Structural changes in the IT industry have made the upcoming recession more manageable.
In the past few years there has been some unprecedented things happen in the world of which Covid was a huge part. When the pandemic started, within the IT industry we thought this may become a huge problem. I was working in an IT consultancy at the time and I can’t count the number of times we met (online) and reviewed financial spreadsheets as the panic started. It transpired that Covid had a fantastic silver lining. Not only did organisations want a bigger digital presence but working from home was forced upon them. This created 2 major changes in the IT world –
- A significant increase in IT demand
- A working from home culture
Both of the above have increased contractor demand, increased rates and attracted more contractors to the market.
What will a recession bring?
There is likely a world recession coming and we have seen many tech layoffs around the globe mentioned in the press. I get asked frequently, what will happen to contractors during a recession?
Is now a good time to start IT contracting?
Like Donald Rumsfeld, it makes sense to review what we know, what we don’t know and what we can predict.
Unlike the impact of Covid on the IT industry which was largely unknowable in advance, the world has been through recessions over the past few decades e.g. 1975, 1982, 1991 and 2009. As much as each recession was different and the IT industry has changed significantly over this period of time, a few things are likely to be very similar.
How a recession affects different businesses
There is a saying that ‘sin wins when the economy loses’. So, the likes of alcohol, chocolate and cigarette sales tend to increase. Extravagant spending like gambling reduces as people tend to gamble a little less when times are hard and they have less spare cash.
Some businesses don’t really get affected at all – supermarkets, healthcare, pharmaceuticals and council services will be largely unchanged. This is because people still need to eat, they get sick and waste still needs collecting. You could argue that during a recession more people cook at home so supermarkets may increase their business as we also saw during Covid.
There are also businesses such as banks that have legal and compliance projects to continue to deliver and these projects are unaffected by a recession.
A majority of organisations will struggle financially in a recession as customers reduce their spending. In areas where customers spending is a luxury this spend generally reduces. Affected organisations will reduce their overhead costs and their spending on non-essential activities. Any IT projects that they believe are not essential are likely to be stopped and they may also look to reduce their IT headcount where they can.
From an HR perspective, staff cuts generally fall on those who are “cheapest” first. A contractor has no long term employment contract. From an IT perspective this may mean IT contractors are let go first followed by permanent members of staff. This will increase supply of skilled IT staff to the market. Demand for new IT staff will probably reduce and IT contractors will need to fight harder to find employment.
Some businesses may also thrive in a recession, especially as they offer an alternative for people getting others to do work. As an example, more people will do home DIY rather than pay a builder to come in and do some work. This means the likes of Mitre10 and Bunnings will probably do well.
IT contracting in a recession
I don’t have a crystal ball, but I have some thoughts on what may happen to the IT contracting market.
During Covid many kiwi businesses looked at new ways of finding and hiring IT skills as we suffered a ‘digital skills gap’. Many looked overseas and now have partnerships with offshore vendors. Depending upon the currency markets these organisations may expand their offshore teams. So kiwis may get remote work for overseas projects.
A number of contractors will be let go or not get renewed as projects finish or get stopped. These contractors will increase the supply and reduce their hourly rates to win a new piece of work with an organisation that is still delivering IT projects. This will in turn squeeze the rates on all contractors as those in work may seem overpriced in comparison.
As an IT contractor I would be looking to find a role within an industry that may survive or even thrive and ideally get hired onto a long term piece of work e.g. a bank compliance project.
I believe a contract role is less secure than a permanent role in a recession but not by much. If an organisation needs to cut costs, first to go will be the contractors but likely permanent people will follow shortly after. One element that is worth taking into account is that contractors are probably more used to change and changing roles. They are good at finding work and have networks of contacts who can tell them about work opportunities. They may (or should have) set some funds aside for a gap so maybe able to deal with a gap in employment better.
Generals have a tendency to “fight the last war” and each new recession is different from its predecessors. So the reality is that nobody really knows how a recession will play out.
What I do know is that being part of good networks like the IT Contractors LinkedIn Group and the IT Contractors Meetup group will not be a waste of your time. Learning robust networking from people like Colart Miles will also help you.