Market Outlook 2002: IT contractor demand will grow in 2002

Over the next week UKTECH will present various interviews and discussions with leading agents, accountants and clients in the IT contracting sector, outlining their opinions and outlook for the industry in 2002. In the first article of the series, Robert Lindsey, Chief Executive of the recruitment agency, Certes Group, talks about his view of the market for 2002...

UKTECH: Do you think there's an IT skills shortage in the UK at the moment?

Mr Lindsey: "The recent increased supply of both contract and permanent staff as a result of downsizing initiatives has gone some way in addressing the issue of 'vacant seats.' However, it hasn't been sufficient to address the current 'shortfall in knowledge' for certain key skills which means that the demand and associated remuneration for these skills and experience will continue."

UKTECH: What evidence have you seen to support this? Which skills do you see as particularly lacking and are there any skills sets you see as being abundant at the moment?

Mr Lindsey: "We are still seeing demand for e-business and the associated network, storage and security infrastructure skills. It is unlikely that companies will shelve these projects despite the tightening of budgets and as such failing to staff core IT projects like these effectively could jeopardise the long-term competitiveness of the business.

"Granted some IT departments can simply tighten their belts, and some could manage workloads with existing permanent staffing levels, rather than supplementing numbers with contractors. However, due to the skills shortage, many companies come into the current period of economic insecurity with IT departments that were already short of the needed skills sets and so a spate of redundancies or a freeze on headcount may only serve to limit the growth of the business."

UKTECH: Have you seen strong competition between contractors in the UK for contracts over the past 12 months due to market conditions?

Mr Lindsey: "The issue of competition in the marketplace is more significantly a client driven issue right now. There are a number of factors forcing the competitive nature of the market, firstly clients' increasing of service expectations. Secondly, the increase in market players as general recruitment agencies and recruitment portals move in to compete with the established IT recruitment specialists. Whilst the market has stabilised somewhat there are still too many agencies chasing high volume contract users.

"Customers are naturally demanding lower costs, but on top of this they have additionally increased service levels, so the challenge now is to deliver a high-quality service for less money. This combined with the legislative issues associated with IR35 has given clients more power to dictate stringent Terms & Conditions on agencies as well as continue to drive agency margins down. Many players in the market now believe margins have been driven so low that it is almost impossible for agencies to sustain profitability, more particularly within the confines of the expansive terms and conditions and broadening service expectations."

UKTECH: Is this situation likely to change in 2002?

Mr Lindsey: "The market must understand that if staffing agencies can't make profit they will have no incentive to remain in this business, and we believe that 2002 is going to be a significant milestone year, and one which will be tough for all of us. But it really is too early to predict how it is going to pan out. We believe the time is ripe for the market to sit up and take a good hard look at how service provision and pricing structures now need to be aligned to the commercial realities of sustainable contract resourcing.

"As we've already identified, margins that volume contract users are prepared to pay for their contractor resourcing barely cover the costs associated with supplying the levels of service required. If this persists there will be an increase in the number of liquidations and businesses for sale as agencies find they just can't sustain the business model they are being forced into. Those agencies that are left will more than likely concentrate on areas where they can make profits which could mean that few if any will represent IT contractors in the way they traditionally have.

"We also have a concern that many contractors will end up finding themselves being treated in the same style as 'temps' due to the more generalist agencies applying their business model (developed to work within the cost and service parameters dictated by clients) which in real terms, tends to devalue the contractor.

"Perhaps one of the most significant changes that may be around the corner in 2002 for contractors is the issue of payment timing. IT contractors have become accustomed to the privilege of being paid in much shorter time periods to their permanent colleagues. Given the pressures that continue to be placed on agency margins and the fact that clients are continuing to take longer to pay up - this just isn't sustainable anymore and it's likely that 2002 will need to see a change in mindset and expectation from contractors with regard to the frequency and speed of their payments.

"In response to these market pressures, our approach has been to take prudent steps to ensure we can sustain our service to the client, whilst still representing contractors' interests. In some cases this has resulted in modifying and streamlining our services to both parties. We are also adapting to these market conditions by offering contractors new opportunities and customers new types of service that offer better value, to justify sustainable margins."

UKTECH: Have you seen many contractors go permanent in the last few months and do you think this will increase or decrease in 2002? Have you seen many permanent staff going into contracting?

Mr Lindsey: "We have seen fewer contract to permanent conversions over the last few months, than we did over the same period last year, due largely to the increase in recruitment freezes and large scale redundancies.

"In 2002, we are expecting to see higher volumes of lower skilled contractors going permanent to gain more stability, while the highly skilled contractors will grow more in demand and command higher remuneration."

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Richard Powell, UKTECH