IT biggies slash subcontracting to protect margins

Major information technology (IT) services companies are reducing subcontracting to smaller tech vendors to protect margins that have been hit by the massive slash in pricing during the downturn in the sector.

During the heydays, large software firms used to subcontract part of their contracts to smaller vendors — either due to capacity constraints, unavailability of skills or merely to reduce the cost of their project.

Neeraj Gupta, general manager -public, education and healthcare - Dell India Pvt Ltd, said: “It (subcontracting) is coming down. There are people (large IT firms) who have been reducing the amount of subcontracting”.

IT analysts at UBS Investment Research note that lower “out-contracting” is one of the ways large software players are safeguarding margins.

“Margins have been protected through aggressive subcontractor reductions and incremental restructuring,” said the UBS analyst team led by Jason Kupferberg in a December 7 report.

Analysts said such a move will impact the businesses of medium and smaller IT players. These are dependent on bigger players for business as they cannot bid for large deals by themselves.

Mahesh Shastry, senior vice-president and head of global operations of TTL (travel, tourism and logistics), Sonata Software Ltd, said his company has seen a drop in subcontracting work.

“It (subcontracting work) has come down. We have been doing some work for product vendors and software developers. (Now), they (bigger product and service vendors) are getting lesser work done outside”.

According to him, tumbling pricing is forcing larger companies like IBM, Accenture, Tata Consultancy Services and others to execute most of the project on their own.

“They (bigger players) are now thinking — do we need subcontractors when we can do it inhouse. It (lower subcontracting) helps them improve utilisation and they also do not have to share profits with subcontractors,” said Shastry.

Chandramouli C S, director, advisory services, Zinnov Management Consulting, said one of the reasons larger tech firms were subletting lesser work was because the volumes have come down.

“Earlier (prior to 2008), volumes were very high while their capacity (number of skilled people) was lower. With volumes having come down drastically in the last one and half year, a large part of the project is done within the company”.

Chandramouli said the requirement for getting work done from smaller vendors has also come down because most software MNCs have scaled up their delivery centres in India. “Now, it is easier for them to ramp up (their workforce) in India than rope in some other vendor for an element of the contract”.

Subhash Dhar, member executive council and group head, sales and marketing, Infosys, said his company follows a policy of subcontracting only as a last resort. “We like to have control over quality the (of delivery to customers) so we do most of the project inhouse. We subcontract only when specific skills are not available”.

Dhar does not see any major change in his company’s current policy on subcontracting in the near future.