Tighter US visa rules and rising application fees are driving up subcontracting costs across India’s top IT firms, as companies expand local hiring in overseas markets to reduce reliance on H-1B workers. Infosys recorded the sharpest increase, with subcontracting expenses rising 11.5 per cent year-on-year to 8.7 per cent of revenue in the September quarter.
Interestingly, Tech Mahindra, which reported a 10.3 per cent jump in subcontracting costs as a share of revenue in Q2, actually had the steepest YoY decline at 9.6 per cent, according to data accessed from UnearthInsight.
Meanwhile, IT industry bellwether Tata Consultancy Services (TCS) had the lowest dependency on subcontractors, with subcontracting costs only being about 5 per cent of its revenue. Overall, barring TCS, all the top eight IT majors saw a sequential increase in subcontracting costs in Q2.
“Infosys recorded the sharpest rise, driven by demand for new-age AI skills and project-specific location needs,” the data said.
Why are IT subcontracting costs rising?
The data emphasised that this industry-wide rise is linked to tighter US visa norms and fee hikes, prompting greater use of local subcontractors for onsite work. “Tech Mahindra’s costs declined as it focuses on margin optimization, using consistent reduction in subcontracting as a key lever,” the data added.
According to industry analysts, however, while H-1B visa limitations is one of the key drivers for this but it’s still only a small part of a larger narrative.
H-1B visas are non-immigrant visas that allow US companies to employ foreign workers in specialty occupations such as science, technology, engineering, mathematics (STEM), and IT. Moreover, the US accounts for nearly 60-70 per cent of Indian IT firms’ revenues.
“Instead of investing into full-time employees, IT majors are preferring subcontracting. They are expanding near-shore capabilities. While H-1B visa changes are a small factor of it, this is predominantly due to deal terms changing,” said Gaurav Vasu, founder and CEO, UnearthInsight.
The nature of deals and the deal tenures have shifted significantly. Amid fluctuating and slowing demand environment, IT companies are seeing shorter tenure deals of six to nine months. These deals include specialized AI / transformation led projects in the US and Europe market.
Additionally, demand uncertainties are driving IT firms to focus on short-term contractors rather than full-time employees as long-term costs.
“Companies are holding off on expanding full-time hiring until demand improves. When they do see short-term spikes in demand for specialized skills, they're turning to subcontractors instead," said Piyush Pandey, SVP - Institutional Equity Research (Lead Analyst) at broking firm Centrum.
Other analysts agree.
According to Gaurav Parab, Principal Research Analyst at consulting firm NelsonHall, the rise in onshore and nearshore contractor costs is increasingly structural.
GenAI and transformation programs are being delivered in shorter project cycles, which reduces the incentive to add long-term staff, Parab added. At the same time, clients in highly regulated sectors are placing greater emphasis on local deployment to meet security and compliance requirements.
"Subcontracting helps address these pressures in the short term by giving providers flexibility to source and rotate talent quickly, even though it weighs heavily on margins," Parab added further.
What IT companies said on H-1B exposure?
During their Q2 earnings conference calls in October, all the IT majors have unanimously said they have significantly reduced their dependency on H-1Bs over the years.
TCS said that only 500 employees are on new H-1B visas, while Infosys said workers requiring H-1Bs are a minority. HCLTech said it has constantly reduced reliance on visas while strategically strengthening global delivery model over the years.
Wipro said that the recent hike in H-1B visa fees will have no impact on its business, as the company has already localised 80 per cent of its workforce in the US.
Persistent Systems, meanwhile, has not filed a single H-1B application from India in the past 12 months, despite getting nearly 80 per cent of its revenue from North America.
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