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IT companies struggle with high subcontracting costs


SEPTEMBER 14, 2022

Top-tier IT companies have seen their subcontracting costs rise on a sequential basis. (IE)

The subcontracting costs of Indian IT services companies have been on the rise in recent months due to high demand and attrition rates.

IT companies hire subcontractors, or third-party agencies, to meet the demand needed to fulfill projects with specific skill-sets that may not be readily available internally.

“Because of high attrition, sometimes IT companies are unable to start a project on time. So, subcontracting is the only solution to meet the client needs in a timely manner. Also, subcontracting gives the company access to specialised skills that may not be available in-house,” said Abhisek Mukherjee, cofounder and director, Auctus Advisors.

Subcontracting costs of IT companies increased during the pandemic, as many industry players subcontracted employees to close gaps in their workforce. “There has been a radical change in the demand and pay in the IT sector, and hence the pay for subcontractors in this domain has also increased,” said Aditya Narayan Mishra, MD & CEO, CIEL HR Services.

Subcontractors are further used to bridge skill gaps, meet the demand for top talent, and manage a seasonal workforce crunch, said Yeshab Giri, chief commercial officer, Staffing & Randstad Technologies, Randstad India. “As the subcontracting costs amount to 13-14% of total costs incurred by the IT firms, many companies have continued this approach, expecting that this outlay would be recovered by subsequent growth in their profits.”

Top-tier IT companies have seen their subcontracting costs rise on a sequential basis. Infosys’ cost to subcontractors increased 10.6% sequentially to Rs 3,969 crore in the June quarter from Rs 3,588 crore in the March quarter. Wipro’s subcontracting fee increased 3.3% to Rs 2,945 crore in the June quarter, from Rs 2,850 crore in the preceding three months. Tata Consultancy Services’ (TCS) fee to external consultants rose to Rs 5,100 crore for the first quarter ended June, up 10% from Rs 4,632 crore in the March quarter.

“Our subcontractor expenses currently are at 9.7% of our revenues, and have moved up from about 7% levels to where we are currently,” TCS CFO Samir Seksaria said during the last earnings.

“Subcontractors are also based on supply disruptions at a local market level. So, that definitely has a role to play. As travel opens up, as more normal talent movement opens up, our opportunity to optimise that will also improve,” TCS chief executive Rajesh Gopinathan said during the company’s Q1 earnings.

High subcontracting costs have impacted the margins of these companies. Infosys’ Q1 margin declined 150 basis points sequentially to 20%. “The major components of the sequential margin movements were headwinds of 1.6% due to salary increases, 0.4% due to drop in utilization as we create capacity for future, 0.3% due to increases in subcontracting, third party and other costs,” Nilanjan Roy, CFO, Infosys, said in a post earnings call.

Experts believe most Indian IT companies are approaching subcontracting agreements mindfully and can take additional steps to ensure that their margins are not impacted in the long term.

“One of the most important steps would be lateral hiring for specific skills, mapping out and evaluating the supply chain of employees and subcontractors,” said Randstad’s Giri.

Courtesy/Source: The Financial Express