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IT services companies’ subcontracting costs rise as demand picks up

Most contract staffing firms have seen demand go back to 80-90 percent of pre-pandemic levels. According to contract hiring executives, the share of subcontracting will increase due to rising demand and increasing acceptance of the work-from-home model

January 22, 2021 / 02:42 PM IST
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Subcontracting in IT services is slowly making a comeback. As growth momentum picks up and work from home becomes more acceptable, subcontracting costs will go up further, say executives and experts.

After the onset of COVID-19, companies had cut down on subcontracting and focussed on increasing utilisation of existing employees to save costs. Between April and June 2020, companies had also frozen lateral hiring plans and deferred on-boarding of freshers.

However, over the last few months, demand for subcontractors is back at pre-COVID-19 levels.

Subcontractor costs

The subcontracting costs of IT services firms have been rising over the last few years and now account for about 15 percent of overall revenue. Also, subcontractors are paid more than full-time employees. A Bengaluru-based staffing executive explained that if a full-timer is paid Rs 45,000 for a certain role, a contract employee would be paid Rs 60,000 with the same qualification.


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This is on account of the increased flexibility contract staffing offers and the reduced cost of bench resources. Bench employees are reserve employees on the company's payroll standing by in anticipation of future projects.

A case in point is the pandemic. Companies cut down subcontracting and increased utilisation of existing employees when the pandemic struck. However it is picking up, as demand improves. Take, for instance, top IT firms TCSWiproInfosys and HCL Tech. For the nine months that ended in December 2020, TCS and Infosys’ subcontracting came down by close to 4 percent. Wipro’s was down by 8.3 percent. HCL Tech’s outsourcing cost came down by 8.4 percent.

However, on a sequential basis, these companies have seen subcontracting costs rise. For the quarter ended December 31, 2020, TCS’ fee to external consultants went up 5 percent to Rs 3,230 crore, from Rs 3,063 crore in Q2 FY21.

Infosys’ cost to subcontractors saw a 13 percent increase to Rs 1,817 crore in Q3 FY21 sequentially. Wipro’s subcontracting fee increased 2 percent between the quarters ended September 2020 and December 2020 and now stands at Rs 2,066 crore. HCL Tech’s outsourcing expense went up by 5.7 percent to Rs 2616 crore.

Prateek Aggarwal, CFO, HCL Tech, told Moneycontrol in a recent interaction that subcontracting costs had come down in the June quarter in the wake of COVID-19. But they have increased over the last two quarters and will increase further in the coming months.

In an earlier interaction with Moneycontrol, V Ramakrishnan, CFO, TCS, said that the company will continue to hire contractors in the areas where there is demand for particular skill. “We will continue to hire. This is an area which we continuously focus on. It is more tactical,” he added.

What’s driving contract staffing?

Most contract staffing firms saw demand go back to 80-90 percent of pre-pandemic levels. According to contract hiring executives, the share of subcontracting will increase due to rising demand and increasing acceptance of the work-from-home model.

Demand is huge and companies might not be able to fulfill it internally. This includes projects that were stalled earlier as well as new deal wins. Over the last two quarters, Indian IT services firms signed large contracts and are in need of talent to execute them. For instance, Infosys signed deals wins worth $7.13 billion and TCS, $6.8 billion. Wipro signed a large contract worth $700 million with German firm Metro AG.

Though HCL Tech did not share the value of deals the company signed, it said the company closed 13 large transformation deals, all of them net new deals, in Q3 FY21.

While lateral hiring continues, contract staffing becomes integral to execute projects at scale.

Work from home acceptance

Work from home models are gaining wider acceptance among clients and companies find the flexibility contract staffing offers attractive.

Ramesh Alluri Reddy, Director – Managed Services & Professional Services at staffing firm Adecco Group India, explained in an earlier interaction that companies are still wary of going full-time and contract staffing gives them flexibility.

Companies such as TCS and HCL Tech are already piloting gig working models. TCS’ Ramakrishnan said that it is currently in the early stages of a gig working pilot.

HCL Tech Chief Human Resources Officer VV Apparao pointed out that the company now had a dedicated policy for gig working. However, gig work is yet to pick up as the employees also have the flexibility of working from home and office as the WFH model evolves.
Swathi Moorthy
first published: Jan 22, 2021 02:42 pm

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