Infosys seeks to cut temp hiring from third-party contractors

Bengaluru: Infosys Ltd is looking at reducing the number of engineers deployed by its subcontractors on overseas projects to meet its profitability target as hiring these temporary workers is at least one-and-a-half times more expensive than using its own employees in a similar project.

Infosys plans to deploy its own employees on new projects after imparting them with skills that they earlier lacked, a reason India’s second largest software exporter was forced to rely on outside resources. The move is likely to assuage investors’ concerns that Infosys, like its rival Wipro Ltd, is chasing market share at the expense of profitability.

“One of the operating levers is to cut down the reliance on third-party contractors and the way we plan our projects, it should not be wrong to believe that we will certainly bring down this component (for this fiscal year),” said a senior Infosys executive, who declined to be named.

A spokeswoman for Infosys declined to comment, citing the competitive nature of the move.

Infosys does not disclose the number of third-party engineers it employs but its wage bill for hiring subcontractors is the second largest component of the company’s expenses and has increased to 6.1% of revenue for the year ended 31 March from 4.7% in 2013.

In contrast, Infosys’s expenses on salaries and bonuses narrowed to 47.1% of its revenue last year from 48.5% in 2013. This was primarily on account of cost-cutting measures implemented by co-founder N.R. Narayana Murthy, who, upon his return in 2013, cut the number of employees working overseas and shifted significant work to its centres in India.

The company executive cited earlier said that since third-party engineers are more expensive than a company employee, any decline in the number of such resources will help widen its operating margin.

“It is heartening to see such measures are also being looked at as it suggests that company realizes they have to keep an eye on profitability even as they look at increasing revenues,” said a Mumbai-based head of research at a domestic brokerage. “But it is one of the more difficult ways as moving people from one project to another is always one of the more difficult areas to work.”

Infosys reported an operating margin of 25.9% for the year ended 31 March and expects profitability of 24-26% for the current fiscal, even as chief executive Vishal Sikka has outlined an ambitious goal of 30% operating margin by 2020, primarily by automating many services.

As new business from companies across the world is being awarded to IT vendors at rates that threaten to erode operating margins, the largest IT firms have started taking measures that they believe will help them maintain their profitability. This is the second step Infosys is initiating after starting work to re-deploy many of its experienced engineers evenly across its 8,500 master projects and some new ventures instead of concentrating them in a few projects in a bid to cut costs, Mint reported on 24 June. The biggest companies in the country’s $146 billion outsourcing industry, including Tata Consultancy Services Ltd and Infosys, use engineers from third party vendors when either the firms do not have the talent to work or when a certain work is expected to be completed in relatively less time.

“Over the last 12 months, a lot of steps have been taken on training front. (By now) we also have a good sense of the kind of projects which are coming in the company. Based on all these things, this percentage of contract workers should come down,” said the executive mentioned earlier in the piece.

Experts said the success of the move to cut Infosys’s reliance on subcontractors hinges on execution. “It’s a noble goal to reduce reliance on third parties,” said Ray Wang, founder of Constellation Research, a technology research and advisory firm. “This requires really sophisticated talent management and learning management. Not all skill sets are re-skillable. For example, training a SAP Hybris (a business application for e commerce firms) engineer to do Artificial Intelligence work would require the engineer to have some advanced math to begin with. However, there are easy wins by making sure cross skill sets are there in product development and implementation.”