IT subcontracting picks up amid slowdown talk
Sluggish activity in technology space usually compels industry to rely more on third-party vendors than taking employees on rolls
image for illustrative purpose
- IT cos witnessing high subcontracting cost amid high attrition, talent demand
- Subcontracting forms about 6-8% of total employee cost
- Subcontracting on the rise due to rising demand for digital projects and high attrition
Bengaluru: Subcontracting is witnessing an initial sign of uptick in the Indian IT services industry as talks of slowdown gathers pace. This is despite the fact that subcontractor costs have already been high among major players. Experts in the know said that slowdown in technology industry usually prompts companies to depend more on third-party vendors than taking employees on rolls.
"We see signs of subcontracting going up in coming quarter. Companies have started to rely more on subcons for executing projects as the concerns of slowdown rise," Supaul Chanda, vice-president of technology recruitment firm Experis of Manpower Group told BizzBuzz.
He said that IT firms usually take more comfort in employing subcons for executing projects than hiring employees full time during uncertain demand cycles.
Indian IT companies have already been witnessing high subcontracting cost amid high employee attrition and talent demand. On an average, subcontracting forms about 6-8 per cent of total employee cost in most Indian IT services firms. Due to rising demand for digital projects and high attrition seen in the IT industry in the last one and half year, companies are taking the help of subcontractors for project delivery.
Also, travel restrictions during the pandemic have led to rising dependency on subcontractors in onsite locations like the US. Against this backdrop, all large and mid-tier firms have shown rise in subcontracting expenses. Currently, most IT firms have reported subcon expenses in the range of 10-12 per cent or more in recent quarters.
"It (subcontracting cost) is a variable cost and therefore it has strategic value to us in an uncertain environment. So, all aspects of it play out. We are keeping a close watch on it and we will be reacting to it depending on how the demand-supply situation plays out," Rajesh Gopinathan, CEO of Tata Consultancy Services (TCS), said during the post-earnings analyst call.
In the first quarter of FY23, TCS' subcontracting cost stood at 9.7 per cent, which was around 7 per cent in the preceding quarter.
Meanwhile, companies like Infosys said that it would reduce its dependence on subcon in coming quarters in its bid to support margin.
"We will continue to focus on various cost-optimization measures, including rationalization of subcons, flattening of the pyramid, increasing automation, reducing on-site mix, and increasing pricing," said Nilanjan Roy, Chief Financial Officer at Infosys.
Not only among large companies, even dependence on subcontractors among mid-tier companies are rising despite record hiring across the industry.
We see signs of subcontracting going up in coming quarter. Companies have started to rely more on subcons for executing projects as the concerns of slowdown rise
-Supaul Chanda, vice-president of technology recruitment firm Experis of Manpower Group
