Subcontract cost set to ease for IT firms

Bengaluru: Indian IT services companies' reliance on subcontractors has risen sharply in the last one year owing to robust demand environment and high employee attrition. However, company officials are of the view that the ratio of subcontractor cost to the total expenses will come down in coming quarters as more fresh engineers enter the workforce and travel resumes globally with receding Covid wave.

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 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 amid 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.

However, industry experts are of the opinion that this will come down in the next financial year. "IT firms are aggressively hiring freshers who will check the rising attrition. So, reliance on subcontractors will fall. Also, as travelling is opening up, Indian IT firms have started sending employees to onsite locations for project delivery. So, subcon expenses are likely to fall in coming quarters," said a Mumbai-based analyst.

Company officials had a similar view on this matter. They felt that subcon expenses would fall, which would support the overall margin level.

"The demand environment is so strong that we don't want to leave anything on the table. And therefore, whether it's through subcon, whether it's through lateral or freshers, we will first intend to fulfill that demand. And of course, over a period of time, we will optimize that entire structure," said Nilanjan Roy, Chief Financial Officer at Infosys.

"We were one of the lowest in the industry at about 6.9 per cent pre-Covid, and we are above 11 per cent (subcon expenses) now. But this is a lever, we will have over the medium term to optimize," he added.

As per analysts, a significant part of the SG&A (selling, general &administrative) expenses is likely to come back from next quarter with resumption of travel apart from opening of offices. With expenses from these heads coming back, IT firms have to reduce costs like subcontractor expenses to support margin.

Management of large IT companies were also expecting attrition numbers to come down from coming quarter, which will also reduce reliance on outside resources for executing projects.