IT Contract Market Overview
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GROWTH
The IT contract solution has been operating for around 35 years and is considered by many to be founded by the original owners of Computer People Plc. They spawned the company from a small software house when it was recognised that an increasing amount of it's business was being generated by the provision of people rather than product.
THE 1980's
In the market's middle years, during the eighties, the market grew at a fast rate, with the number of agencies peaking at around 600 individual operating companies services around 30,000 contractors. Agencies offered clients a database search capability and therefore spent a great deal of money on specialist hardware and software solutions. Typically, profit margins (the agency fee) during this time were of the order of 30%. Large investments in advertising to secure new candidate registrations together with fast and efficient I.S. systems were necessary in order to win market share. Clients offered Preferred Supplier contracts to those agencies that could provide large databases and efficient search capabilities. At that time, just 5 agencies controlled 25% of the total market.
EARLY 1990's
The market started to shrink from 1990 with a lull occurring for four years. During this time the World Wide Web together with cheaper Client/Server technology emerged, producing a variety of solutions which reduced the reliance of the traditional agencies on their databases and the large advertising spends required to attract registrations.
Jobserve, the internet job search website emerged. Founded by Robbie Cowling, Jobserve originally had a number of services - all geared initially around the contract market. Jobserve is most famous for the daily email to individual candidates of yesterdays job adverts from agencies advertising those skills that the individual is most interested in.
LATE 1990's
Massive Y2k exposure pushed the contract solution to the limits with close to probably 100,000 contractors on billing through 1,850 agency suppliers. The successful older agencies continued to grow in terms of turnover, but their market share fell. The market was extremely fragmented with the largest agency controlling only 3 or 4% of the market.
Today
Lower demand for contractors have seen rate increases slowing down or even reversing. Many contractors are now looking for permanent posts due to the turn-down as IT Directors are pushed to lower contract expenditure.
Comment
As an agency, there are few barriers to enter the contract agency market; money to fund the payroll (cash flow) and some technology and access to the Internet. It is now technically possible for a contractor to obtain contract work solely through Internet Web sites such as Jobserve and Gojobsite who supply a service to candidates (contract and permanent) by offering advertised jobs in the United Kingdom via a search engine on the web. This can deliver small lists of job opportunities that match search criteria, and provide e-mail links direct to agencies. More than 80% of all contract placements are sourced via these Internet solutions. See paper Impact of internet for further reading and discussion on agency databases.
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MARGINS
With lower technology prices and simple cost effective solutions to attract contractors, the margins are under less financial pressure, and as a result, are now simmering at around the 15% to 20% mark across the whole UK industry (larger buyers attract lower margins). Very high demand rates over recent years together with an element of "panic buying" by clients in the past encouraged young agencies to enter the market. Client may have up to 20% of their contract staff bought from non-approved sources - outside these preferred supplier arrangements. The agency profit in these cases will be substantially higher - up to 30% would be normal.
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MARKET EVOLUTION
During the eighties the market was split between Small (1 - 20 contract staff usage) and Large (20+ contract staff) users. Client sites with 100+ contractors were very few. At that stage in the contract market's evolution there were a significant number of smaller client sites operating their own MIS departments which required the occasional use of contract staff to cover holidays, sickness and some skill shortage. The trend over the last 15 years for these smaller sites has been to source packaged solutions and selective outrsourcing - the need to support these systems is normally contracted to the systems providers and solutions companies.
TODAY
Today, although there are larger numbers of contractors, the dominant trend is toward a shrinking client market who in the main are either the Solution Providers, brand Vendors and large End Users (FTSE 250) who are buying the larger numbers of contract labour. The very successful agencies see the relationships they have with these larger clients as the key differentiator between their own service and that of a competitor. They look to create long term partnerships with their clients rather than satisfying themselves with quick wins. Financially, they can afford to reduce the expensive sales force and balance the lower cost of this with effective account management and efficient bulk service delivery. However, with less sales activity, the danger does exist to allow new competitors in.
NEW AGENCIES
Many newer companies seeded during the middle to late nineties operate aggressive sales and marketing techniques, working to higher margins. They may employ lower skilled account managers but pay large commissions. Some such agencies have achieved notable success with these tactics, but their niche in the market has also won a reputation for high-pressure selling equivalent to that of the double glazing sales industry at it's worst. On the one hand, clients are pursuing Preferred Suppliers / Partner strategies and on the other there are a large number of sales people attempting to win small chunks of higher margin business from a decreasing number of clients. This trend, together with large demand is bringing margins that clients pay, under pressure again. There is no doubt that the contract market is under pressure through continued long term growth. The role of the contract buyer is becoming increasingly more scientific.
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CONTRACT RECRUITMENT METHODS
Fundamentally, there are two alternatives when deciding on the functional ownership of resource acquisition:
- Line management responsibility
- Central resource responsibility
CENTRAL RESOURCE FUNCTIONS
The best run central resource units make positive impacts upon the Time - Cost - Quality triangle.
- TIME - Clear ownership of processes with time-saving mechanisms
- COST - Commercial constraints with preferred suppliers, attracting major financial benefits together with a professional negotiating stance
- QUALITY - Clear management reports and escalation procedures
Resource centres can often fall in to the trap of becoming a monopoly, believing that their job is to control recruiting managers, forgetting to supply a competitive service. For this reason, many permanently staffed resource centres receive poor reputations (from line managers and suppliers). Further, major problems can occur when the design of the functional responsibility is either split or unclear:
- Duplication of effort
- Dilution (or Chinese whisper effect) of communicating between disparate parties
- Problem ownership
- Incoherent and misunderstood instructions
RESOURCE CENTRE REPUTATIONS
I.T. is known to be an esoteric, acronym driven industry. It can be difficult to understand for the layman and takes considerable training for the professional. Resource Centre administrators can often misinterpret the nature of technical requirements and fail to realise the true problems and pressures associated with specialised technical recruitment and fail to deliver the service. This can further highlight resource centre deficiencies and their use may not be maximised. A central service delivered to IT project managers (who in their own right are trained in risk management) needs to operate risk-free. If a project manager spots a risk, he's likely to plug it by going outside "the loop".
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RECRUITMENT MODELS
CENTRALISED
The recruitment and successful maintenance of a contractor sourced centrally, has a supply chain with clear roles and responsibilities. Additionally, the resource centre will be able to take a view across all the business and advise, consult and negotiate as a centre of excellence.
LINE MANAGEMENT
In contrast, recruiting via line management can be expensive with little control or measurement. Isolated line managers will be at the "mercy" of agency salespeople, having to "pay up" or risk project deliverables.
RECRUITMENT AND MAINTENANCE OVERHEAD
The emphasis on making the recruitment project the key to success can be misleading. Long term success for contract procurement and acquisition requires "maintenance" which includes contract extensions, quality reviews, problem solving and some legislative and contractual requirements together with supplier management.
RECRUITING
The number of methodical steps required to conclude a successful placement is high. Job specifications need to be drawn up, agencies informed, CVs sifted, interviews conducted and finally offers made. The offer process can fail and it is tempting to "pay up" rather than surrender the resource. This total process leads to high levels of telephone calls and communication with the agencies. A site with 100 contract staff and an on-site average of around 9 months, this process has to operate many times per year; stopping or hindering it mid-flight normally requires the process to start again. Specifying incorrectly will also either incur paying too much (by over-specifying) or finding unsuitable candidates (under-specifying) and delaying the recruitment project.
MAINTENANCE
Once in situ, there will normally come a time where an extension to the duration of the contract will be re-negotiated (the chance of at least one extension is around 90%). This process will incur financial risk and exposure; the contractor may use this to lever a higher rate or the individual may seek a new client. A strategy of longer contracts can be used to counter this, however an increase may be inevitable. Again, numerous communications to the agent will be required prior to settling an agreement.
LONG TERM BEST PRACTICE
The best Resource Centres will have at their heart a "customer service" ethos and an ability to add additional value to the recruiting manager and the suppliers. But why? True Best Practice techniques have a genuine pay off. Applied from the heart, any Best Practice arrangement implemented with thought and realism will achieve savings - not only in achieving lower costs, but in customer service, motivation, performance improvements and helping to create happier working atmospheres. Topics that we approach include:
- Contractor induction
- Meaningful management reports
- Market analysis
- Research
- Problem solving for both line management and contracted staff
- Creation of new services to address changing environments
- Genuine advice and guidance on recruitment
- Legal and contractual advice
- "HR" services to contractors
- Supplier management (possibly the most overlooked subject)
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KEY MOTIVATORS, DRIVERS AND NEEDS
LINE MANAGEMENT NEEDS
IT Managers are trained to operate in a structured and methodical environment. For much of their time however, the pressures of delivery and disorder can surround them. They require the support services that they depend on, to operate risk-free. In this regard, while recruiting contract staff, managers need systems that operate reliably with clear lines of responsibility. They need confidence that the task of finding relevant quantities of quality CVs, screened to the right price and availability are being looked after by a dependable function.
AGENCY NEEDS
The core time of a successful IT computer contract agent is spent on the telephone, speaking to potential candidates for clients. Their success is mostly determined by two factors, their skill and the accurate job specification delivered to them by their client. Slight differences between the actual specification and the search criteria that the agent works to, will dramatically influence the outcome of the result. It is possible for an agent to spend a considerable amount of time and energy actually being completely non-productive. It is clear that any barriers will affect their success. Clear job specifications, and clear communication between the resource centre and the agent will result in not only a better success rate, but profitable suppliers who will stay keen and motivated.
RESOURCE CENTRE NEEDS
The most crucial part of any centralised recruitment function is it's own resource centre. Primarily, an IT contract resource centre is a mixture and blend of skills:
- Technical
- Recruitment
- Procurement
- Administration
The competencies and expertise are diverse and acquiring the resource to accomplish the role successfully can be difficult. The needs of a resource centre, therefore, rely more on the individuals employed rather than something material.
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HISTORIC PROCESSES
Analysis shows that there are only two basic recruiting models to work from:
LINE MANAGEMENT MODEL
Recruiting managers will tend to use between two to three agencies from a list, probably arranged via procurement using a preferred supplier system. Normally, the requirement will be communicated verbally over the telephone. The recruiting manager will probably store no recruitment data and the results of CVs or Interviews will be discarded on each occasion. Negotiations will be conducted by inexperienced negotiators - recruiting managers!
CENTRALISED FUNCTION
The best operators will design and publish a method of operating which allows recruiting managers to concentrate on their core activities - delivering projects - rather than spend time in communication with agencies. It will also be designed to motivate the suppliers in delivering a first class service. The best central systems will deliver the benefits it was designed for and will focus on the Time-Cost-Quality triangle. Briefly, the system should be designed to challenge and detail all requirements and communicate these to the supplier agencies by email or fax. It will log and chase feedback on all CVs, arrange interviews and negotiate each offer. The centre should pro-actively manage all contract end dates and negotiate with agencies early in an endeavour to control inflation and to remove the possibility of loosing valuable resources to an IS competitor. Over time, the database used to store this data will grow and operators will find that candidates will be presented more than once - their price history, previous rejections, notes and interview results - and available at the touch of a button. It will become an invaluable tool in calculating negotiating variables and market movements.
SUPPLIER MEASUREMENT
Resource units should measure supplier performance monthly, which should aid in the production of a monthly report highlighting any risks or issues to senior management. Suppliers may be scrutinised and in conjunction with procurement and contracted service levels, may be removed from the preferred supplier list due to non-performance and an inability to respond to encouragement.
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CONTRACTOR COSTS
Under normal circumstances, the contractors pay rate constitutes more than 80% of the cost. Many client organisations mistake the agency profit margin as a main negotiating variable and measure this carefully. Certainly, profit margin is important and the trend across the whole UK is around 18%. Medium sized clients (100 - 200 contract staff) can negotiate lower margins - down to about 14% - by supplying the agencies with a "one stop" client resource centre. However, there comes a time when quality of the delivered service will become affected by the lower profitability. Pay rates are negotiable. Contract staff will always try and obtain as much as they can squeeze from the market. The culture in the industry is to talk rates upwards. There is a fine line between negotiating too hard and disrupting the emotions of an individual, however with training and skill, long term, high cost saving benefits may be achieved. Pay rate control may be measured against the original cost the contractor requested and the successful negotiated price. A measurement of standard contract rates in the UK may be also used as a check or balance. Contract extensions may be measured in a similar format together with the measurement of percentage increases.
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COST SAVING OPPORTUNITIES
BULK DEALS
Resource centres attract bulk profit deals which allows agencies to use their lower cost account "deliverers" rather than high cost sales staff. This lower cost to the agency allows lower margins to be negotiated because the cost of sales will decrease
PAY RATES
Pay rates normally constitute more than 80% of the total cost of the contractor. It is relatively "easy" to control and negotiate this element on a deal-by-deal basis, saving many percentage points. Professional Resource Centres "watch the market" and find any avenue open to them to bridge the negotiating gap. By taking a view across all the business at a site together with market knowledge, savings may be made by advising agency staff and line management on capped limits.
NEGOTIATIONS
Agency staff attend professional sales negotiation courses. It can be argued that recruiting managers are the least qualified to negotiate for contract staff. Line managers have a qualified need and in this regard will take few risks and in any case the salesman will have qualified this need. For managers, it will be tempting to "pay up" rather than hold off and wear out a negotiation process. Agents and contractors enjoy quick decisions, but a structured and "wearing down" bargaining approach can save large sums of money. Audited results at Barclay Anderson resource centres show further savings averaging 5% - 6% per negotiation.
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