Cautious Dutch labor market chooses for temporary personnel and short-term contracts. This is not a sign of a coming economic revival; rather the opposite.

Yesterday, on August 2nd, the company where I work, held its monthly personnel meeting. My company is a small, but distinguished ICT consultancy firm with an exclusive orientation on the 100 largest companies in the Dutch financial industry: large banks, insurance companies and pension funds. As the company delivers ICT consultants with ample financial business knowledge, it targets at a tactical level of the financial organizations.

Although this might seem less interesting for you, two subjects were discussed that are topical in the Dutch consultancy and temporary labor industry of mid 2011:

• The continuing pressure on the prices per hour for consultancy, as there is more supply than demand 
• The increasingly short duration of consultancy contracts over the last year. 

Since the credit crisis lifted off in The Netherlands in September, 2008, there has never been a feeling of despair in the Dutch economy, like there was in the USA or Greece. The only industries where serious pain was felt, were in the banking and insurance industry. But just like any other government in the Western world, the Dutch government saved all large banks and insurance companies, except for DSB Bank. And when 2010 entered, most financial organizations were already ‘healthy’ again.

It is true, some non-financial companies – especially in the manufacturing and building & construction industry – had a very tough time too, but most companies suffered only minor losses or still had some kind of profit. To help troubled companies, the Dutch government created the part-time unemployment benefit (P.U.B; check out the link for more information). This P.U.B was deployed in order to supply the companies-in-need with a 50% subsidy on salary costs, with the purpose of keeping employees at the company that temporary ran out of work.

But further, the crisis didn’t feel like a true crisis, as it seemed to be over before it really began. The large banks – the main customers of my company – laid off consultants when budgets were halted (mid-2009), to hire them back only a few months later when the budget was released again.

Most consultancy assignments that my firm got in 2009, were mostly for a few months up to a half year. And although there was some pressure on the prices, the rates were still sufficient to minimize losses or even make a small profit. Although a few consultancy companies came into deep trouble, most survived effortlessly. And then at the end of 2009, everything seemed to be fine again.

But during the last six months of 2010 and the first 7 months of 2011, there were two clear trends:

• Large consultancy firms, like Logica, Origin and Cap Gemini in The Netherlands, maintained a policy of lowering prices per hour for consultancy. These companies did this under pressure of the large banks and insurance companies. Contracts were bargained for large numbers of consultants and the discounts on the gross hourly rates were enormous. If you were not in on this, you were out!
  
  The remaining rates were hardly sufficient to earn back fixed costs, but were still better than having 25% of the consultants without assignments. Although small consultancy firms sometimes had better deals, due to good personal relations of their consultants, also these firms had to give away 10-15% of their gross price.

• The second, even more disturbing trend was: Consultancy assignments that became shorter and shorter. The number of assignments that had a duration of less than a month was soaring, while a duration in ´good times´ is often at least three months, especially in times when consultants are scarce.
  
  On top of that, it became much harder to continue these assignments. Many assignments really ended after 2-6 weeks. And what were earlier last day prolongations, became (sometimes) even last-minute prolongations, after very hard bargaining and threats by the principal to lay off all consultants if tariffs were not lowered.
  
  Although a consultancy contract is a special kind of temporary contract, the difference with normal temp contracts is quite large. In contrary to a normal flex-worker, a consultant is mostly hired for dedicatedly executing projects, because of his special skills. As a consequence of that, the relation between the consultant and his principal is often much stronger than with a normal temp worker. Therefore in this industry, the extreme short contracts of less than a month are almost unheard of.
  
  You have to consider, that the to do-lists of banks, insurance companies and other financial services organizations, concerning ICT-projects, are currently quite long. This is caused by postponements of ICT-activities in 2008 – 2010 and also by projects like SEPA (Single Euro Payments Area), Basel II + III (banking industry) and Solvency II (insurance industry).
  
  Still, in spite of the large list of projects, hiring consultants for a longer time is often considered too risky.

I think these are tell-tale signs of a rebound of the 2008-2009 crisis. In my opinion this would not be a surprise at all. A few days ago, the Dutch Central Bureau of Statistics showed some data on temporary labor, that are in line with these previous findings:

 

Increase in temporary contracts with prospect of permanent appointment 

More and more employees in the Netherlands have a temporary employment contract that offers the likelihood of a permanent appointment. Most of them are younger employees. In the fast growing care sector, in particular, the number of workers with such a contract has risen considerably in the last 15 years. 

Six percent of temporary employees have prospect of permanent contract 

There were more than 6.3 million employees in the Netherlands in 2010. By far most of them, 85 percent, had a permanent contract with fixed working hours. Another 6 percent had a temporary contract with the prospect of a permanent appointment. This percentage has doubled since 1996.
The remaining 9 percent of employees were flex workers, such as agency and standby workers. This percentage varies according to developments in the economy, and was between 7 and 10 percent from 1996 to 2010.

Employees by type of contract

 More and more 35-54 year-oldsTemporary contracts with the likelihood of a permanent appointment are often seen as a sort of probationary period. Indeed it is often young workers who have these contracts. Six out of ten of employees with such a contract in 2010 were younger than 35, compared with three in ten who had a permanent contract.
The percentage of 35-54 year-olds with a temporary contract and the prospect of a permanent appointment has risen substantially since 1996, however: from 18 percent to 37 percent. 

Employees with permanent contract for fixed working hours1) and with temporary contract and prospect of permanent contract, by age 

 Increase mainly in careThe number of employees with a temporary contract and a prospect of permanent contract increased in the health care and welfare sector in particular. This sector has grown strongly in recent years. Nearly one in five employees with a temporary contract with the prospects of a permanent contract worked in the care sector in 2009. In 1996 the largest group of employees with these contracts was in trade. 

Employees with temporary contract and prospect of permanent contract, by main sectors of industry

Having temporary contracts soaring in normal labor situations, is also a very deflationary signal. In good economic times, good personnel is hard to get. Companies then offer rather fixed contracts to their prospective workers than temporary contracts, in order to bind people to them.

The fact that companies don´t dare to hire people for longer times, points out that companies are afraid that less prosperous times are ahead. Especially, when you consider that the Dutch society is aging at a steady pace, which could lead to a shortage in personnel in the not too distant future.

Because of all the restraining measures that were taken by the Dutch government, the recession of 2008-2009 didn’t cause much pain at Dutch companies. 

Unfortunately, this meant also that the overcapacity in all kinds of industries, was maintained, instead of being taken away. The consequences could be that the coming recession might cause much more pain than the last one, as the challenges are enormous, nowadays: the Euro-crisis, the American debt-crisis and the inflating bubbles in China (real estate) and India, that could lead to socionomical unrest there.

This pain will certainly be felt in the consultancy and temporary labor industry, as these industries are the most vulnerable for peaks and troughs in the labor market and often act like a barometer. 

Especially the combination of lower rates and short-term contracts is killing for these industries, as it means that more people are not working and the working people bring in less money. This wears down the budgets and reserves of these companies.

And that is not a happy perspective.