Is it time for IT contractors to get permanent jobs?

Writing about IT and having a beat that includes IT outsourcing puts me in contact with lots of businesses that rely on outside support for their IT.

As it is the PCG’s National Freelance Day I thought I would put together a blog about the challenges facing freelancers.

Thousands of IT contractors support our government and financial institutions.

Nationwide cuts contractors

I recently spoke to Nationwide’s COO Tony Prestedge, who told me that contractors are perhaps the most talented and knowledgeable IT professionals out there.

Despite this high praise Nationwide, which used to hire over 200 contractors virtually constantly, has replaced them with IT service providers as part of a £1bn IT transformation project.

Also the supplier builds up expertise so trains new hires itself rather than internal staff doing it. When contractors leave they take specific skills and knowledge with them. When new one come in they have to be trained again.

So despite Nationwide’s COO believing IT contractors are some of the best resources available and the company consuming IT skills heavily at the moment it cut out contractors in favour of suppliers with the internal staff becoming integrators.

General Motors goes in-house

The next recent event that could impact IT contractors is General Motors’ decision to take IT back in-house. Obviously this affects IT services firms more, particularly main supplier HP, but if other companies follow GM’s example IT contractors could lose out.

GM sees the future of IT in-house so if other big businesses follow its example there could be less work for contractors.

GM CIO Randy Mott said: “Transforming our internal IT operations will give us the resources, tools and flexibility we need to provide better services and products to our global GM customers.”

Offshore threat

And nobody can forget the offshore threat. IT services forms are substantially undercutting UK IT contractors through lower cost labour from offshore locations. UK IT contractors are even being forced to train overseas workers to take their jobs.

Shrinking public sector opportunity

Then in the UK public sector there could be less contracting as the government faces an exodus, as new guidelines will force freelancers earning more than £220 a day onto departmental payrolls.  

But perhaps more of a threat to contractors and possibly a reason for them to seek jobs with IT services providers is the move by businesses to have more strategic relationships with suppliers. IT departments inside big business are becoming smaller and more focused on integrating multiple suppliers.

So what next for IT contractors?

How do IT contractors see the future?

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As an ex-contractor I'd welcome a permanent job, but there aren't any.

It's true that financial pressures are causing many businesses to cut contractors, but few of them are actively recruiting UK staff to replace them. In any case, UK employers have historically failed to invest in developing and retaining the skills of their own staff (and continue to follow the same self-destructive policy in most cases), which has been one of the reasons for the strong freelance market here. But contractors also fill a specific niche for staff you can hire and fire at will without any long term commitments or financial risks, and UK businesses have benefited from this flexibility in the past.

It's true that outsourcing work to a few integrated suppliers means the client no longer needs individual contractors, but the work still has to be done by somebody. The far bigger problem is the trend for these suppliers to move work offshore where UK workers (permanent or contract) are excluded from competing with cheap offshore resources. And as you point out, onshoring by the same suppliers is also a threat to all UK IT staff, who cannot compete with the low salaries and tax-free allowances paid to intra-company transfers by the fat consultancies. Both these trends are damaging the UK IT skills base generally, as opportunities to maintain and develop vital skills are eliminated for UK-based permanent staff and contractors alike.

GM's decision to bring work back in-house is a rare counter-example in the USA, which is unlikely to be emulated here in the UK, partly because we have undermined our own skills base and flooded our own industry with cheap offshore staff to such an extent that there is no route back to in-house UK-based development for many businesses. Even if the clowns at RBS, for example, wanted to bring their development work back to the UK, they couldn't do it because they've already fired most of their experienced staff in the UK, and they'd probably just import their cheap inexperienced offshore staff anyway, which would be of no long term benefit to the UK IT industry whatsoever.

Meanwhile, the UK public sector is about to create its own artificial "skills shortage", as they are effectively trying to force contractors to submit to IR35 rules, which are essentially a mechanism for ensuring individual contractors cannot compete with fat consultancies, who don't have to comply with IR35 or even pay tax on the allowances paid to cheap onshored staff.

Many contractors who are able to find work in the private sector will probably do so, taking their specialised skills and project-specific experience with them. Others will simply raise their daily rates to compensate for the crippling marginal rate of tax/NI imposed on them by forced submission to IR35. Their public sector clients will struggle to replace them with similarly experienced freelance staff unless they are prepared to pay market rates for the skills they need, including things like higher-level security clearance, and many government departments are still unable to recruit permanent staff to replace them.

Unfortunately, instead of creating jobs for UK IT staff - permanent or contract - this will probably result in another taxpayer-subsidised boom for the fat consultancies who will be able step in and charge the government fat daily rates (consultancies often charge twice the usual daily freelance rate for an experienced developer) while being exempt from IR35 and importing yet more cheap inexperienced offshore staff into the UK. Less UK taxpayers' money will flow back into the UK economy via salaries or taxes, and opportunities for UK-based IT workers will be reduced still further.

In other words, the UK IT industry will continue its self-inflicted, government-sponsored spiral into oblivion.

"Then in the UK public sector there could be less contracting as the government faces an exodus, as new guidelines will force freelancers earning more than £220 a day onto departmental payrolls."

Not exactly - that wouldn't be quite so bad, as a temporary employee of a government department would not have to pay the employer's NICs and would at least have some limited employment rights.

What is actually happening is that the government wants to force contractors to submit to IR35, which imposes both sets of NICs on the individual worker, restricts the ability to pay tax-free business expenses, and confers precisely no employment rights (paid holiday, sick pay etc) on the individual, who bears all the costs and risks of temporary work.

Even if contractors believe they would normally be exempt from IR35, they are required to prove this to the client or to HMRC before being able to compete for a contract. As HMRC always claims people are liable to IR35, the contractor would have to appeal against this decision, a process which can be expensive, time-consuming and certainly would not be complete in time to start work on the original contract. The alternative would be to pay for an expensive contract review service in the hope that this can be completed in time to start the contract, assuming the contractor can even see the contract before completing the selection process.

As the fat consultancies with friends in government are not required to play by the same rules, it will be much easier for them to place one of their onshored staff in the role, even though the consultancy often charges more, and pays little or no tax in the UK, while their onshored worker also pays little or no tax here, and nobody pays any tax at all on the generous tax-free subsistence allowances available to onshored staff (but not to UK contractors under IR35).

This is just another attempt to rig the public sector market in favour of the same fat consultancies who have screwed up so many public sector projects in the past.

As an umbrella company, Contractor Umbrella work with many IT contractors and have seen an uplift in demand for contractors over the last 6 months.

The latest survey from Staffing Industry Analysts has revealed that as UK businesses continue to use the specialist skills of contractors, all hiring amongst temps, across all industries, will reach 106% of their historical high since 2008, during 2013 – some sectors may even exceed this.

So maybe it isn't all doom and gloom for contractors!