Outsourcing Under the Obama Administration

Outsourcing Under the Obama Administration

There is considerable anxiety and speculation from all quarters on its continued growth and profitability. Equity analysts and industry participants are attempting to determine the likely extent and impact it will have on the industry's and companies' fortunes

By Sam Kramer, Baker & McKenzie The immediate future is indeed very uncertain for the outsourcing industry. There is considerable anxiety and speculation from all quarters on its continued growth and profitability. Equity analysts and industry participants are attempting to determine the likely extent and impact it will have on the industry’s and companies’ fortunes. Barack Obama was elected as the 44th president of the U.S. on a platform of change. He has promised that his administration will change politics as usual in Washington, and the way the federal government does business. President-elect Obama comes into office at a time of unprecedented economic woes, with high unemployment, a spiraling deficit and a weakened standing in the international community. These challenges will shape and inform the Obama administration’s positions on the U.S. domestic economy and its foreign policy. From Obama’s speeches during the presidential campaign, his platform posted in his Website, and from various news accounts, we can begin to get an understanding of his attitudes toward outsourcing and offshoring, and how the policies of an Obama administration may impact those sectors. Outsourcing is a term that is bandied about in the media without any real consistency or sophisticated analysis. It is often used to refer to any contractor relationship or delegation of duties. And most often, the connotation is a negative one, carrying with it a suggestion of cronyism and abdication of responsibility. The CNN pundit Lou Dobbs has made a career of using a brand of populism to denigrate offshoring (which he equates with outsourcing) and any governmental policy that even suggests a service engagement with an overseas company. While these populist sentiments invariably color any discussion of outsourcing, one must delve beyond the general suspicion of any delegation of duties to understand the attitudes toward the outsourcing industry and how political policymaking by an Obama administration may affect that industry. Obama and his team address the topic of outsourcing primarily in connection with three policy areas: taxes, national security and jobs. Like his media counterparts, he refers to “outsourcing” when many (but not all) his comments are specifically directed at offshoring. This distinction is important to keep in mind in evaluating the reach of Obama’s statements. He has consistently stated that he would eliminate tax breaks for companies that move their operations and jobs overseas. “Barack Obama and Joe Biden believe that companies should not get billions of dollars in tax deductions for moving their operations overseas. Obama and Biden will also fight to ensure that public contracts are awarded to companies that are committed to American workers.”, reads a statement on barackobama.com. While this policy statement is frequently cited as evidence of an anti-outsourcing position, it is more of a critique of tax deferral strategies that U.S. companies use to shelter income from U.S. taxes by locating operations outside of the U.S. A consequence of this deferral strategy is often to shift operations (and therefore jobs) to non-U.S. facilities, which can have a similar affect on domestic employment to offshoring. Yet, the loss of tax revenue from these relocated operations is as much of the target of Obama’s attacks as is the loss of jobs at home. Maintaining American jobs had been a central focus of the Obama campaign, and it became a high profile issue as the collapse of the U.S. economy caused a spike in unemployment. As a candidate for the U.S. Senate, Obama gave the keynote speech at the 2004 Democratic convention where he spoke about American workers “who are losing their union jobs at the Maytag plant that’s moving to Mexico and now are having to compete with their own children for jobs that pay seven bucks an hour.” As a Senator, Obama co-sponsored the Patriot Employers Act. The Act provides for a tax credit of one percent of taxable revenue to employers who, among other requirements, maintain or increase the number of full-time workers in the U.S. relative to the number of full-time workers outside of the U.S., and who maintain their headquarters in the U.S., if they have ever been headquartered in the U.S. in the past. S. 1945. The Patriot Employer Act would provide tax incentives to U.S. companies that maintain or increase American jobs, but would also be available to offshore service providers that increase their U.S. headcount through their U.S. subsidiaries. As a presidential candidate, Obama frequently attacked the Bush administration for its outsourcing of government functions to private contractors. In a response to a questionnaire this summer on federal contracting from the Washington Post, the Obama campaign stated “Senator Obama is concerned by the rising number of government contractors that are often unaccountable and frequently less efficient than government workers. As president, Obama will restore effective oversight of the government contracting process and reduce our nation’s increasing dependence on private contractors in sensitive or inherently government functions.” On Obama’s Senate Website, there is a link to an L.A. Times editorial from 2007 critical of no-bid, private defense contracts, such as those with Blackwater in Iraq. In March of this year, Obama wrote a letter to the International Teamsters Union stating that the practice of outsourcing aircraft maintenance services overseas raises security concerns. Obama’s policy responses to the outsourcing of government services has been to sponsor legislation to improve transparency and oversight of the contracting process, and not to advocate eliminating the practice altogether. During the presidential campaign, some were concerned about an anti-outsourcing/anti-offshoring bias within the Obama camp after a memo was distributed by the Obama campaign during the primary contest entitled “Hillary Clinton (D-Punjab)’s Personal Financial and Political Ties to India.” The memo highlighted the Clintons’ ties to Indian multi-national companies, and insinuated that Mrs. Clinton was financially beholden to Indian companies engaged in stealing American jobs. Obama took responsibility for the memo, prepared by his staff as opposition research, and regretted its tone and attempts to cast aspersions on fundraising by the Indian-American community. However, the memo was also highly critical of offshore service companies such as TCS, but this did not provoke any specific rebuttal or distancing from Obama. If Obama’s policy statements and stump speeches on the campaign trail are a reliable indicator, the Obama administration will be focused on maintaining jobs for U.S. workers and reducing the tax benefits for U.S. companies that relocate operations overseas. He is likely to try and use tax policy as a chief method of achieving these goals. However, Obama has not displayed the anti-outsourcing and anti-offshoring sentiments held by many of the populists in his party. Obama acknowledged on the campaign trail that “[w]e know that we can’t put the forces of globalization back in the bottle. We cannot bring back every job that’s been lost.” IT industry leaders in India have shrugged off suggestions that the Obama administration will be anti-outsourcing or seek to ban or regulate the outsourcing industry. They point to an expected increase in H-1B visa availability to bring skilled IT workers to the U.S. and to the cost-cutting advantages of outsourcing during an economic downturn as indicators that offshoring services will remain robust during the Obama administration. “Obama’s statement [critical of outsourcing] was on outsourcing jobs; I think we are more in the business of offshoring work”, said Partha Sarkar, CEO, HTMT Global Solutions. Reflecting upon Obama’s election victory, Ganesh Natarajan, Chairman, Nasscom, stated “[T]he whole restructuring of the financial-service industries that will be taken up by Obama … will provide a greater deal of opportunities for the Indian companies.” The Indian IT industry, along with the entire outsourcing sector, are adopting a wait-and-see approach with respect to the new administration’s policy on offshoring, but none expect a seismic change in the offshoring of high tech and other services to overseas service providers. Sam Kramer is a Partner in the International Commercial Group in the Chicago office of Baker & McKenzie. A graduate of Northwestern University School of Law, Kramer’s practice focuses on structuring and negotiating outsourcing and managed services arrangements.