Subcontracting costs at eight Indian IT companies rose to 11.3% of revenue in the quarter ended September 30, up from 10.5% a year earlier, according to data from business intelligence firm UnearthInsights. This increase reflects growing reliance on locally hired workers due to immigration restrictions and talent shortages. Tata Consultancy Services (TCS), the country's largest IT services provider, recorded the largest increase at 1.5 percentage points to 6.8%, while Wipro and Infosys saw relatively modest increases of 0.2 percentage points each. As per UnearthInsight founder Gaurav Vasu, over the past three to four quarters, subcontracting expenditure has risen as more client-site work is executed through subcontractors.
Among mid-tier companies, Persistent Systems remained the most exposed with subcontracting costs rising 0.3 percentage points to 15.3%. For the last 12 months (LTM), the figure climbed to 9.6% from 7.7%. Infosys has acknowledged that subcontracting costs, at 8.9%, remain elevated compared with about 6% before the Covid-19 pandemic. The company's Chief Financial Officer Jayesh Sanghrajka told analysts that a one percentage point reduction would provide 15-20 basis points of margin headroom. He noted that there is an endeavour to bring subcontractor costs down over time, but it will never come down to zero, with even the best years maintaining the range of 5-6%.
According to UnearthInsight founder Gaurav Vasu, restrictions on H-1B visas and uncertainty over PERM applications are reinforcing the trend, particularly in the US where companies need access to onsite talent. The US government has introduced several measures to tighten entry of skilled foreign workers, including cancellation of PERM-related processes amid allegations that firms sought to bring in lower-cost foreign workers at the expense of US employees. Indian IT companies have gradually reduced H-1B visa dependence but face a persistent mismatch between local talent availability and client skill requirements. Kamal Karanth, co-founder of staffing firm Xpheno, noted that costs across IT services companies are likely to rise in the near term as they replace employees moving to global capability centres at higher salaries, with companies still hiring to counter average attrition of 12.5%.
The increase represents immediate pressure on operating margins at a time when IT services companies are grappling with subdued revenue growth amid macroeconomic weakness and geopolitical uncertainty. UnearthInsight estimates that PERM-related restrictions could compress operating margins by 20-30 basis points. Vasu expects subcontracting levels to remain elevated at 9-12% for tier-one companies and 15-18% for tier-two players amid current geopolitical environment. Offshoring already accounts for 78-82% of delivery at tier-one companies and 74-80% at tier-two companies, leaving limited room for further increases. The financial implications are considerable because subcontracting is generally more expensive than deploying employees on the company's own payroll, with employee costs and subcontracting expenditure together determining delivery costs.
