Human liabilities: coping with the cost of IT staff

Human liabilities: coping with the cost of IT staff

The readjustment of the IT market from the high of two years ago has left companies struggling under the pressure of inflated workers’ salaries. Meanwhile, a cut-price contractor market is competing rigorously with services providers for business. Agnes King takes a look at firms dodging the landslide.

While announcing KAZ Group’s annual results in August, managing director Peter Kazacos signalled the company is facing something of a human crisis. “We’re carrying a lot of people at higher salary than some of our competitors, which makes it difficult to be competitive when margins are coming down,” Kazacos says.

Salaries for IT positions have fallen 20 per cent across the board from two years ago on the back of the tech slowdown, according to IT recruitment firm Candle. At the peak of the IT industry in 2000, a project manager commanded an average salary of $105,000. Today, a new employee in the same role would get about $80K minus the perks.

With Australia's top 10 IT outsourcers carrying between 1,000 and 7,000 staff, of which 60 to 85 per cent fill technical roles, the expense quickly adds up. Using a salary gap of $25,000 for, say, 60 per cent of staff, the smallest of these outsourcers could save $15 million annually and the largest $105 million if they were to re-employ their staff at current rates. Add to this the 20 per cent average per employee for superannuation, holiday loading and other benefits, and you have yourself a tidy sum indeed.

In a climate where sizeable projects are precious, there is no room for such discrepancies. What separates the win of a contract from a loss these days is marginal, compressed by a flat local market fraught with conservative IT budgets, a paralysed US market, and investors cracking the whip for increased performance to recover a mere percentage of the billions lost on technology stocks worldwide.

Perhaps because of the extent of the pressure being applied, IT companies have been admirably resourceful in their bid to survive. In an effort to avoid inflated labour costs, many, such as Indian-based Infosys, are filling positions with cheaper workers sourced from overseas talent pools. The firm caused a right ruckus in September by announcing that 60 of the 100 programmers at its Victorian software development facility will be Indian expatriates.

The Australian Department of Immigration, Multicultural and Indigenous Affairs (DIMIA) issued 4,899 temporary ICT (information and communication technology) visas between 2000-2001, and a further 3,612 in 2001-2002. Data collated by DIMIA shows that within this period, 25 per cent of all applications for skilled migration to Australia were in the area of ICT. The minimum government salary requirement for temporary employees -- $34,075, excluding superannuation and other benefits -- makes sponsoring them an attractive proposition for Australian businesses, says Alan Rigas, principal at Sydney-based consulting firm Alan Rigas & Associates, which specialises in migration services. (The minimum salary was to be revised on November 1, with preliminary estimates suggesting an increase of about $1,700).

Rigas says some companies may be deterred from the economic advantages by concerns about the standard of foreign workers' qualifications and training, as well as cultural differences. But the fact that they are so cheap in the marketplace will tempt many organisations to utilise them, at least to some extent.

From the candidates’ point of view, $34K is significantly more then they might receive in their home countries. "The expense of travel, processing and resettlement here is negated by the fact that they come out ahead," says Rigas. Added to the attraction is the safe and high standard of living that Australia provides.

What DIMIA's temporary visa figures don’t include is the number of short-stay visas (sub-class 456, entitling a three-month stay), used by multinational outfits like Dimension Data to move a low-cost mobile workforce of network engineers, programmers and consultants around the globe.

Dimension Data CEO Steve Nola says that while in the past the company would send development projects offshore, it now imports a team of, say, South African engineers for a specific integration task before shipping them home again.

"As part of a global business, we have the ability to use resources internally from countries where the cost of employment is less," says Nola. In many ways, it's simply a more sophisticated version of housing a call centre in the Philippines.

Similarly, EDS has a network of 13 Global Competitive Resourcing (GCR) centres, including one in Adelaide, which compete aggressively for development projects tendered by large multinationals. In these tenders, the customer’s geographical position, or that of the development centre, is irrelevant except in relation to the cost of labour in the region, the availability of resources and the particular expertise -- for example, Australia is renowned for its financial, banking and credit-related applications.

The side-effect of this migratory practice, however, is that Australian contractors are being forced to compete more aggressively for work. Nola says the amount of redundancies over the last 12 months has created an artificial contractor market, which is competing more rigorously for business than Di Data's peers.

"If you look at the volume of work being undertaken by contractors today as opposed to three years ago, it's much higher," says Nola. "Unemployed contractors, in order to survive, are picking up business at lower rates because that's their competitive advantage. This puts strain on hourly rates across the board. For example, you can pick up an HTML developer today for about $25 an hour, whereas in the past you'd probably pay about $180 an hour." Reliable estimates drawn from ABN (Australian Business Number) applications suggest that in the first three quarters of 2002, 12,500 new ITC businesses were formed. Anecdotal evidence indicates that a significant portion of these are independent contractors setting up shop.

At the same time, Philip Attard, director of strategy and marketing for HP’s South Pacific services division, observes that the lifespan of the average contract is being reduced from seven to three years. This means that outsourcers can no longer recoup margin on the falling cost of hardware and maintenance by amortising their investment over a long period of time.

And so the carnage begins

With such pressure upon them, how do companies readjust? The obvious reaction is to cap wages and start sacking people. Alternatively, they can cull business units altogether like Dimension Data did with its Web and online development division and Powerlan did with its hardware services arm. It amounts to the same thing in the end. Job cuts is a pastime that the IT industry has indulged in with gusto over the last 18 months, especially since IT is one of the least unionised sectors -- the ability of pressure groups to make things prickly for companies is seriously retarded.

In October, outsourcing vendor CSC quietly laid off 17 employees after completing a project; a handful of the victims of curtailed spending by large accounts. The retrenchments formed the second phase of a plan to "control costs and realign resources", following a ploy by CSC’s US headquarters to offer voluntary extended leave (six months at 20 per cent pay) to its 66,000 employees.

At the same time, EDS, Australia's most profitable IT outsourcer at last count, announced in October than it had fallen well short of its revenue and earnings targets for both the third and fourth quarters. The company has launched a company-wide cost-cutting initiative including a 3 to 4 per cent staff reduction, which if implemented in Australia would mean the loss of 280 jobs.

Meanwhile, mergers are providing excellent cover for eliminating expensive roles from within organisations. Account managers mysteriously disappeared from the ranks of the combined HP/Compaq as recently as October, aside from the 15 per cent of staff that were ejected in the initial marriage.

Casualties are also expected from the recent acquisition of PricewaterhouseCoopers by IBM Global Services, although reports are afoot that IBM has been shedding staff all year. It's worth noting that the Industrial Relations Commission does recognise the difference between genuine redundancy and simply getting rid of someone who is too expensive. What’s more, getting bailed up in the path of legal recourse is intricate and expensive, according to Lizanne Bennett, industrial officer at the Association of Professional Engineers, Scientists and Managers, Australia.

Companies are looking at around $5,000 in legal fees for an unfair dismissal claim at a state level and upwards of $2,000 a day under Federal jurisdiction, where the case must be argued by a barrister. It’s often better for businesses to negotiate a settlement before things reach this extent, or to avoid it altogether by writing redundancy clauses into individual contracts.

By the same token, the government is not blind to the pressures business face, especially that of small proprietors. Federal and state legislation relieves companies with 15 or less employees from paying redundancy packages beyond any entitlements that an employee has earned prior to dismissal. The Federal Minister For Small Business, Tony Abbott, is currently attempting a review of the Workplace Relations Regulations to increase this number to 20 staff or less.

So hard to find good help

Overall, it's almost impossible to get an accurate fix on the number of IT positions that have been made redundant over the last two years. In July, however, the number of job cuts caught the attention of Abbott, who acknowledged that growth in the ICT sector had plateaued and unemployment rates among computing professionals had risen significantly. As a result, the Immigration Minister, Philip Ruddock, announced a suspension of priority processing for foreign ICT workers and a revised “Occupations in Demand” list was issued in August, which left all but five specialisations acknowledged as being in short supply. This compares to a list of 26 categories originally outlined in 2000.

Exasperatingly, even within this environment, IT companies say good help is excruciatingly hard to come by. Dimension Data’s Nola says there is no way he can consider capping wages because in such a competitive market for quality staff, market-related salaries must be paid simply in order to retain people.

The market is so competitive, in fact, that Dimension Data offers incentives to staff to recommend people -- staff get commission on successful applicants and if the employee remains with the company for a certain period of time, an additional fee is received. Towards the same end, HP invests a large amount of dollars every year on a sophisticated training and staff-retention strategy aimed at skilling up staff ahead of demand and relocate them throughout its worldwide pool so that employees feel constantly challenged. The ability to move people up, even if this means overseas placement, enables HP to give the employee the equivalent amount of responsibility for their salary bracket, rather than being caught in short supply and having to overpay.

For smaller setups, however, the cost of training, both in terms of lost opportunity and the courses themselves, can be too great, which results in firms employing a highly qualified candidate and paying whatever it takes.

Meanwhile, employees are not realigning their skills, expertise and expectations with the degree of urgency that the industry requires. Among distributors, for example, Lan 1 marketing manager Glen Jones says finding sales people who are “hunters” rather than “gatherers” is by far the greatest challenge. Out of a sales force of 10, there may only be three or four hunters, one or two wannabe hunters and the rest happily gathering. Jones blames this on high base salaries, which dulls the incentive to perform.

When Lan 1 went looking for IT telemarketers, Jones says the price that agencies were asking and the skills set telemarketers had in the desired areas were completely out of alignment. When Lan 1 suggested reducing the base salary and increasing incentives, the agencies flatly refused.

But this is about to change, says Emma Stoneham, marketing communications manager for Candle. In her observation, sweeteners such as free cars, health benefits and bonuses are no longer offered up-front but are considered after 12 months when a candidate has demonstrated a positive impact on the business.

By and large, the expectations of employers has risen. Companies expect a single project manager to oversee eight projects and technical staff to have the exact mix of skills for their environment -- operating systems, database applications, programming languages and hardware platforms -- even if it means stalling the project for an extra six weeks to find such staff.

In addition to this, IT employers want technical skills wrapped in business savvy. "In a lot of cases today, the technology is not that crucial to clients. They want to understand how a technology can provide a business benefit," explains Nola. “If you can get technical people that have some commercial and business skill, then you have the perfect person." The perfect employee looks something like this: a combination of IT experience, business savvy, salesmanship, problem-solving skills and strong relationships with executives.

And while Stoneham says that these expectations are bordering on unrealistic, it’s only natural that IT companies should transfer the pressure being applied to them onto the marketplace.

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