India’s IT giants are shunning costly consultants. Blame subdued demand and a shift from tradition.

Bengaluru: India’s top information technology services companies are spending less on hiring temporary consultants for some of their software-related work, portending an extended softness in demand but also signalling a significant shift in the traditional outsourcing model.

Subcontractor expenses as a percentage of revenue for three of India’s top four IT services companies have dropped quarter over quarter over the last two years and are now at their lowest since December 2019, before the covid-19 pandemic made its way to India.

India’s IT services industry is people-led, with employees accounting for about 60% of a company’s overall expenses; consultants, who tend to be more expensive than a company’s employees, make up 4-13% of the costs.

Companies contract consultants from staffing firms when demand from clients outweighs their internal resources. This primarily applied to overseas deals where clients prefered for an IT services company’s employees or contractors to be located at the site of the project.

IT industry experts and executives at staffing firms attribute the reduced hiring of consultants chiefly to subdued spending by clients, as well as to a shift in business models as clients are now more willing to have their work handled remotely.

While this should ideally help companies boosting their margins, most of India’s top IT services companies haven’t been able to return to their pre-pandemic levels. Also, even as the bosses of India’s largest IT services companies have hinted at a better 2024-25 as compared with the year gone by, they have been tempered in their optimism.

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Subcontractor costs for Tata Consultancy Services Ltd, India’s largest IT services company, dropped to 4% of its operational revenue of ₹62,613 crore in the June quarter, its lowest since October-December 2019, when its temporary worker costs accounted for 7.9% of revenue.

For HCL Technologies Ltd, this figure dropped to 12.6% from 14.8% in the same period, and for Wipro Ltd, to 11.3% from 14.7%.

“The drawdown of subcontractor expenses is driven by the ongoing contraction of discretionary spending," said Peter Bendor Samuel, chief executive of Everest Group, a Dallas-based IT research firm. “Discretionary spending often requires contractors to add expertise and onshore capabilities. As this spend has been reduced, the need for contractors also is reduced."

TCS, HCLTech and Wipro did not reply to queries emailed onSunday.

The outlier

For Infosys Ltd, India’s second-largest IT services company, subcontractor expenses as a percentage of its revenue in the June quarter was about 8.1%, higher than the 7.5% in October-December 2019.

Infosys has let go of a significantly high number of permanent employees over the past two years even as itwon many mega deals, making it necessary for the company to hire consultants where their clients’ projects are located.

Infosys didn’t reply toMint’s queries.

TCS has also won a large number of mega deals over the past two years, but has managed to strike a balance between employee-hiring and contracting consultants.

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“They (TCS) prefer to grow their own talent and have further focused on reducing contractors to keep cost low," said Samuel. “They are also the most aggressive firm in moving work to India, where they don’t need contractors."

Despite this, TCS’s operating margin shrunk to 24.7% in the latest June quarter, from 25% in the three months through December 2019. Infosys’ operating margin dropped to 21.1% from 21.9% in that period, HCLTech’s to 17.1% from 20.2%, and Wipro’s to 16.5% from 18.4%.

Changing requirements

“Typically, higher proportion of subcontractor staff is used for onsite engagements, i.e., where the IT services companies’ clients are located. Post-covid, customers were open to having their work done offshore, which is in locations where IT services companies are located," said a Mumbai-based sell-side analyst on condition of anonymity.

“Therefore, subcontractor costs which were high when these IT companies would hire subcontractors to work in clients’ onsite locations have now come down."

Samuel mirrored the analyst’s opinions.

“Contractors are significantly more expensive than internal resources and are usually onshore," he said. “As firms seek to reduce cost, they look to replace contractors with their own staff, which is also often combined with moving more of the work to India or other offshore locations."

Krishna Vij, vice-president of IT staffing at TeamLease, a Bengaluru-based staffing firm, said IT services companies are also upskilling their workforce and reducing their dependence on consultants.

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TCS ended the latest June quarter with about 606,998 employees, up from about 446,675 in the three months to December 2019. For Infosys, the employee count improved to 315,332 from 243,454 over that period, for HCLTech to 219,401 from 149,173, and for Wipro to 234,391 from 187,318.

Despite this, the IT services sector has been battling increasing attrition.

For now, subcontractor costs are expected to hover at the current subdued levels.

“This year, we believe subcontractor cost has bottomed out or will remain stable around this level, need not be an incremental lever," Samir Seksaria, TCS’s chief financial officer, said at the post-earnings conference call with analysts last month.

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