The Ovum View: Holway on the IT salary dilemma

While silicon.com has been running the results of its annual skills survey, Ovum analyst supremo Richard Holway has separately been calling for more realistic salaries...

The IT industry has now entered a mature phase, bringing it into line with many other established technology and engineering sectors of the UK economy.

IT’s share of the UK economy has grown to around four per cent today but is likely to remain at that level for the next 40 years. Future growth will be quite closely aligned to GDP growth which means mainly in the 0-5 per cent per annum range. “Similarly, the days when fee rates, contractor rates and wages are significantly higher than the national norm will come to an end,” says Ovum Holway director, Richard Holway. “For the first time, we are actually seeing signs that average wages in the sector are starting to decline.”

In a maturing industry there has to be a focus on competitiveness and market share. Competitiveness translates to the cost base and, essentially, the cost of employees.

“The skills shortage evaporated in late 1999 and into early 2000. This was in part due to the end of work geared towards dealing with the Y2K bug and the bursting of the dot-com bubble,” says Holway.

There are now over 50,000 fewer people employed in IT services. “It’s very rare to find any company in our sector that hasn’t laid off staff.”

All the indicators are that things are getting worse. Contractors are the first to be laid off when times are bad and the first to benefit when recovery starts, which makes them a good barometer for which way the job market is likely to turn next. Staff agencies have had a horrid time - revenue for the sector has declined 23 per cent in the last year and things are currently getting worse rather than better.

However, staff members that haven’t lost their jobs are still enjoying the salaries they received at the height of the boom. And this is where another problem arises. “Many permanent full time wages in UK IT services companies are now not competitive,” says Holway.

While fee rates have dropped back to the levels of 1996 (rates are up to 50 per cent lower than the high point of 1999-2000), wage rates have remained high. “Compulsory salary cuts are against the law and so too is replacing current employees with new, cheaper ones,” warns Holway. Likewise, employers might encounter problems when new staff demand to be paid the same over-inflated salaries as their already-employed peers.

Companies are now faced with having to pay salaries that are set at levels that date back to before the downturn while fee rates have dropped off.

“Our industry has not faced this dilemma before. This is now a major problem - companies need to cut their cost base but how do they do it?”

Holway suggests that one possible way forward is performance-related pay. New employees might be offered a lower base salary alongside a performance pay bonus. If the dilemma is not faced, however, the survival of some companies will be on the line. Indeed, the threat from the offshore providers might mean that UK IT jobs are lost forever.

“A year ago everybody was living in denial, convinced that things would pick up during the second half of 2002,” says Holway. “Now CEOs are taking a more realistic approach. In fact, there is far more realism at the top – the mid-ranking management are living in denial. Most CEOs are pragmatic and doing something about it.”

Related Ovum Research: The Offshore Services Report 2003 – An Ovum Report

For further information see www.ovum.com or email info@ovum.com.