IT firms see spike in sub-contracting costs

As domestic IT players seek to deliver new-generation and digital services, they are looking beyond their in-house talent pools to hire sub-contractors and external professionals. They are willing to pay more for these sub-contractors as the crunch for qualified employees with new-age technical skill-sets gets intense.

Usually, most of these recruitments pertain to on-site (or overseas) locations, though hiring for external professionals happens for domestic operations, too. Issues related to H-1B visas in the US are also leading to an increase in such hiring.

Consider this: for TCS and Infosys, sub-contracting costs increased 25.6 per cent and 38.9 per cent respectively for the first nine months of FY19 compared to the same period in FY18, while their employee expenses rose only 18 per cent and 15.3 per cent respectively.

For mid-tier players such as Mindtree and Zensar Technologies, sub-contracting costs rose a whopping 59.3 per cent and 69.5 per cent respectively, even as their employee costs increased by less than half those levels.

Given that many new digital projects tend to be short-term or one-off in nature, it also helps IT firms to juggle talent based on client requirements.

Talent, visa woes

“Sub-contracting costs have risen due to a combination of issues including the challenge in obtaining H-1B visas for sending employees from India and the crunch for local talent in the US,” says Ashish Chopra, Sr Group VP & IT Analyst, Motilal Oswal Financial Services.

“While niche skill requirements can be fulfilled by hiring full-time employees, it may take more time, thereby causing a delay in the commencement of a project. Hence companies take recourse to sub-contractors to execute the projects in a timely manner.”

The increase in digital deals won by Indian IT vendors has accentuated the trend. “Digital contracts require on-site delivery and domain specific talent. Also, the size of the digital contracts is rising and so is the demand for talent,” says Amit Chandra, Analyst - IT, HDFC Securities. “Digital as a percentage of revenue for Indian IT firms is around 30 per cent and growing at 32 per cent YoY. Most of the large deals are in the transition stage and sub-contracting is the only option to the fulfil talent gap and timely delivery.”

Harit Shah, Senior Research Analyst, Reliance Securities, adds: “Shortage of trained digital workers is a bigger driver for hiring more subcontractors than the visa issue. Digital projects — whether one-off or slightly long term — need to be adequately staffed with skilled resources.”

Expensive recruits

Though hiring consultants or sub-contractors for a short duration would have the desirable effect of not adding to the employee count, it does not optimise costs for software vendors. Also, given that they bring niche skills to the table, their price tags are higher.

Chandra of HDFC Securities throws more light on this aspect: “There is a severe talent crunch in the US due to a huge demand for new-age programmers. There are many vacant positions and companies are hiring a lot of freelance programmers to fulfil the demand. The cost is $200,000-300,000, which is way higher than the average size of $90,000-120,000 for a programmer on an H-1B Visa,” he says, adding: “Sub-contracting costs as a percentage of sales have increased by 200-250 basis points and have impacted margins for IT firms.”