The Truth Behind H1B Visas in the USA

So what’s the real story on H1B visas? It’s not what you think it is.

It’s one of those issues that has been almost reduced to sound bites, so I wanted to go a level or two deeper than the mainstream media and politicos, and explain the economics of what has really been going on for twenty years now in the US.

I am not writing this with any ill will towards the people here in the US on a H1B visas. I know many of these people, have become friends with them, and a great number of them have gone on to green cards, citizenship, and many are now great Americans. The truth is that once here in the US, the H1B person will often want to stay in the US, and can end up an indentured servant to some degree of their sponsoring firm. This thing is ugly on both sides of the equation.

How do I know a lot about this topic?

After the turn of the century, I spent two years selling offshore, outsourced information technology services in India. This was the final two years of my life in “big company IT services”, also referred to as IT consulting.

Prior to this, the first 14 years of my career were spent delivering and selling high end, US and UK based IT consulting services. I entered this offshore world in 2002 as it seemed this was the unavoidable path the industry was taking.

I worked initially for Sapient, which had migrated to an offshore delivery model, followed by a stint at Caritor, which was a midsized Indian firm that eventually purchased Keane in an LBO.

I will try to be concise, while explaining this in detail, focusing on the money part of the equation.

First, let’s look at who is being granted H-1B Visas in the USA.

This fact might surprise you, but the largest sponsors of the H1B visa are companies that are simply reselling the labor! I found the following chart of the largest sponsors of H1Bs in 2016.

If you look at this chart, what should jump out at you is that 9 of the top 10 H1B sponsors are IT services/consulting vendors. IBM is really a services company these days as is everyone else on this list except Microsoft.

From the list above, Infosys, Tata, Wipro, HCL, Tech Mahindra and Igate are all companies selling labor from India.

IBM, Accenture and Deloitte are US companies, but now hire most of their consultants in India, to sell all over the world.

Every company on this list would consider the USA to be its largest market for offshore labor revenue.

What does that mean, “an IT services vendor”? This means they sell technology labor. They sell rank and file tech professionals such as programmers, project managers, database administrators, network engineers, etc.

Just like your piano teacher gets paid by the hour for lessons given, IT services vendors get paid primarily for services rendered by their consulting armies to corporate clients.

In other words, 9 of the 10 companies on this list make their money trying to pay an employee $X/hour and billing them to a client for an amount of money greater than $X/hour. That’s the business they are in.

Some people in industry might unkindly refer to them as pimps.

So when you hear about companies supporting the H1B program, you have to remember that these visas are being given in the largest numbers (9 of the top 10) to companies that sell the labor, and in this situation, they are selling labor from India, to US corporate clients.

Who are the US companies buying this labor?

It is everyone from the major banks, to major telecom companies, to the tech industry, to every other industry you can imagine. It has been the fantasy of corporate pencil pushers that they could somehow save a fortune on technology expenses if they adopted this model. This is all driven by the dream of cost reduction, and that information technology is a commodity like buying staples or copy paper.

The Math of IT Services Industry

Let’s get into how these IT services companies make their money. The IT services industry has a couple of really important metrics and none more so that “Gross Margin”. Since this industry sells people, the cost of the people is the “Cost of Goods Sold” from a cost accounting perspective.

The goal of a legit IT services company is to have a 50% gross margin. This means that if the cost of all your consulting employees, including salaries, benefits, bonuses, vacation, etc. is $X/year, then you want the revenue for all these employees to be $2X per year.

Remember this because it is important later.

The Onsite/Offshore Model

Here’s what everyone is missing in the media. When the consultant on the H1B visa comes to America to work for a large US client, the goal of his or her employer is NOT to just staff this person at the client. That is only the tip of the iceberg.

The real goal is to employ a lot of people back in India, who will report to and interact with the person here in the US on the H1B.

For every person here on an H1B visa (or an L-1 Visa as well if memory serves me correctly), the goal is to have five more working for this person back home in India. This is referred to as the “Onsite/Offshore” model and the desired ratio is usually 1:5.

So while the US company is paying the outsourcing vendor for the H1B consultant, they are also paying for the five other full time resources in India per H1B visa holder. Here is the math:

So the Gross Margin for this team is $85(gross profit) / $165(revenue) = 51.5%, which is great by industry standards, and if consistently hit, will result in a high stock price for the services company.

The only way to hit the margin targets is to push more and more offshore staff to the US client, as they have a much higher gross margin built in.

Why is this? The H1B person has to have somewhat of a market salary, so they will be paid on the very low end of acceptable, but really that person is just there to facilitate the much larger goal of filling up the office in India with client funded work at a nice gross margin.

The Pencil Pushers Dream

So in our example above the US client paying the bill is getting six staff to work on their projects, none of which is an employee of the US client. They pay no benefits to these people as they are all the employees of the third party IT services firm.

The fantasy of the pencil pushers at the US company is that these six people will do the work of maybe three US workers, and if that was the case it seems like a great deal as the fully loaded FTE cost of $75/hour for the US IT workers comes to $225/hour for three of them; hence $165 < $225. If you can target older workers to replace with offshore, this hourly average might be a lot higher, maybe even $250 to $300/hr.

So what really is happening is that the US workers aren’t just losing their jobs to people here on the H1B, they are really losing their jobs to people working in corporate office parks in India, making $15K a year doing programming.

These people back in India show up in no real statistics for the US company as they don’t need visas, don’t pass through customs, have no footprint in the US. They are invisible to some degree.

How Did This Happen?

The offshore vendors got their foot in the door with US companies during the Y2K challenges of the 90s, as US consulting companies were often afraid to do the systems programming work needed to solve this looming Y2K disaster, due to fear of the potential liability if they screwed up these projects. The India companies seized on this opportunity and today Infosys, TaTa, Cognizant and many others are huge international companies.

What This Program Really Is

So the H1B program is really just a way for US companies to replace US workers with cheaper offshore labor, and fill up the office buildings in Bangalore and New Delhi with cheap resources doing the programming, business analysis and QA testing of their corporate masters back in the US.

While there is a lot of focus on the H1B person, this person is really a Trojan Horse of sorts. This is a very different situation from the disingenuous tech CEOs at their press conferences, claiming they can’t get the skills needed for their companies in the US.

What they can’t get is people willing to work for very little money to do very bread and butter IT jobs.

The pimp analogy is now far off base.

Finally, I could write a lot more on why these large offshore programs often don’t work for large US corporations, and have done nothing but ensure there is no innovation in industries like banking for example. In fact, I personally benefit by working in the FinTech industry, an industry that might not exist if the banking industry viewed technology as an opportunity to innovate rather than an expense to manage. This is the subject for another article.