IT firms look to cut reliance on subcons

l Average subcon cost went by 3-4% in last 2 yrs

- IT cos to increase employee utilisation levels now

- To bring subcon costs to pre-pandemic levels

- Higher number of freshers provide leeway for cost savings

Bengaluru: Indian IT firms are desperately trying to reduce their dependency on third party vendors- called as subcontractors in industry parlance- in onsite geographies like the US and Europe in their bids to reduce cost.

Experts in the know said that subcontractor (subcon) expenses are likely to come down to pre-pandemic levels in the coming quarters.

“Firstly, demand is coming down. Secondly, IT firms have recruited the freshers in large numbers earlier. Now, these freshers are productive and can be deployed in projects. The long-term goal of IT firms is to reduce dependency on subcons with the right sizing of the pyramid. Moreover, H1B visas are available for sending resources from offshore locations like India to onsite geographies like the US. Therefore, overall subcon dependency will come down now due to these demand-supply factors,” Pareekh Jain, an IT outsourcing advisor and Founder of Pareekh Consulting told the Bizz Buzz.

During the pre-pandemic period, subcontractor cost of the overall cost structure used to be 7-8 per cent. However, it has now increased to 11-12 per cent for most companies on the back of pandemic-led demand surge, difficulty in sending people to onsite locations amid the Covid along with less local hiring. For instance, subcon costs for Infosys stood at 11.3 per cent by the end of March, 2023.

As demand is projected to be tepid in FY24, all IT firms are scouting for avenues to control cost and bringing down reliance on third party vendors is one of the top items for cost control.

“As we look beyond FY24, we believe we have various levers to generate more efficiencies like improving utilization, reducing subcons, improving pyramid apart from growth acceleration and potential pricing increases, which will enable us to aspire for higher margins over time,” Nilanjan Roy, Chief Financial Officer of Infosys has said during the analyst call.

Even market leader Tata Consultancy Services has started to replace high cost subcontractors with its own employees in onsite geographies from fourth quarter onwards. “In the current (Q4 of FY23) quarter, we had increases in the onsite manpower cost item. Some part of it was on account of replacement of higher cost sub-contractors with employees, and some part of it due to increased local hiring,” Samir Seksaria, CFO at TCS has said during earnings call.

“The way we are exiting the subcontractor cost side of it should be helpful. And we should be able to further double down on that (for reducing cost),” he has added.

While IT firms’ focus on reduction of subcontractor cost continues, HR experts are of the opinion that subcon cost will not come down drastically given the flexibility and cost advantage.

“If you see the cost and flexibility that subcons provide with regard to hiring full-time employees onsite, then the dependency is likely to continue. Because despite tepid growth projections, the pipeline of deals remains strong for the industry,” Supaul Chanda, GlobalBusiness Head of talent engineering firm- Otomeyt told the Bizz Buzz. He also said that hiring in subcon side remains subdued like full-time staffer hiring as of now.

IT firms recruited freshers in large numbers. Now, these freshers are productive and can be deployed in projects. The long-term goal of IT firms is to reduce dependency on subcons with the right sizing of the pyramid.

- Pareekh Jain, Founder, Pareekh Consulting, tells Bizz Buz