Big deals come with bigger labour costs for Indian IT services companies

The December quarter results of Indian IT services companies have been quite good with growth defying estimates for most firms on the back of healthy deal wins and a strong pipeline. However, almost every company is fighting the margin pressure owing to aggressive hiring as they had to rush to meet client demands from these new projects. 

In the past two quarters of FY19, there has been a pick-up in the demand, which is forcing the Indian IT firms to increase the pace of hiring in onshore locations apart from engaging the subcontractors. As the pricing for these projects is more or less the same, firms are seen mitigating the impact to certain extent by increasing the mix of offshore.

Indian IT firms will continue to evolve their business and operating models in order to cope with these disruptions, not just to remain profitable but also increase their topline, said Gartner analyst D D Mishra. 

“Indian IT firms are aware of the changes ahead and are taking necessary steps to cope with the threats or converting them into opportunities. But for some time, it will continue to be challenging for them,” said Mishra.

During Q3, Infosys signed 14 large deals with a contract value of around $1.6 billion while larger peer TCS clinched deals worth $5.9 billion. In fact, TCS said its employees, including the subcontracting staff that were hired in the Q3, have all been deployed in projects that started January 3 this year, at least two weeks earlier than the usual time. Almost every large cap and midcap IT services player has reported record deals this quarter.

While large companies managed to address the client requirements through subcontractors as well as increasing the pace of onshore recruitment, midsize and small IT services firms such as Persistent Systems, Hexaware, and Zensar are seen trying to offshore as much as works possible to tackle this challenge.

“Even as we continue to win these deals, there is an enhanced effort on servicing and staffing for some of the existing key accounts, both on-site as well as offshore," said a senior Persistent executive post Q3 earnings. The company also indicated that increasing offshore mix helped it deliver strong margins in Q3FY19.

To add to the talent woes, immigration authorities in the US have released final rules to ensure higher number of H1B applicants with advanced degrees from US institutes get an advantage during the filing season that starts on April 1. Under the prior process (which was put in place by the US Congress), if necessary, USCIS would run a lottery specifically to select 20,000 H1B visa beneficiaries who had a Masters degree (in any field) from a US university. After that, they would select the remaining 65,000 beneficiaries from the remaining petitions that had been filed. Under the new system, the process is reversed.  

“In our experience, the Indian IT services companies do not employ a large number of foreign graduates from US Masters programmes (although that number is increasing). Therefore, this change is likely to disadvantage those companies this year," said Scott J. FitzGerald, partner, Fragomen Worldwide.