Covid-19 impact: IT bigwigs likely to speed up client staff absorption

Large deals with rebadging of clients’ employees made a comeback in Q1 of the ongoing financial year as IT services firms chased revenue growth amid demand slowdown. Experts are of the opinion that this trend is likely to accelerate in the coming quarters owing to vendor consolidation. Also, interest shown by domestic IT companies in acquiring in-house centres of global firms is also expected to provide fillip to this trend.

“While rebadging is not something new for Indian IT service providers, clinching these contracts during a pandemic indicates vendor consolidation. As firms look at driving revenue growth through the inorganic route by acquiring captives of global firms, such absorption of client employees is likely to increase in the coming quarters,” said Pareekh Jain, an IT outsourcing advisor and founder of Pareekh Consulting.

Rebadging refers to absorption of employees of the client by the IT services firm as part of the outsourcing contract.

Earlier this month, the country’s second-largest IT services provider Infosys announced a $1.5 billion deal with US-based investment firm Vanguard. As a part of this deal, around 1,300 roles in Vanguard will transition into Infosys. HCL Technologies is also in the process of rebadging some employees of Cisco as part of the deal to acquire Cisco’s self-optimising network (SON) technology for around $50 million.

Over the years, Indian IT firms have bagged many outsourcing deals in which they had to absorb the staffers of clients as part of the agreement. Such deals are margin dilutive in the beginning, though companies boost operating margins with project ramp ups.

Meanwhile, net revenue per full time equivalent (FTE) is likely to see adverse impact due to such deals. Revenue per FTE indicates how much revenue each regular employee generates for a company and is a critical measure of efficiency.

Last year, Tata Consultancy Services (TCS) had absorbed 1,300 employees from General Motors India’s engineering centre after it clinched a five-year contract worth $500 million from the US automobile giant.

Similarly, in September last year, Wipro bagged a $300 million contract from ICICI Bank after entering into a business-transfer agreement with Vara Infotech. According to the deal, the Bengaluru-headquartered firm absorbed 3,800 employees of Vara Infotech. Wipro had rebadged close to 9,000 staffers from US-based human resources and financial services firm Alight’s India unit as part of the $1.6 billion outsourcing contract. Infosys had also bagged $1 billion contract from US telecom giant Verizon as part of which it absorbed about 2,500 staffers from the telecom firm in 2019.

According to HR experts, at a time when IT firms see rise in their reserved employees due to project delays and cancellations, this may add to the pressure on utilisation levels.