IT services provider Infosys Ltd said it has largely exhausted the possibility of improving its profit margins by increasing employee utilization levels and will focus on bringing down on-site employee numbers to boost margins.
The company reported an employee utilization level of 84.9% for the three months ended December — an all-time record — compared to 81.9% six months ago.
In other words, nearly 85 out of the company’s 100 employees were deployed on projects ‘for clients’, while the remaining were either kept on the ‘bench’, or were deployed for Infosys’ own projects.
Finance head Ranganath Dwarakanath Mavinakere said there was ‘limited runway’ to squeeze out profits by increasing utilization levels.
“We have to look at other levers,” he said. “On-site mix is one,” he said.
Out of the 85% of employees who are working on client projects, some will be working ‘on site’ at client offices, while the others will be working for the client from Infosys’ delivery centers offshore.
It is more profitable for Infosys to keep employees in lower-cost locations like India, instead of sending them on-site to high-cost locations like the US.
Nevertheless, some must be send abroad for work that simply cannot be done remotely.
Mavinakere said the company has managed to bring down the percentage of such employees who are deployed on-site.
“It used to be at 30.1% (last year)” he said. “Last quarter it came down and this quarter, it again came down to 29%.”
“That is something that we’re focusing on,” he added.
Infosys, like other companies in the sector, has been forced to offer ‘fixed cost’ model to its clients instead of billing them on the basis of ‘time and materials’.
In the traditional ‘time and materials’ model, companies like Infosys and TCS would send a bill to their clients every month giving details of the number of employees they deployed to work on the client’s account, and be reimbursed on that basis.
However, clients are increasingly demanding ‘fixed price’ contracts and are not interested in how many employees are used to fulfill their projects.
In the latest quarter, the ratio of such fixed price contracts to ‘T&M’ contracts improved to 51.4% from 48% nine months ago, according to the company’s numbers.
This change, said Mavinakere, also helps the company in improving the onsite-offshore mix.
“If you look at the first nine months of this year, the onsite employee costs as a percentage of revenue has also come down, which is primarily on account of managing our fixed-price project profitability, role-mix and many other factors,” he said.
Separately, companies like Infosys and TCS will be forced to cut-down on onsite employees if a proposal by the Donald Trump administration to stop Green Card applicants from staying on in the country is approved.
At present, hundreds of thousands of Indian IT workers stay on in the US beyond the six-year limit for H1B visas.
This is because anyone who has qualified to apply for a Green Card or permanent residency is allowed to stay in the country until his or her application is processed, which can take several years.
If all Indian IT workers on such ‘automatic extensions’ are sent back to India, companies such as Infosys, Wipro and TCS will have to depend more on offshore and American employees and far less on on-site employees.