IT Scan

March 2, 2004
Recent US anti-outsourcing moves -- a legal analysis

Pavan Duggal

NEW DELHI -- The U.S. Senate recently passed the Consolidated Appropriations Act 2004, being HR 2673. This is "an act making appropriations for agriculture, rural development, food and drug administration, and related agencies for the fiscal year ending 30 September 2004, and for other purposes." This law provides for statutory spending for different departments of the US.

The purpose of the said law relates to protecting jobs in the US. In fact, section 533 of the law appears under the heading entitled "IMPACT ON JOBS IN THE UNITED STATES." Section 533 requires as follows: -
"None of the funds appropriated by this Act may be obligated or expended to provide any financial incentive to a business enterprise currently located in the US for the purpose of inducing such an enterprise to relocate outside the US if such incentive or inducement is likely to reduce the number of employees of such business enterprise because the production is being replaced by such enterprise outside the US."

The law further states: -
"An activity or function of an executive agency that is converted to contractor performance under Office of Management and Budget Circular A-76 may not be performed by the contractor at a location outside the United States except to the extent that such activity or function was previously performed by Federal Government employees outside the United States."

A perusal of this law shows that a US government contract acquired by a private corporation cannot be outsourced or relocated to a legal entity outside the US, if such a move is likely to reduce the number of employees of such business enterprise. The law mandates that when the federal US government gives a contract to an American company, that American company cannot subcontract or outsource the same to an entity outside the US, including India. This law is based on the rationale that as the source of the US federal government projects is public money, that public money cannot be redirected through subcontracting or outsourcing. The law talks about the federal US government orders, and only those relating to the departments of agriculture, rural development, food and drug administration and related agencies.

The act is meant for the fiscal year that ends on 30 September 2004 and thus the law is only for a limited period. However, consequences of such a law can have long-term effects. Indian companies and the Indian BPO sector have taken the stand that such a move will only impact the Indian outsourcing sector. NASSCOM stated that this would impact 2 percent of the total outsourcing to India. However, Business Standard reports that Indian software and BPO services will lose business worth Rs.1, 400 crore, if the proposed US law gets president Bush's approval.

This federal law passed against outsourcing by the US senate is likely to seriously impact the vibrant growth of the Indian outsourcing industry. Since most of the Indian companies have a majority of US clients, the possibility of Indian companies being hit by such a law cannot be ruled out. This act represents the first federal US legislation that aims to ban outsourcing of US government contracts. So far, various states in the US had been toying with different bills and legislative proposals relating to outsourcing of jobs to countries like India. However, due to various reasons, including lobbying by the Indian government and industry associations, the said bills and proposals did not come into force.

Since now, there is a legal and policy precedent to ban outsourcing of US contracts, the same can easily be extended to the other state government and non-government contracts. Further, such a bill does more than legitimizes the claim that outsourcing leads to loss of jobs. My only apprehension is that such a law may have an avalanche effect, in the sense that it becomes the trigger point for passing other similar federal and state government acts.

Since the government is the biggest spender, Indian outsourcing companies would be impacted. The law has not touched companies who do non-US government contract work. Such companies will be free to outsource their non-US government contract work to BPO companies in India. However, a reasonable chunk of the BPO work that comes from the US and relates to the US government contract work has been legally impacted as that comes in the form of sub contract from American companies who have been granted contracts/assignments of work by the US government.

At the time of writing, this law has yet to be signed by president Bush. However, this is the right time for the Indian government, policy makers and industry associations to influence the American lawmakers to defer the implementation of the law. Such a law is not only going to make an impact in India but would also impact other BPO emerging nations such as Philippines, Ireland, China, Vietnam, etc.

The fact is that the provisions relating to anti outsourcing have been made an integral part of the fiscal legislation, makes it clear that it will not be easy to veto such a prospect. We, as a country, cannot force the US lawmakers not to exercise their sovereign powers of legislation as law making is a sovereign function and no sovereign country can interfere in the exercise of sovereign powers of another sovereign country.

I feel that India has been riding on the wave of success in the newly emerging BPO revolution. In this successful growth period, legal aspects have taken a back seat. The outsourcing industry should address itself to various legal issues and challenges that the sector faces. It is necessary for the government, with appropriate legal strategies, to tackle such BPO back lashes. If this new move does not awaken us, we will be living in a fool's paradise.

We need to use all options available to impress upon the US lawmakers and the US government, that such a legislative move is likely to impact not only the growth of American economy, but also the economies of other countries. In addition, such a move will lead to increasing costs for the US public exchequer. In some manner over the period of time, this law, if implemented, will make the US government contract assignments uncompetitive, expensive and unwieldy, and may have a negative impact on the US economy and other economies in the long run.

This law rings an alarm bell for the Indian BPO industry and for the government, to put their heads together and evolve a comprehensive legal strategy, to meet such kinds of situations. The recent buoyant growth of the BPO sector in India has tended to ignore the various legal issues impacting the BPO industry. Let us awaken to effective damage control measures before it is too late. This is essential to safe guard the growth of the BPO sector on which India had already pinned such great hopes.

(The author is an advocate in the Supreme Court of India. He is also the president, cyberlaws.net and member of nominating committee, ICANN.)

Contact:
pduggal@vsnl.com