it companies: Subcontracting costs rise 60% in 2 years for top four IT firms

Outsourcing cost of Tata Consultancy Services, Infosys, Wipro and HCLTech increased to more than Rs 62,939 crore ($7.6 billion) for the year ended March 31, 2023, compared with Rs 39,368 crore ($4.8 billion) in fiscal 2021, according to data compiled by specialist staffing firm Xpheno.

A sharp increase in the hiring of subcontractors to fill in the immediate need for staff to ensure delivery of projects could be one of the reasons for increase in corporate-staffing firm malpractices, human resource experts said.

“The billion-dollar-plus spent on subcontracting at large IT firms and the rapid rise of it post-pandemic has accentuated the decade-old practices of staffing procurement,” said Kamal Karanth, cofounder of Xpheno.

Industry sources peg the number of subcontractors at 10-15% of an IT player’s workforce. On an individual basis too, these numbers have shot up for companies. According to companies’ financials, the fees to external consultants paid by TCS rose 61.5% in the two years ending fiscal 2023 to Rs 21,337 crore. Most of this payment relates to subcontracting.

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For Infosys, the cost of technical subcontractors nearly doubled to Rs 14,062 crore in the last two years. Wipro’s number was up 38% to Rs 11,524.7 crore while for HCLTech, this cost rose 47% to Rs 14,950 crore.

“An IT company typically has 80-120 staffing suppliers and each supplier is brought in based on unique skill specialisations they bring in, like cloud, cybersecurity or data analytics. However, this leads to an unmanageable long tail and the process is prone to vulnerability as the empanelment is based on relationships (rather) than capability in some cases,” Karanth said.

Subcontracting costs and employee expenses are shown as two different line items in financial statements. This is because salary is generally considered as a fixed overhead while subcontractors are billed on an hourly basis and do not feature in the company’s payroll.

According to reports last week, a whistle-blower at Tata Consultancy Services had accused certain senior executives of violating the company’s code of conduct to give preferential treatment to a few staffing firms. During its annual general meeting on Thursday, the company said six employees and six staffing firms were banned due to discrepancies in the recruitment of business associates.

“The industry is very volatile and decisions have to be taken fast as it (subcontracting) is directly linked to revenue,” said Aditya Mishra, CEO at CIEL HR Services. “There are too few process checks and quality parameters in staff procurement and human resource management compared to delivery functions. This has always received lower priority and has come to light due to the recent events,” he said.

Outsourcing cost of Tata Consultancy Services, Infosys, Wipro and HCLTech increased to more than Rs 62,939 crore ($7.6 billion) for the year ended March 31, 2023, compared with Rs 39,368 crore ($4.8 billion) in fiscal 2021, according to data compiled by specialist staffing firm Xpheno.

A sharp increase in the hiring of subcontractors to fill in the immediate need for staff to ensure delivery of projects could be one of the reasons for increase in corporate-staffing firm malpractices, human resource experts said.

“The billion-dollar-plus spent on subcontracting at large IT firms and the rapid rise of it post-pandemic has accentuated the decade-old practices of staffing procurement,” said Kamal Karanth, cofounder of Xpheno.

Industry sources peg the number of subcontractors at 10-15% of an IT player’s workforce. On an individual basis too, these numbers have shot up for companies. According to companies’ financials, the fees to external consultants paid by TCS rose 61.5% in the two years ending fiscal 2023 to Rs 21,337 crore. Most of this payment relates to subcontracting.

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For Infosys, the cost of technical subcontractors nearly doubled to Rs 14,062 crore in the last two years. Wipro’s number was up 38% to Rs 11,524.7 crore while for HCLTech, this cost rose 47% to Rs 14,950 crore.

“An IT company typically has 80-120 staffing suppliers and each supplier is brought in based on unique skill specialisations they bring in, like cloud, cybersecurity or data analytics. However, this leads to an unmanageable long tail and the process is prone to vulnerability as the empanelment is based on relationships (rather) than capability in some cases,” Karanth said.

Subcontracting costs and employee expenses are shown as two different line items in financial statements. This is because salary is generally considered as a fixed overhead while subcontractors are billed on an hourly basis and do not feature in the company’s payroll.

According to reports last week, a whistle-blower at Tata Consultancy Services had accused certain senior executives of violating the company’s code of conduct to give preferential treatment to a few staffing firms. During its annual general meeting on Thursday, the company said six employees and six staffing firms were banned due to discrepancies in the recruitment of business associates.

“The industry is very volatile and decisions have to be taken fast as it (subcontracting) is directly linked to revenue,” said Aditya Mishra, CEO at CIEL HR Services. “There are too few process checks and quality parameters in staff procurement and human resource management compared to delivery functions. This has always received lower priority and has come to light due to the recent events,” he said.