IT Firms Cut Subcontracting As Discretionary Spend Slows, Automation Rises

Subcontracting costs for Indian IT firms are declining as discretionary projects dry up and automation adoption rises, reducing the need for external vendors and streamlining operations.

The cost incurred by IT firms to outsource specific and specialised tasks to other vendors is the subcontracting expense. Typically reliance on subcontractors is reduced in a subdued demand environment as a cost cutting measure. Contract staffing costs more than deployment of full-time employees, as it provides flexibility and specialist skills.

Reduction in subcontracting cost is being used as a lever to maintain margins. Ramkumar Ramamoorthy, Partner at Catalincs, said, “IT companies use subcontractors to gain access to specialised expertise, address quick-burst skill needs and scale up discretionary programs. Given that discretionary programs are drying up, companies are maximising every margin lever.”

This includes reducing sub-contractor usage, increasing utilisation rate, controlling travel costs, reducing discretionary general and administrative(G&A) expenses, and optimising employee pyramid structures, he added.

Margins for the top IT firms have remained range bound in FY25, as the demand environment remains subdued due to macro-economic factors. The prospects of margin expansion continues to be bleak, as companies now look to optimise through other levers.

TCS' Chief Financial Officer(CFO) Samir Seksaria in recent Q4 results said, “If the current uncertainty prevails, it can lead to lower operating leverage as utilisation will be impacted and sudden contraction in demand delays or deferrals can have an impact on margins.”

The company hopes for broad-based revenue growth to bring in better operating leverage. The levers being banked on still continue to provide some potential tailwind like the ones of pyramid, productivity and realisation, according to Seksaria.

Similarly, Infosys CFO Jayesh Sanghrajka said, “We see opportunities in terms of increasing value based selling in terms of pricing, in terms of lean automation of doing more productivity, increasing near shore and multiple of our geographies.”

The subcontracting costs are expected to reduce 10-15% in the coming quarters, according to Teamlease Digital. While subcontractor demand may rise temporarily due to project-based needs, the long-term focus will remain on permanent, in-house staffing solutions.

Krishna Vij, Vice President at TeamLease Digital said, “Subcontracting costs for major IT companies have declined primarily due to the increased adoption of automation technologies and a shift toward building in-house capabilities. AI-driven development and automation have enabled companies to perform tasks more efficiently, reducing the reliance on subcontractors. With over 40% of routine tasks now automated, companies are able to optimise their workforce and improve cost efficiency.”

For instance, Infosys has said it has invested significantly in hiring talent with proven GenAI skills and is rapidly upskilling existing engineering talent. Infosys has over 250,000 employees trained in the areas of generative AI, with over 3 million lines of code being generated using GenAI large language models.

Similarly, since July 2023, Wipro has trained more than 225,000 employees on basic GenAI fundamentals, while more than 30,000 employees have been trained on more advanced levels of AI based on their roles and personas. In July 2023, Wipro made a $1 billion announcement in its ai360 ecosystem, designed to infuse artificial intelligence (AI) into every solution, tool, and process.