IT Contractors in a Weakened Economy

Results from the 2001 IT Contractor Compensation Survey

Deutsche Zusammenfassung

Source: IT Contractor Magazine

Editor’s Note: With this special “Outlook” guest column, the "IT Contractor" magazine takes a look at the “state of the state” of IT contracting, sharing information from the 2001 IT Contractor Compensation Survey sponsored by people3 and Mercer Human Resource Consulting .

The recent economic downturn and the reverberations from a series of major geopolitical events have had a significant impact on the IT sector. Companies are struggling to control costs and improve bottom lines. This approach has resulted in downsizings and layoffs, with many IT projects being discontinued or postponed. With tightened budgets and increased cost-control pressures, organizations have adjusted their staffing strategies.

Results from people3 Inc. and Mercer Human Resource Consulting’s “2001 IT Contractor Compensation Survey,” which surveyed 36 large U.S.-based firms that collectively employ more than 6,200 IT contractors and 4,000 full-time IT employees, indicate a downward trend in contractor staffing. More than 47 percent of survey participants indicated a decrease in the use of contractors between November 2000 and October 2001, when concern for a deepening economic recession and deteriorating business conditions was at its peak. The top reasons?

• Economic downturn and market conditions.
• Cost control.
• Larger pool of permanent staff.
• Improved internal capabilities and focus on developing full-time employees.
• Decreased demand due to changing business needs.

It is apparent, then, that the degree of companies’ use of contractors is often driven by internal demands that are directly or indirectly influenced by external economic and market conditions. Given this, once the economy rebounds, business conditions improve and more IT projects are funded, the need for contractors will certainly increase. Survey results show that 41 percent of companies that reported a decreased use of contractors between November 2000 and October 2001 also expect to increase usage between November 2001 and October 2002, based on:

• Improvement of external market conditions.
• Increase in business demand (e.g., more IT projects).
• Achievement of cost-effectiveness in using contractors.

The top three reasons organizations use IT contractors are:

• To support project staffing needs.
• To access and transfer knowledge on new technologies.
• To reduce and control permanent head-count costs.

Once the use of contractors has been justified, IT leaders and managers must determine in which IT functions contractors will be placed, how many will be acquired and their tenure. Through a resource management process, contractors are assigned to roles that best match their skills and abilities and provide the most value to the organization. Survey results indicate that 33 percent of contractors are hired to fulfill project needs, especially for projects using new technologies requiring skills not found in an organization. Companies hire 27 percent of contractors to support their legacy systems; 28 percent are for infrastructure support. The remainder is hired for such needs as bringing in project management expertise.

Because contractor use is considered a temporary, short-term staffing arrangement, most contracts are negotiated on a “one-off” basis. Therefore, the more independent contractors and individually negotiated contracts a firm has, the greater the deviation in contract terms and conditions. As a result, a greater effort is required to monitor costs and contractor performance. Survey results indicate companies’ preferences in contractor status: On average, 69 percent of contractors working in an organization were sourced from contractor staffing firms, and 22 percent were independent contractors.

Participants were asked about the geographic locations from which contractors were hired. The results indicate that 79 percent of contractors are within the United States, and 21 percent source offshore, with India topping the list as the most popular sourcing country, followed by the United Kingdom, Demark and South Africa. According to the survey data, when sourcing within the United States, most companies hire contractors from local or regional markets.

An important process in contractor resource management is negotiating and managing contracts. It is crucial that contractual terms and conditions meet business requirements, as well as clearly define the legal responsibilities and liabilities that govern a temporary employment relationship.

The nature of contractor work is temporary, short-term staff supplementation, backup or replacement of staff. As indicated by the results of the “2001 IT Contractor Compensation Survey,” the average, total contracting length of 12 months per contractor is typical. But the results also indicate that some companies use contractors two years or more. However, long-term “temporary” staffing may point toward problematic staffing practices. If a contractor is maintained in the same functional area or repeatedly performs non-strategic work, other sourcing strategies, such as outsourcing, might be considered.

The survey results indicate a prevalence of a “right-to-hire” option in contracts. Nearly 81 percent of companies that source IT contractors from staffing firms employ such a practice. Putting a right to-hire clause in the contract is simply a “try-before-you-buy” staffing approach. Companies adopting this approach understand that maintaining long-term contractor staffing does not make sense, particularly from a cost-control perspective. This type of staffing approach gives both hiring companies and contractors the opportunity to evaluate a potential fit before committing to long-term employment. It is also a reliable way to recruit candidates with the right knowledge, skills, competencies and attitude.

Because of the non-employee status of contractors, companies are not responsible for providing traditional benefits, such as pensions, 401(k) retirement plans or life and medical insurance, that are available to employees. However, there are certain programs that companies can and do offer to the entire workforce without jeopardizing a contractor’s classification. These programs exist to provide the staff with a better work-life balance and create a positive work experience. More than 58 percent of survey participants indicated that they offer contractors certain non-cash benefits, such as flex-time, attending company events and attending company-paid training. However, offering incentives through contracts is not the prevalent market practice. As reported by survey participants, only 17 percent of companies pay incentives based on contracts. These incentives are usually used to ensure on-time delivery of projects or full-term completion of contracts.

The success of contractor programs often depends on whether specific service levels and contractor performance measures are defined and agreed upon during the contract negotiation process. The survey responses indicate that 94 percent of companies have defined non-compliance ramification terms in the contract to protect their right to receive the contracted services at agreed-upon service levels and timelines. When service levels are not satisfied:

	94 percent of participants choose to replace unsatisfactory contractors.
	88 percent of participants terminate the contract before its expiration.

Some companies may establish a trial period (e.g., two weeks) with contractors to ensure their performance meets contractual and business requirements. Some choose to have a short contract period (e.g., three months), then review and renegotiate rates and other terms and conditions after each contract cycle.

A regression analysis from the “2001 IT Contractor Compensation Survey” shows that a number of combined factors influence the determination of contractor rates:

	Skill proficiency level is the single, biggest influence on contractor rates. Companies pay significantly higher rates for contractors with advanced levels of proficiency.
	Individual skills (e.g., Java) do not have a significant influence on contractor rates. Instead, generic skill categories (e.g., programming languages) tend to impact the actual rates paid.

Specifically, contractors with networking and enterprise resource planning (ERP) skills are, on average, paid higher rates.

A comparison analysis of contractor rates and full-time employee base salaries reveals that when only the salary cost is considered, using contractors is a very expensive staffing option. On average, an outside contractor is typically paid two to three times more than a full-time employee.

The weak economy is driving an overall reduction in use of contractors, but it also creates some demand and opportunity, as well. Success factors for IT contracting firms during the next few months appear to be:

	Providing the latest, in-demand skill sets.
	Accommodating client needs for flexibility and quick turnaround in sourcing and supplying talent.
	Making contracting terms and conditions as simple and stable as possible.

Authors: Diane M. Berry and David M. Van De Voort. Diane Berry is vice president of Research for people3. Her expertise is in the areas of compensation and staffing for IT professionals. David Van De Voort is a principal in the reward and talent management practice of Mercer Human Resource Consulting.