Tech firms’ temp worker costs dip as demand falls

livemint.com:

Wipro Ltd, sub-contractor expenses as a percentage of revenue in the December quarter dipped to below or near levels that prevailed before the outbreak. At TCS, HCL Technologies, and Wipro, sub-contractor expenses accounted for 6.14%, 13.12%, and 11.61% of revenue in the third quarter, falling below 7.75%, 13.4%, and 14.49% they reported in the January-March period of 2020. At Infosys, these expenses were a tad higher at 7.89% at the end of December, against 7.32% in the March quarter of FY20.

Spending less on temporary workers is one big lever to improve profitability for IT companies, given that salaries account for 60–65% of their expenses, with sub-contracting costs alone accounting for 6–13% of total expenses. In the December quarter, TCS’s operating margin came in at 25%, against 25.1% in the fourth quarter of FY20. HCL, Infosys and Wipro clocked operating margins of 19.8%, 20.5%, and 16%, respectively, against 20.9%, 21.2%, and 17.6% respectively in the March quarter of FY20.

Emails sent to Infosys, TCS, HCL Tech, and Wipro remained unanswered till press time. Sub-contractor costs primarily refer to costs of outsourcing work to outside contract staff. As the pandemic lockdowns fuelled demand for software work, sub-contracting costs peaked in the June quarter of FY20.

Many companies struggled to hire sufficient numbers, including fresh graduates and experienced executives. Since then, as demand softened, IT services firms have needed few temporary engineers, allowing them to trim these expenses. The decline in sub-contractor costs signal better profitability for these companies in the days ahead.