Scrambling to cope with rising wages, worsening attrition and people-led growth, India’s top technology firms are for the first time beginning to explore sub-contracting of projects to smaller vendors.

Though they account for less than a per cent of the total projects delivered by TCS, Infosys and Wipro, officials and experts tracking the sector say these companies could sub-contract up to 5% of their work over the next five years.

The prime drivers are mitigating the risks of high attrition and wage inflation. These projects involve mostly commoditised skills and do not need complex programming expertise or understanding of a particular domain.

“Some executives from our own company are proposing that they can launch sub-contracting business provided we give them assured business. We have started two pilots,” said a senior official at one of the top five Indian technology firms.

Outsourcing majors are also loathe to add more staff on their payroll and hence sub-contracting work — to firms like Magna Infotech — becomes an important option. Magna Infotech was acquired by Bangalore-based staffing firm Ikya for Rs 100 crore last week. Having found a partner to take care of working capital, Magna now plans to increase its headcount from 5,000 to over 10,000 over the next few years. The company serves some of the top multinational outsourcing firms and is seeing increased interest from Indian tech firms to sub-contracting.

“We are ready to inform customers, wherever needed, on sub-contracting. Many Indian outsourcing customers do not mind,” said the head of domestic IT business at one of the top 10 Indian tech firms. Already, the Indian contracted staff market is expected to become around $2.5 billion industry in five years.

Globally, companies such as IBM have been subcontracting commoditised projects to smaller, niche vendors such as Infinite Computer Solutions over past many years. While ET could not verify the quantum of work currently sub-contracted by IBM, several officials and experts tracking the company said the Big Blue gives away at least 15% of its work to professionals outside of its payroll.

“Given the fact that there are more ups and downs and that there is a need to expand the bench for contracts without taking any hit on the bottomline, you will see more of sub-contracting,” says Sid Pai, managing director of outsourcing advisory firm, TPI India.

Experts such as Rodney Nelsestuen of TowerGroup say that for sub-contracting to drive growth, a level of trust is essential with the US customers. “At one end of the spectrum, one might see the day when an outsourcing company doesn’t own their production but contracts all of it out. That is, a new type of vendor may emerge that takes on an outsourcing contract but essentially sub-contracts most or all of the work,” Nelsestuen says.

“Once a level of trust is established, US companies may become comfortable with the process. While I don’t have an estimate on the size of this market as a part of overall outsourcing spending, sub-contracting may be a means to grow the entire business for a vendor since they can offer additional services at reasonable prices and with a quick start up by tapping sub-contracting vendors,” he added.

As demand for more temporary IT staff gains momentum, firms such as Magna will face challenges of taking it to the next level. Another driver for hiring more temporary staff is that IT firms want to arrest their linear-people-led growth. Moreover, temporary staffing helps in bringing down people costs by at least 25%.

Experts say sub-contracting can be a means to reduce ‘bench’ strength, or additional resources that are not always employed in projects. Based on the continued growth of outsourcing, this specialisation may be the way of the future and may offer smaller, boutique firms a better chance at survival.

For some, like software programmer Anirudh Jain — who worked with a Pune-based tech firm until last year — working on a part-time, sub-contracted project means more flexibility. “There’s no swiping the card business, no dealing with bureaucratic managers at the top. I now work for 8-10 months every year, and travel around for rest of the year,” Jain, 28, says.

But not everybody is comfortable working for an unknown firm, where projects are not exciting enough. “It’s a good proposition as an entrepreneur. But as a professional, I would rather work with either an exciting start-up or an Infosys instead of some subcontracting firm,” says Trishna Shankar, a software programmer based in New Delhi.

But for many customers, sub-contracting to unknown vendors by primary contractors is worrying. Moreover, sending projects to another, smaller vendor also means risks that need tighter controls.

“Some of our banking customers are particular about where the data moves. So, this won’t sell with them,” said another official at a Bangalore-based mid-size tech firm. “End of the day, the genesis of Indian IT industry is based on staff augmentation and sub-contracting, so it’s been used for a long time,” says Pai.

Source:http://timesofindia.indiatimes.com/tech/enterprise-it/strategy/Big-IT-cos-sub-contracting-projects/articleshow/6946385.cms