BENGALURU: IT services companies are increasingly relying on artificial intelligence (AI)-led productivity gains and tighter cost controls to protect margins as the cost of delivering projects rises amid US visa restrictions and growing demand for specialised skills. The traditional offshore delivery model is also coming under pressure, with companies turning to local contractors and specialist partners to execute projects that require onsite presence or niche expertise.
Data from HFS Research showed that subcontracting costs at large Indian IT firms rose to 10.5% of revenue in the September quarter of FY27, compared with an average of 9.6% in the year-ago quarter. The increase marks a steady rise over the last four quarters. The suspension of the US Permanent Labour Certification Programme (PERM) has pushed companies to hire local contractors for onsite roles that would earlier have been filled by employees based in India. At the same time, the growing demand for specialised AI and data skills has prompted firms to bring in external partners to execute projects faster.
The challenge for companies is to absorb these higher costs without allowing them to erode profitability. So far, they have managed to do this through a combination of controlled wage bills, tighter employee pyramids, higher utilisation and lower administrative and infrastructure expenses. AI-led efficiencies in their own delivery operations are also helping offset the additional expenditure.
“Subcontracting costs have risen, but companies have sustained margins by controlling other costs,” Gaurav Vasu, founder and CEO of UnearthInsight, said. Although employee costs account for nearly 55-60% of the overall cost base, companies have kept wage increases and the wage bill as a proportion of revenue largely under control, he said. However, margins are being sustained around pre-Covid levels rather than expanding significantly.
HFS data showed that average operating margins across large IT firms increased by around 0.2 percentage points year-on-year in the September quarter, against revenue growth of 3.2%. TCS reported an operating margin of 24%, unchanged sequentially, while Infosys maintained its margin at 21% and retained its full-year guidance of 20-22%. HCLTech‘s margin rose 131 basis points sequentially to 18.2%, while Wipro‘s increased 50 basis points to 16.5%. Tech Mahindra reported a 40-basis-point expansion to 14.8%.
Rupee depreciation has provided an additional cushion, alongside productivity improvements and company-specific restructuring programmes. “There has been a combination of factors that have acted as levers. Since the last quarter, rupee depreciation and AI-led productivity have helped margins,” Ashwin Venkatesan, partner at Everest Group, said.
However, the benefits have varied across companies, underlining that subcontracting costs alone do not determine profitability. TCS and Tech Mahindra both increased their use of subcontractors over the year, but TCS’ margins declined 1.2% year-on-year, while Tech Mahindra’s rose 2.7%. Revenue growth and the overall cost and business mix have played a greater role in determining the outcome, Achyuta Ghosh of HFS Research, said.
Companies are also taking different approaches to protecting profitability. While TCS and LTM are investing in AI capabilities and partnerships to build differentiation, Infosys and Wipro are placing greater emphasis on margin discipline. Infosys CEO Salil Parekh has indicated that the company is becoming more selective about deals that do not meet its margin thresholds. While this could constrain some revenue opportunities, analysts say it can improve cash flows and profitability.
Source: The Financial Express
