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JobStats - October 2002 - rumours of IT industry's return to life greatly exagerated: 11 Oct 2002

11 Oct 2002

Market trends

The demand for permanent employees continues to fall. The demand for contractors continues to rise. It has now returned to the proportion of adverts that was seen in 1999. Is this good news or bad news though. One major reason for employing contractors is that they are easier to get rid of when the work dries up. One interesting move here though is that the proportion of jobs for contract or permanent staff is rising. One reason for this change is that the contractor premium (the extra that you get paid as a contractor) has shrunk considerably over the past two years.

In the City both CSFB and JPMorgan Chase have announced substantial job cuts recently and the IT departments will certainly be taking their share of the pain. The finance sector is a major employer of IT staff and there has been a drastic shrinkage in revenues over the past two years. Another major employer of IT staff has been the telecoms industry and the telecoms companies have been bleeding all over the floor (don't mention 3G licences). The big software houses also face difficult times ahead. Logica and CMG are merging and industry analyst Ian Spence predicted recently that there would be 5000 job losses following the merger.

What can we expect to see in the coming months? The run-up to the festive season is always a popular time to shed staff as employers play the Grinch in the Christmas amateur dramatics. I expect that we'll see more staff being laid off in the next two to three months. The reason Christmas is popular is because employers can save on paying annual bonuses and on the three bank-holidays (and also because their hearts are two sizes too small).

Has the market stopped shrinking then? No. The best that can be said is that the rate of decline has slowed. Rates are also falling across all bands and for permanent staff as well as for contractors. Incidentally I would expect to start to see pay-cuts for permanent staff starting to be introduced. Up until now the bonuses have been able to take the strain and that coupled with the savings made by cutting contractor rates and laying off staff have shieled permanent staff from the pain of pay cuts. If the pain in the City carries on much longer though expect to see pay being cut.

Why most companies handle pay-cuts badly

The typical pay-cut has been announced (usually to contract staff) as a 10% or 20% cut for everyone with no exclusions: accept it or walk. 'Harsh but fair' you might say but is it fair. Well it's not fair to staff who have joined in the past year. The justification for the pay cuts is that the rates rose dramatically in 2000 and the companies are taking back the excess money they paid then. The rates have already fallen sharply though for people joining since the glory days of 2000 and to cut the pay of people who are already getting a fair market price for their labour is foolish. By cutting the pay of people who are already fairly priced they risk losing them to other companies. The argument here might be that the market is terrible - they'll never find another job. But even in the quietest market there are some jobs to be had and the best people are the ones who find it easiest to find new jobs.

Another approach that some companies consider is to try to find out what their staff should be paid given the skills they have. So they look at the median rates in the market and say 'That's what these people should be earning". This might sound like a more sophisticated approach but the effects will be even worse. Assuming they are smart enough not to raise the pay of the staff earning less than the 'market price' but they just cut the pay of the top earners, what will happen. The people being paid a premium were getting the money for a reason, presumably because they were the best at their jobs. So with this approach they are rewarding the worst performers (by not cutting their pay) and punishing the best people. They might not be able to get other jobs now but guess who'll be the first to leave when the good times return. Long term it's a strategy for loosing the gold and keeping the bronze.

The right way to do it is to look at each employee individually and see what's happened to the rates paid for the basket of skills they've got since the time their pay was last fixed. To get the most accurate idea you should also look at what they are being paid so that you can capture the different movements of rates at different ends of the pay scales. It's not perfect (nothing is) but it's better than the slash-and-burn approach that the personnel departments have been adopting up to now. One objection to this would be that the HR department doesn't know what the key skills of its IT staff are. It's a fair point but the solution is to ask either the individuals themselves (and get their boss to agree to it) or just to ask their boss what skills they have.

When will things get better

Not this year and probably not next year either. There has been a steady stream of happy noises from spokesmen for IT companies saying that the downturn is temporary and that this quarter will be down but the next quarter will be up. The numbers paint a different picture though with profit warnings and revised forecasts (down, always down). Recent comments by Julian Hewett, chief analyst sum it up well:
"Ever since the downturn began, it seems that the recovery
 has always been 'two quarters away'. It seems to us that
 the industry is still living in denial."


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