Does loyalty pay in IT contracting?

For some time now, IT contracting in SA has been gently, albeit profitably, ambling down a conventional path with few distractions and generally high comfort levels. However, there does appear to be a need for a new approach to this vital sector of the IT industry.

Contractors should be able to question the profit margin of their agency -- and receive an honest and transparent answer.

Jill Hamlyn, MD, The People Business

In the past, contractors would align themselves with a single contracting house and would rely on it for the management of their career. In return for this loyalty, the contracting house promised to provide a package deal consisting of ongoing work, joint bargaining for an inflation-pegged increase in rates, financial planning, social get-togethers and monthly meetings.

For this, the contracting house would charge the client a fee and pay the contractor between 20% and 30% less than that fee. To a certain extent this has worked well, especially for some of the contracting houses that have gained substantial rewards. Having tied in a contractor, their work is fairly straightforward, with lucrative margins.

However, our contracting manager, Andrew Avis, feels that contractors need to play a more dominant role. This includes seriously questioning, among other issues, the discrepancy between their remuneration and the commissions earned by consultants.

He believes that the majority of IT practitioners leave permanent employment primarily to boost their earnings. It is apparent that contracting is not simply a passing trend but an increasingly viable option that is being taken seriously by many public and private organisations. In light of this, it is obvious that someone in the client-contractor-agency equation stands to make a fair amount of money.

Contractors are often able to earn a substantial amount, and in some cases this may be an understatement. At the same time, they are prompted to point out that their consultant tends to be immaculately groomed in designer suits and visits them in a luxury vehicle.

It is therefore not the level of earnings that angers many contractors, but rather the division of wealth between them and their consultant.

An examination of fee structure, workload and levels of responsibility throws the issue of gross margins and fair distribution of income into the limelight. Succinctly stated, contractors are increasingly of the opinion that contracting houses are unjustly exploiting their skills. In some cases they have a valid point.

The question that I feel begs to be asked is, what is a justifiable margin? Capitalist, free-marketeers would unequivocally argue that contracting houses are legitimately free to ask whatever the market can bear.

If the contractor, for example, is happy with R70 per hour (possible increasing his earnings by 50% and more) and the client is happy to part with R100 per hour, then all is well. More socially conscious commentators would probably consider a margin in excess of 40% to be morally indefensible.

Somewhere between these two diversely opposite poles of reasoning lies the truth. Given the fact that the majority of consultancies pay their contractors some 14 to 30 days before they receive payment from their client, and thus have to finance a not inconsiderable payroll, one can begin to understand the need to secure reasonable margins. In addition to this, there are the usual advertising and administrative costs which are subjected to increasing inflationary pressure.

Having acknowledged this, however, I personally believe a margin of between 10% and 15% should suffice. This will ensure a viable business venture on the part of the consultancy and allow for increased earnings for the contractor, who, after all, is the person who actually delivers the goods. Contractors should be able to question the profit margin of their agency -- and receive an honest and transparent answer. A direct rebuff or evasiveness may signal cause for concern.

In the past, it has also been expected that contractors remain within the fold of their chosen contracting house. To a large degree this loyalty allows the agency to dictate the nature of the contracts and ultimately the shape and substance of careers. Although promoted vigorously by the consultancy, it has largely relieved contractors of the responsibility of marketing their skills.

Unfortunately, this also has the effect of negating the second most important motivation for becoming a contractor, namely independence.

In the haste to spend and invest their enhanced earnings, many contractors neglect to take a long-term view of their careers and may be forced to accept contracts that remove them from mainstream technology and adversely affect their future prospects. Sometimes this is the result of acting in a manner to appease their consultant, but sometimes they are the victims of less then honest advice.

More sinister are unscrupulous agencies that contractually make it very difficult for contractors to refuse assignments and seldom take individual needs and aspiration into account.

Both Andrew and I believe that the surest resolution is for contractors and clients to follow the international trend towards multiple alignment. Contractors and clients can then register with between three and six consultancies. This allows for greater choice and the resulting competition between consultancies will encourage a less selfish approach, benefiting the clients, the contractors, and ultimately the IT industry as a whole.