New Federal Outsourcing Restrictions Reflect Anti-Offshore Outsourcing Sentiments

A law that prohibits offshore outsourcing by federal agencies will have little practical impact, according to vendors that sell IT services to the government. But its passage indicates that the practice of shifting high-tech work to low-wage countries is stirring an increasingly shrill chorus of protectionist voices in Washington and alarming foreign governments whose prosperity depends on the outsourcing wave.

Even prior to the enactment of the law on Friday, federal CIOs had been reluctant to place work offshore. Their main reasons for not doing so included the growing political backlash against the practice and concerns over privacy and security, according to numerous IT-services sales representatives.

A spokesman for IBM says the company's federal government contracts typically don't involve offshore work. An Accenture spokesman says his company also doesn't perform federal IT work overseas "because none of the agencies have asked for it." Sam Sliman, executive VP at Irving, Texas-based IT services contractor Optimal Solutions Integration, says his company's Bangalore, India, office doesn't perform work for the U.S. government.

Sliman, however, says he's concerned that the legislation may strain trade ties between the United States and India and make it more difficult for his company to sell services to the Indian government. "That may be the real impact of this," Sliman says. In an interview this week with the Press Trust of India news agency, Indian IT minister Arun Shourie said his government views the U.S. anti-offshore outsourcing legislation as protectionist. "I feel this would worsen prospects of multilateral negotiations in trade," Shourie told the news agency.

The federal anti-offshore outsourcing rules are contained in a $373 billion omnibus spending bill that President Bush signed into law on Friday. The law stipulates that any work privatized by a federal agency "may not be performed by the contractor at a location outside the United States" unless the work had been previously performed by federal workers outside the country.

By and large, service providers are more worried about laws that would restrict offshore outsourcing practices at the state level; cash-strapped governors have proven more willing to move work offshore to save money. Lobbyists have been pressing hard to defeat a bill pending before the Indiana Legislature that would prohibit the use of offshore labor by agencies in that state.

Representatives from American Express, Anthem Blue Cross and Blue Shield, Electronic Data Systems, and Lincoln Financial Group have, over the past several days, urged the bill's sponsor, Republican state senator Jeff Drozda, to soften the legislation. "These folks are realizing they're going to have a major problem if this kind of legislation goes through," says Drozda, who calls offshore outsourcing "a national crisis."

The Indiana legislature is set to vote on Drozda's bill on Thursday. Drozda says he's confident that his proposed law will get a boost from the new federal regulations. Says Drozda, "It shows that we are in keeping with the mood of the country on this."