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Cutting contractors’ rates will cost clients more and could backfire spectacularly

With some key players in the financial sector forcing major cuts in contractors’ rates, ContractorCalculator believes their strategy could backfire spectacularly, costing the banks much more in terms of: extended project times; the true overall costs of projects; and reduced quality when projects are finally completed. But there is a simple solution.

“Personal experience, as well as independent research, shows that good programmers can be ten times more productive than their mediocre counterparts,” explains Dave Chaplin, chief executive of the ContractorCalculator website. And he certainly knows a thing or two about IT contracting in The City, having spent ten years leading software development projects for the likes of Merrill Lynch and HSBC. “If the banks cut contractors’ pay, the good ones will move on, leaving developers who will take much longer to complete the work, and costing much more in billable hours.”

Barclay’s Capital has reportedly told its contractors to take a 10% cut and Merrill Lynch has given its agencies two weeks to absorb an 11% reduction, or see their contracts terminated. Merrill Lynch’s Head of Communications for Europe, the Middle East and Africa, Jezz Farr admitted to ContractorCalculator: "This is part of a cost reduction programme being applied across the whole firm as a result of the difficult market conditions."

Chaplin, who has been heavily involved in multi-million pound IT integration projects in London’s Square Mile, is convinced that the banks’ strategy is more for the benefit of managing their shareholders’ perceptions than adding real value. “If the banks need to cut costs, a more effective approach is not to renew the contracts of the poorest performing 10% of developers. This means you only have 10% disgruntled contractors. Cutting rates across the board means that 100% of your contractors will be put out and put off. And the obvious result of that is that best ones will leave.”

The financial services industry may be shooting itself in the foot, with indications that demand for contractors will actually increase. Recent surveys by the Recruitment and Employment Confederation, for example, suggest that the more contractors will be needed, as firms switch to using lower risk temps and contractors to weather the economic storm.

So, as Chaplin concludes: “With many IT contracts central to the future success and competitiveness of financial firms, short-termism now could prove very costly indeed.”

Notes to editors:

ContractorCalculator is a leading independent website for the UK contracting industry--most of whom are highly skilled workers in information technology, engineering, electronics, and construction.

There are close to half a million such workers in the UK today who prefer to run their own businesses and work under contract rather than become employees of specific companies. Their contribution to the economy is crucial to keeping our business competitive. Our websites have tracked this industry since 1999.

Dave Chaplin can be contacted at ContractorCalculator on 0871 218 5152.

Published: 27 October 2008

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