Increase in  flexi-staff hiring may eat into IT industry's margins

According to the latest talent market research by Infosys, called Talent Radar 2019, the top five technical skills in demand in digital projects are: analytics, user experience, automation, IT architecture and artificial intelligence.

Companies like Tata Consultancy Services Ltd, Infosys Ltd, Wipro Ltd, HCL Technologies Ltd and Tech Mahindra Ltd have adopted this model in varying degrees.

The IT-ITeS (IT-enabled services) sector tops flexi-staff adoption with around 12 out of every 100 employees being contractual or flexi staff, according to the Indian Staffing Federation (ISF), the apex body of the domestic flexi staffing industry.

The sector’s flexi workforce is expected to grow to 720,000 by 2021 from half a million in 2018, according to ISF.

To be sure, the move toward contract hires has been a trend across industries, but it has become more visible in IT of late because of a rise in project-based work.

In tune with global IT spending, which is expected to remain flattish this year, clients are increasingly moving to project-based work instead of long-term contracts, wherever possible.

However, this is a double-edged sword as it also impacts the margins in the short-term due to the higher costs.

At Mindtree Ltd, now a Larsen & Toubro (L&T) unit, the average subcontracting/flexi hiring ranges from 10-15% of its overall workforce.

“The first advantage of flexi hiring is that demand can be fulfilled faster. For example, in IT services industry like ours, we fulfil such demand in 15-30 days as opposed to lateral hiring, wherein the average varies from 30-75 days. Secondly, for requirements that are short term, it makes business sense to leverage the subcontracting/flexi hiring models without increasing the headcount," said Pankaj Khanna, vice president, talent acquisition, Mindtree.

Similarly, the Infosys report cited above said, engaging temporary workers strategically is one of the key approaches to addressing the talent needs of today. “As enterprises progress in their digital journeys, the winners will be those who utilize multiple hiring sources and reskill workers in a culture of lifelong learning," U.B. Pravin Rao, chief operating officer, Infosys, said in the report.

The Internet of Things (IoT) and AI-based applications will create over 2.8 million jobs in rural India over the next 8-10 years generating ₹60,000 crore every year, according to industry body Broadband India Forum. Hence, the sudden rise in job opportunities and shortage of immediate talent supply will lead to more demand for contractual staffing.

“With emerging technologies such as AI and big data, new skill requirements are in demand. Flexi staffing is a solution to find out the right skills, based on project requirement," said Rituparna Chakraborty, president, ISF and co-founder, Teamlease.

Corroborating the views on the skills gap, Sivaram S, engagement manager, consulting firm Zinnov, said: “The focus on flexi-staffing is to quickly deploy talent for new-age areas such as AI, Machine Learning, and IoT, and drive velocity/agility in transformative engagements. It can be viewed as a means to augment existing digital engineering workforce in an organization, as there are challenges associated with hiring for specific skillsets."

Flexi staff can be deployed quickly, as opposed to permanent hires where there is a long onboarding process, say industry experts.

The reason for the proliferation of project-based work, as opposed to long-term contracts is the global slowdown that is leading companies to hire for one-off projects so that they can easily let people off when there is no requirement, said Siddharth Pai, IT consultant and venture capitalist.

“The trend that began with large non-Indian firms is now being adopted by Indian companies too," said Pai.

However, flexi hiring comes at a cost to these companies that have to shell out 15-20% more for employees with these skills, thus increasing the pressure on margins—at least in the short term.

According to Nomura research, subcontractor costs as a percentage of revenues stood at 7.5%, 8.2%, and 15.3% for Infosys, TCS, and Wipro, respectively, and have increased by 50-160 bps over the past two years.

One bps or basis point is one-hundredth of a percentage point.

“Subcontractors are typically 15-20% (more) expensive than employees and are a margin headwind going into FY20F… Sub-contracting expenses are also rising at Infosys and TCS given higher visa rejections and limited availability of talent onsite especially for the digital skills," Nomura stated in a research report dated 27 August.

Increase in sub-contracting resulted from a combination of surge in demand and staffing challenges on account of tech supply crunch, said Apurva Prasad, Research Analyst (IT), HDFC Securities.

He added: “TCS and Infosys’ sub-contracting expense surged by 26% and 40% respectively over the past year."