in visa costs and fees as well as a potential decrease in the number of visas dispersed each year.

For the IT and professional services vendors TBR follows closely, these likely changes come right as the industry adjusts to impacts from automation, cloud-based cannibalization and digital transformation.

How significantly does doubling salaries for 13,000 professionals impact business?

According to myvisajobs.com, an employment website for immigrants, Tata Consultancy Services (TCS) has roughly 13,000 H-1B visa holders working in the U.S., at an average salary of around $76,000. Given TCS’ heavy visa usage, one could expect proposed changes to the existing program would have a drastic impact on labor arbitrage benefits and thus hinder the company’s ability to meet its target operating margin of between 26% and 28%. In the larger context, 13,000 employees are a slight fraction of TCS’ 350,000-plus workforce.

While those employees may be necessary for delivering services on-site in the U.S., a doubling of their salaries (to meet a Trump-proposed higher minimum wage for H-1B visa holders) would impact operating margin, and TCS is already shifting a large portion of that work back to India delivery centers. TCS’ digital business, currently at 16.8% of total revenues, will increasingly be done remotely. Not surprisingly, TCS reduced its H-1B visa pool by approximately 3,000 over the last year.

Overall, the entire IT services market continues to buckle under pressure from emerging technologies and changing client demands. For example, new software delivery models demand vendors such as Infosys, TCS and Wipro find professionals who can work with and nurture relationships beyond the traditional IT buyer. IT services vendors must expand on-site and/or nearshore talent bases to support emerging technologies, from prototyping and agile development to delivery.

As a result, IT services vendors will have to draw from onshore resources, further eroding the need for H-1B visas while forcing TCS and peers to compete with IBM, Accenture and others for local U.S. talent. While expected H-1B visa policy changes are likely to impact India-centric vendors, they will ultimately see margins decline if they are unable to tap into automation more rapidly.

For example, recent management commentaries suggest Infosys will expand its presence in the U.S., where it currently generates over 60% of its sales, even as the company’s onshore resources as a percentage of total headcount, around 16%, remains the lowest among its India-centric peers. As previous hiring initiatives have been primarily client-driven and mainly supported through H-1B visa-sponsored staff, Infosys will face performance pressures similar to TCS when immigration policy changes.

We believe Infosys is building out an automation-enabled solutions portfolio that can help it offset higher onshore hiring costs or additional visa fees. Additionally, Infosys could alleviate a potential spike in cost by concurrently lowering its number of visa-dependent resources while expanding nearshore presence. Infosys currently maintains approximately 2,000 people in Mexico and Costa Rica

Visa policy impacts come and go — automation and cloud are here forever

TBR believes the anti-outsourcing sentiment that India-centric firms face from the new administration may fade as other contentious issues, some also immigration-based, dominate the news. But even if the sentiment simmers down, TBR believes substantial policy changes are highly likely.

“I know the H-1B very well. And it’s something that I, frankly, use, and I shouldn’t be allowed to use it. We shouldn’t have it. Very, very bad for workers. And second of all, I think it’s very important to say, ‘Well, I’m a businessman, and I have to do what I have to do’ when it’s sitting there waiting for you. But it’s very bad. It’s very bad for business … and it’s very bad for our workers, and it’s unfair for our workers. And we should end it,” Trump said at a Republican debate on March 10, 2016.

TBR believes enterprise IT buyers — the very large American companies using India-centric offshore services vendors — will continue skipping over the details around their IT vendor’s country of establishment and find an IT services company that can offer savings at scale, likely through automation, and can deliver on the emerging technology promises of digital transformation, regardless of substantial policy changes.

U.S.-based IT vendors are not immune to the market shifts and have been struggling to find and retain talent as well, in some cases creating their own training programs to build talent from the ground up (i.e., training college graduates or even high school graduates).

In December 2016 IBM CEO Virginia Rometty announced the company will hire 25,000 employees in the U.S. over the next four years — 6,000 in 2017 — for what she termed “new collar” positions, requiring skills in cloud, data science and service delivery, and will invest $1 billion in training and development programs to address skills gaps in the U.S. labor market. We expect IBM will target recent high school and college graduates to fill these positions, at salaries below those of the legacy services employees laid off last year, to manage the margin impact of onshore hiring.

IT services vendors will adjust to potentially dramatic H-1B visa changes (or even a wholesale cancellation of the program). In the struggle to find qualified IT staff, U.S. companies will find new ways to recruit and retain talent, as well as accelerate adoption of emerging technologies, such as cloud and automation.

Accenture, which also takes advantage of H-1B visas and maintains over 64% of its workforce in low-cost regions (according to TBR’s estimates), has invested approximately $1 billion per year in recent years for training and reskilling resources. The net result of automation and new technologies will force vendors to prioritize — for future recruits — caliber over scale. The skills gap in these new areas globally will and should raise questions — not about immigration, but rather education policies.

A larger question for India-centric IT services vendors is not how they will deal with fewer or no H-1B visas, but how they will deal with the changing landscape in delivering outsourced IT services.

Note: Estimates on the total number of H-1B visa holders employed in the U.S. are clouded by incomplete and occasionally misleading data regarding applications, issuance and actual usage, in addition to the multiyear duration of visas and their potential to change status.