Contract employees in IT firms are one of the first to be laid off in the event of a crisis such as COVID-19. But it is only temporary, for subcontractor need will only increase once the demand recovers, say experts.
When crisis hits
During the global financial crisis, most companies laid off contract employees and, for a period of time, staffing firms took the biggest hit. “Back in 2008, demand for subcontractors went down by 50 percent,” Ajay Shah, Head – Recruitment, Teamlease Services, pointed out.
As we are dealing with the novel coronavirus pandemic, this is more or less likely to repeat. Currently, most firms are looking to cut down salaries and defer pay hikes. Some of the employees are likely to be put on bench and subcontractors will be relieved to utilise existing resources at the back of projects and to cut costs.
Forum for IT Employees (FITE) has filed a petition in the Maharashtra labour department against IT majors terminating contract employees. A startup in Bengaluru has fired close to 2,000 contract employees recently. This is likely to continue till the pandemic is under control, said staffing executives Moneycontrol spoke to.
Though they did not share the number, subcontractors could account for as high as 15 percent depending on the company's business model.Post-crisis scenario
However, once the market recovers, the executives said, they expect the demand to grow significantly just like in 2008.
What the executives say is not far from the truth. For, subcontracting costs in IT firms have grown exponentially since the global financial crisis a decade ago.
Let us take Infosys for instance; the cost of subcontractors increased from Rs 1,166 crore in 2008-09 to Rs 7,646 crore in 2018-19. In the case of Wipro, sub-contracting cost went up from Rs 1,392.6 crore in 2008-09 to Rs 8,922.5 crore in FY19. In both cases, a growth of about 500 percent.
For TCS, India’s largest IT service provider, subcontracting cost in FY09 was Rs 1114.57 crore. The company’s FY19 annual does not specify subcontractor’s cost separately. However, the cost of external consultants almost doubled compared to FY18. The cost stood at Rs 12,256 crore compared to Rs 6,415 crore in FY18.
Obviously, the company revenues too have multiplied in the last decade, growing anywhere between 100 and 300 percent. But as the earlier figures show, not as much the subcontractor costs. Even on a year-on-year basis, the numbers have seen an increase of 15-50 percent in FY19, much higher than the revenue growth, which now stands at 7.7 percent.
“Like 2008, there might be a drop in the meantime, the demand will continue to grow post-COVID-19,” Shah pointed out.
Why would subcontractors be more in demand?
There are several reasons for this. Vikram Ahuja, co-founder, Talent500 by ANSR Consulting, said it is the most risk-free option. For instance, it is easy to ramp down a temp workforce than a
fulltime workforce. Here, you are dealing with just one agency rather than individuals.
Another reason is cost-cutting and better utilisation. Supaul Chanda, a former Teamlease Services Executive, said in an earlier interaction that increasing subcontractors helps companies reduce bench strength and overall spend by 9 percent. He explained that while contract hiring comes at an increased cost, the company saves on other expenses such as hiring, training and maintenance of the bench employees.
The recent shift to work from home has also helped. Going forward, Ahuja explained that the sector will see increased acceptance of remote employees since concerns about security and productivity, which were an impediment, is less of an issue. This would result in top talents as contract employees, unlike now where they are mostly employed in low-end work, he added.