Domestic IT services companies increasingly absorbing staff of clients

Experts say the recent deals by TCS and Wipro will have impact on operating margin, but it will only reflect in the third quarter of this financial year

Continuing with their global approach, domestic IT services companies are increasingly absorbing employees of their clients in India in order to bag large outsourcing contracts. 

Though rebadging has become the norm of the industry, absorbing employees in big numbers in India could have a negative impact on operating margin of these firms, said experts.

“Indian deals are generally margin-dilutive. That’s the reason most domestic companies have never pursued Indian contracts aggressively,” said Pareekh Jain, an IT outsourcing advisor and founder of Pareekh Consulting.  “In case of some of the recent contracts, what is the kind of impact on margin. But, net revenue per full-time equivalent (FTE) will definitely see adverse effect.”

Revenue for FTE indicates how much revenue each regular employee generates for a company and is a critical measure of efficiency.

Last month, Tata Consultancy Services (TCS) said it would take over 1,300 people from General Motors (GM) India’s engineering centre after it clinched a five-year engineering services contract from the US automobile giant. Though TCS didn’t reveal the contract size, sources said it would be upward of $500 million.

Similarly, in September, Wipro bagged a seven-year contract worth $300 million from ICICI Bank after entering into a business-transfer agreement with Vara Infotech. According to the deal, Wipro would absorb about 3,800 employees of Vara.

“Any rebadging deal is margin-dilutive. So, the recent deals announced by TCS and Wipro will definitely have impact on operating margin. However, it will only reflect in the third quarter of this financial year,” said a Mumbai-based analyst. 

Globally, the contours of large deals have changed significantly, with most of these requiring service providers to do a lot of rebadging of employees, apart from investing upfront on those contracts. 

For instance, Infosys last year had bagged a contract worth $700 million from US telecom giant Verizon, as part of which it had to rebadge around 2,500 employees of the telecom firm. Wipro has absorbed around 9,000 staff of US-based human resources and financial solutions firm Alight’s India unit into its business process outsourcing division as part of a $1.6-billion outsourcing contract. 

“With many of the rebadging of client employees happening in the legacy side of business, companies have to weigh risk factors before entering into such contracts. Any disruption in the revenue flow can add to the cost,” said Jain.