IT companies facing high subcontracting costs

The subcontracting costs of Indian IT services companies have been on the rise recently due to high demand and attrition rates. Subcontracting costs of IT companies increased during the pandemic, as industry players subcontracted employees to close gaps in their workforce.

IT companies hire subcontractors, or third-party agencies, to meet the demand needed to fulfil projects with specific skill-sets that may not be readily available internally. Subcontractors are further used to bridge skill gaps, meet the demand for top talent, and manage a seasonal workforce crunch.

Yeshab Giri, Chief Commercial Officer, Staffing & Randstad Technologies, Randstad India, said, “As the subcontracting costs amount to 13-14% of total costs incurred by the IT firms, many companies have continued this approach, expecting that this outlay would be recovered by subsequent growth in their profits.”

Infosys’ cost to subcontractors increased 10.6% sequentially to Rs 3,969 crore in the June quarter from Rs 3,588 crore in the March quarter, which led to a decline of 150 basis points in the company’s Q1 margin sequentially to 20%. Wipro’s subcontracting fee increased 3.3% to Rs 2,945 crore in the June quarter, from Rs 2,850 crore in the preceding three months.

Tata Consultancy Services’ (TCS) fee to external consultants rose to Rs 5,100 crore for the first quarter ended June, up 10% from Rs 4,632 crore in the March quarter. TCS Chief Executive Rajesh Gopinathan said, “Subcontractors are also based on supply disruptions at a local market level. So, that definitely has a role to play. As travel opens up, as more normal talent movement opens up, our opportunity to optimise that will also improve.”