Amid rising onsite wages, high visa rejection rates and a politically-charged environment in the US, where a debate on outsourcing is waging, India's IT firms including Infosys, Wipro and TCS are relying on external subcontractors more than ever before.
For the financial year ended March 2016, Infosys, Wipro and TCS spent more on parcelling off more customer projects to smaller vendors, according to their financial reports. According to top executives of these companies, most of the subcontracting work took place onsite in the US, resulting in higher expenses.
In the year ended March 2016, TCS spent Rs 7,823 crore on external consultants' fees, compared with Rs 6,116 crore in the year-ago period. The subcontracting expenses as a percentage of revenue climbed up to 7.2% from 6.46% last year.
Even though Infosys' subcontracting expenses witnessed a sequential drop in the March quarter, the overall expenses for the year were much higher. For FY16, Infosys spent Rs 4,417 crore on technical subcontractors, compared with Rs 2,909 crore in the previous year. Wipro also witnessed an increase in subcontracting costs. For FY16, subcontracting expenses went up to Rs 6,486 crore, compared with Rs 5,208 crore.
The increased expenditure on subcontracting comes at a time when Indian IT firms are attempting to evolve beyond relying on temporary visas and hire locally, when they are trying to increase profit margins by handling more work offshore and also battling increased immigration scrutiny in a politically-charged environment in the US.
However, according to executives and experts, companies are still struggling to contain those expenses due to a shortage of skilled labour at onsite locations like the US and thus have no option but to turn to subcontractors.
"What is happening is that subcontracting expenses for IT firms are going up, largely due to factors such as onsite reduction due to attrition and a shortage of skills. So these companies have no choice but to rely more on subcontractors, even though they are talking of gradually phasing out the reliance on subcontractors," said an analyst at a multinational brokerage firm who declined to be named.
To be sure, subcontracting is not a new phenomenon in India's $160-billion IT industry. Top Indian outsourcing firms have been subcontracting work to smaller vendors for nearly a decade now.
However, most companies are now starting to go beyond their traditional approach to subcontracting, at a time when the global technology industry is undergoing its biggest transformation due to the rise of cloud computing and analytics and business models are also evolving at its core.