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Cutting IT contractors’ rates may backfire on the banks, costing them more

Despite the economic woes besetting the UK’s financial sector at the present, not all firms are suffering. In fact, some major players with the right portfolio and risk profile are still doing very nicely, thank you.

So ContractorCalculator asks if now is the right time for banks to be heavy handed with their IT contractors, and whether those that insist all their contractors take a pay cut are choosing the right strategy.

Quality not quantity

According to ContractorCalculator’s CEO, Dave Chaplin, it is quality and not the quantity of IT contractors that matters: “If you asked good IT contractors the secret of success for an IT project, they would say ‘hire the best people you can find, keep the teams small, and they will make it happen’.”

However, it appears that some banks don’t agree. Barclay’s Capital is reported to have told its IT contractors to take a 10% pay cut or leave. When ContractorCalculator asked Barclays Capital if the reports were accurate, the request was declined, “for reasons of confidentiality”.

Merrill Lynch is reported as asking the agencies supplying IT contractors to reduce rates by 11%, giving them two weeks to agree and implement the cut or see their contracts terminated. Head of Communications for Europe, the Middle East and Africa, Jezz Farr told ContractorCalculator "This is part of a cost reduction programme being applied across the whole firm as a result of the difficult market conditions."

A buyers’ market for contracting

ContractorCalculator’s June Market Report revealed that, according to Computer Weekly SSL, May saw a 16.1% drop in IT contractor positions in the finance sector, the biggest fall since 2001. This was contradicted by figures from the Monster Employment Index, which reported an increase in online recruitment in banking, finance and insurance. So, who is to be believed?

What is clear is that good contractors will find other contracts if their rates are being squeezed. Less able contractors will remain and take the hit. And the client potentially loses out as they are left with contractors who might be 10% cheaper, but could be significantly less productive and qualified.

Clients could be left with contractors who might be 10% cheaper, but could be significantly less productive and qualified. Cheaper contractors could cost the banks more, not less.

Dave Chaplin, ContractorCalculator

Chaplin recalls more effective approaches used by some clients in the post-dotcom years of 2001-2002. “Rather than cutting rates by 10% across the board and causing negative feeling with all contractors,” he says, “some clients cut 10% of the less able contractors at contract renewal time, kept the remainder on the same pay and caused negative feeling in a much smaller group.”

IT Contractors – cheaper by the dozen?

Some in the finance sector appear to see IT contractors as a commodity. But that certainly isn’t so, according to a seminal work on software project management and its pitfalls by Fred Brooks, first published in 1975, and called The Mythical Man-Month. The lessons learned by Brooks when working for IBM appear as relevant today as thirty years ago. He points out that a ‘good programmer’ can be up to 10 times more productive than a ‘mediocre programmer’.

It then follows that by introducing cost saving strategies that encourage the more able programmers to leave, the banks are actually taking a step back. The cheaper IT contractors that are most likely to remain will simply take longer to complete projects, thus ultimately costing the banks more money, not less.

Virtuous circle

But the headlines about rate cuts can be misleading. According to many contractors who are regular contributors to ContractorCalculator, there are clients in the financial sector who are maintaining contractors’ rates and not shedding contractors.

In addition, two surveys recently released by the Recruitment and Employment Confederation suggest that the demand for contractors may increase as firms use temps and contractors to ‘weather the economic storm.’

The logical conclusion to the bank’s contractor conundrum is that those who manage their IT contractors well and retain the best will enjoy better performance. Those that apply knee-jerk solutions that might impress shareholders looking for a tough stance on costs could end up paying more. And with so many IT contracts central to the future success and competitiveness of financial services firms, short-termism now could prove very costly indeed.

Published: 13 June 2008

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