IT companies use contractors and consultants, but what is the difference between the two?
Traditionally, consultants are expensive to hire and sometimes difficult to get hold of, since most of them worked for multinational corporations, such as IBM and Gartner Group. Rates of up to £5,000 per day are not unheard of in this world, putting consultancy out of the reach of most small- and medium-sized businesses.
At the other end of the spectrum are contractors. Sometimes they are expensive, but they are useful in the short-term for those projects where expertise doesn't have to be retained in-house. And yet contractors have their drawbacks too, such as their disincentive to finish on-time and on-budget.
With contracting rates in free fall and the impact of the Inland Revenue tax reform IR35, you might pay £20-£25 an hour but the contractor himself takes home barely £10 of that.
To put that in perspective, the same contract at the same rate before IR35 would have netted the same contractor double the take-home income for the same work.
So rates have fallen and, thanks to IR35, tax has risen for most contractors. The better ones are deserting the market by going permanent, moving abroad or just leaving IT.
However, a new breed of consultant is hoving into view. Not for these consultants the daily rates of the Big Boys, nor the quasi-permanent working conditions of the old-style contractor.
Instead, this leaner breed prefers to work like a consultant and bill like a contractor, providing expertise on-demand and backing it up with client support wherever the client wants it.
Did I say "client"? Yes, because we're beginning to see the dawn of consultant-client relationships, where once contractor-employer relationships reigned supreme.
There is a barrier to this progress, however, and that is the recruitment agency. Clients may be unaware of the advantages - in speed, quality and costs - this new breed of consultant is able to offer them. And all too often the agencies are reluctant to discuss a new method of working with their clients, for fear of losing commissions.
So they continue to recruit old-style contractors, who work on-site under IR35 conditions, rather than looking to the future and using their creative juices to meet their clients' needs instead of simply parroting their clients' job specs.
Yet the recruitment agencies have problems too and these are approaching fast because the present contracting rates are unsustainable. As old-style contractors over the past year have seen their take-home pay slashed from £35 to just £10 per hour, the agencies have more and more trouble meeting their clients' needs and matching their expectations.
So what is the solution? The IT industry needs to come to terms with IR35, to accept that the day of on-site contractors is dead and to look at what the new breed of consultant can offer to their business.
The recruitment agencies need to think in terms of introduction fees for bringing together clients and consultancies instead of commissions for contracts. This is the same revenue, just a different approach to gathering it.
IR35 was like a meteor smashing into the IT industry, and the dinosaurs of old-style consulting and contracting are dying. But small, furry consultants - leaner and fitter and better for your business - are poised to move in to help the industry survive.
Roy Stead is director of documentation and software design consultancy Kallisti Yalla
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