US travel nod not a breather for IT cos

Rising Staff Cost

- Subcontracting forms 10-15% of total employee cost

- Impacted operating margins by 50 bps in Q2

- Last week, US allowed international travel

- US accounts for 60% of revenues to Indian IT services firms

The significance of subcontractors in the current time is not going to reduce. There is significant demand for digital skillsets and subcons help companies in fulfilling that gap

- Neeti Sharma, co-founder and president, TeamLease Edtech

Bengaluru: Subcontracting expenses are not likely to come down in the near future even as companies embark on an aggressive hiring plan to meet the supply side pressures. According to experts and industry officials, though US allowing international travel from last week will ease the situation a bit, drastic changes in subcon costs are not expected in the coming quarter.

To meet the increasing demand from clients, IT companies take the help of third-parties with technical resources to execute the project. Such third-parties are called subcontractors in IT industry parlance.

On an average, subcontracting forms about 10-15 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-a-half-year, companies are taking the help of subcontractors for project delivery.

Against this backdrop, all large and mid-tier firms have shown rise in subcontracting expenses. For instance, Infosys said that subcon expenses have impacted its operating margins by 50 basis points in the second quarter of this fiscal. Similarly, market leader Tata Consultancy Services (TCS) has also indicated that higher utilisation of subcons across the industry owing to rising attrition. Similarly, mid-tier companies like Tech Mahindra & Happiest Minds Technologies have also indicated elevated subcon costs in the last three quarters, though things are normalising a bit.

"Higher subcon cost as we are not able to depute many of our people abroad due to travel restrictions. And subcon costs tend to be higher than the cost of our associates," Milind Kulkarni, Chief Financial Officer of Tech Mahindra has said.

Experts are of the opinion that US has allowed international travel from last week, which will enable Indian IT firms to send their engineers to work in client projects in the US, which contributes more than 60 per cent of revenues to Indian IT services firms.

"Given the demand environment, the significance of subcontractors in the current time is not going to reduce. There is significant demand for digital skillsets and subcons help companies in fulfilling that gap," said Neeti Sharma, Co-Founder and President of TeamLease Edtech told the BizzBuzz.

A host of subcontracting firms such as TeamLease, Manpower Group, Randstad, Adecco, Kelly Services, Allegis Global Solutions and many other boutique staffing firms in the global IT industry landscape which supply skilled manpower to technology companies in the US, Europe, and other geographies.

These companies have seen rising demand for their services in the last one and half year as Indian IT firms couldn't send their resources to the US due to travel restrictions amid rising demand. Experts, however, added that as attrition pressure eases up in the coming three-four quarters, the dependence on subcontractors is likely to come down. Top four Indian IT firms are planning to hire around 160,000 fresh graduates in this fiscal year.