Even as companies have bumped up hiring, they are also making peace with surge pricing across subcontractors to make up for the heavy client demand they are processing said executives of IT firms. As in the case of hiring, even in subcontracting, employees with strong digital skills are the ones drawing premium payment.
During the Q2 earnings conference of Tata Consultancy Services, chief financial officer Samir Seksaria noted that talent supply-side shortages and increased employee churn had led to higher back-filling expenses and greater use of subcontractors across the industry. Infosys noted a margin headwind of 0.5% due to higher subcontracting costs which have been seen as a necessity in the current environment. While the higher cost puts pressure on margins, the impact on the bottom line is mostly offset by an increase in business for these companies.
“I think the comp-hikes and subcons were negated by cost optimisation and scale benefits … the subcon increase is not the best from a margin perspective, but you have seen our stats on subcon slightly going up just to fulfil that gap,” Infosys CFO Nilanjan Roy said during that company’s earnings call.
Happiest Minds Technologies saw its subcontracting costs first spiking somewhere during Q2 FY21. “Last year this quarter we spent 7.3% (of expenses) on subcontractors, this year Q1 it reached 14% but is down to 13% in Q2. But you have to see this in line with our employee costs which have stabilised in comparison. Last year it was at 59% but has stabilised at 55% over the past two quarters,” managing director Venkatraman Narayanan said.
He added that when the company started a new project in the Middle East, it made more sense to subcontract people than to hire and deploy on a very short notice to meet the supply mismatch. “It gives us more flexibility in running operations,” he added.
With the record demand that companies are addressing during this period, it is not surprising that subcontracting rates have also surged. However, given the fact that digital skills are in short supply, companies would rather pay up than lose a client opportunity.
“When sometimes the client is so focused on time to market, they are not prepared to wait for the fresh talent to be ready to get deployed on the project. If you’re not ready to wait, then you have to pay surge pricing. So then we need to hire subcontractors or other people and they are going to be a little more expensive. So that means our rate will also be higher,” said Dharmender Kapoor, CEO at Birlasoft.
However, according to their Q2 commentary, most of the IT industry expects the severe talent crunch to normalise within two to three quarters, which is by the April-June quarter of next year when a large pool of freshers hired during FY21-22 as well as upskilled employees will be ready for the market.
“Subcontractors are paid more than full-time employees as subcontracting allows flexibility to companies and helps in reducing bench costs … Due to the limited pool of ready to deploy candidates, companies are willing to pay higher compensation to them. On a sequential basis, subcontracting costs have risen quarter-on-quarter between 7% and 10%,” said Siva Prasad Nanduri, vice president at Team Lease Digital, talking about subcontracting rates during the July-September quarter.
The continued momentum in digitisation efforts, accelerated by the Covid-19 pandemic, has translated into a surge in demand for digital skills, namely cloud infrastructure technology, React JS, Java Full Stack, Android, Angular JS, Cyber Security, and Gaming, among others said Vijay Sivaram, CEO, Quess IT Staffing.
“Over the last year, tech hiring has become increasingly cutthroat as MNCs, traditional IT firms, startups, and GICs are all looking to grab top technology talent, leading to an astronomical gap in talent demand and supply,” said Sivaram.
Most of the demand surge is driven by US and European markets where these skilled employees are being deployed, he said. However, with travel easing over the next few months, companies expect some of this dependence to ease out.
