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Sunday, 24 February 2013

It is a time of forced austerity in the ICT-business! Or, how a formerly exuberant industry is hit by the hammer, coming from the economy and the low-wage countries.

‘Cause nothin’ from nothin’ leaves nothin’
You got to have somethin’ if you wanna be with me
‘Cause ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me

A few weeks ago, on 11 January, I wrote already about the Dutch subsidiary of the French ICT consultancy firm Capgemini and its plans to DEcrease the salaries of a substantial number of older workers.

Capgemini argued that the revenues brought in by these older workers during assignments were too low to justify the height of their current salary, in contrary to younger workers who earnt too little in comparison with their revenues. Capgemini felt it should start a discussion on salary-decrease and demotion (i.e. negative promotion), as a consequence of the enduring pressure on the hourly fees for consultancy and secondments, caused by knowledge workers from the low-wage countries in Eastern Europe and especially India.

The initial article from Het Financieele Dagblad that I used as a source for my blog, mentioned a salary decrease rate of 10% maximum. However, last Wednesday-morning, 20 January, Het Financieele Dagblad (FD) came back at Capgemini with another article. The ICT consultancy company still had the same plans for a salary decrease for its older worker, only the rates differed strongly:

Capgemini asks its (mostly) older workers for salary-discounts up to 30%. This becomes clear from a series of conversations that the ICT company had with a share of its personnel, according to labour union De Unie. The union calls the discounts to be ‘absurd’.

Last month, CEO Jeroen Versteeg of Capgemini Netherlands caused a discussion on wage reduction, when he announced that he would ask a wage-offer from about 400 employees, whose hourly revenues were lower than their salaries. He stated that the offer should go beyond 10% ‘in a number of cases’.

Today, it became clear that these wage reductions were asked in almost all cases. “Fifteen members of ours, who already had these conversations, had been asked for offers of more than 10% in wage reduction”, according to Han ter Halle of De Unie. “For most of them, the offer that they received was a discount of 20% to 30%. Those are the numbers that we also hear from other unions”.

Capgemini states in an official reaction that the cases who would be reduced with up to 30% of their current salary ‘are very low in number’.

I don’t believe Capgemini in this case. It was a ‘brave’ attempt by the company to downplay the situation, but why would labour unions go the press with such a story, when they could easily be disguised with telling blatant lies.

Subsequently, on that same Wednesday, Cap Gemini decided that 30% of wage reduction was perhaps a little bit too harsh. They brought the wage reduction back to ‘only’ 20%. Again the FD:

ICT service-provider Capgemini decided yesterday-evening to diminish its plans for a wage reduction, after internal unrest about the earlier plan to cut 30% off from a handful of salaries. The discount will now be reduced to a maximum of 20%, according to a spokesman on Wednesday afternoon. “30% has been considered to be a very high reduction”, according to the same spokesman. There is still ‘a void between what people earn and what they can’ among 400, mostly older workers (7% in total), like the company mentioned earlier.”In a handful of cases, where that void is very large, the targeted salary-reduction is 20%”.

Capgemini emphasizes that the plan in essence enjoys great support at Capgemini, also from the Employees Council (i.e. Ondernemingsraad, a legally endorsed council, formed by the employees of a company that is at least 50 workers in size in The Netherlands), who approved of the plan earlier.”The general consensus is that it is crisis and something needed to be done”.

Capgemini saw its sales and profits plummet. Large customers in the financial industry and ministries sent their external ICT-consultants home by the masses, in order to save expenses. On top of that, the earnings model of consultancy firms ran on a limp: some hourly rates dropped by 50% in The Netherlands, due to large-scale outsourcing of work to the low-wage countries and the in-sourcing of foreign workers.

And for all consultants in the ICT-industry, who hoped that Capgemini would remain the only company to ask for such a wage reduction, there is sobering news.

Next in line for wage reduction is another ICT consultancy company: CGI, formerly known as Logica. Again, the FD published an article on this subject:

In Capgemini’s footsteps also CGI (formerly known as Logica) wants to approach its wage expenses. The ICT company wants to flexibilize the salaries of all 3500 employees.

On top of that, the company wants to couple a large share of their salary to the achievements evaluation of its employees. The targeted effect is that the salaries of 'overpaid' expensive workers are reduced.

This was stated by the new CEO Ron de Mos of CGI Netherlands. In this way, the ICT-industry takes the lead as an industry that wants to introduce wage reduction.

The large companies in ICT-secondments feel forced to perform these actions, as their industry is hit extraordinary hard by the economy. The ICT is the first target for austerity at banks and the government. Hourly rates and company profits have plummeted, since 2008, while the salaries remained at a high level. This was the reason that CGI cut itself in half, as a consequence of constant restructuring during the last five years. Also the competition fired thousands of employees.

If there is one industry that I know, it is the ICT-consultancy industry: it is for me the industry ‘which pays the rent’.

It is a very volatile and cyclical industry, as it is extremely labour-intensive and the nature of the labour requires high qualifications and thus high salaries:

  • During good times, when qualified labour was scarce, the consultancy firms (over)asked often very high hourly rates from their principals. The principals sighed and grunted, but paid it anyway, being afraid that they would lose their necessary supply of ICT-consultants;
    • One of the oldest tricks in this business, is consultancy firms initially selling experienced consultants ‘who know the tricks of the trade’, but soon replacing them with less experienced workers at almost the same fees;
    • Another issue in this business was a symptom called ‘job-inflation’: after two years a trainee became suddenly a consultant and two years later, the same consultant had suddenly reached management level, virtually without getting extra skills and qualifications;
    • The conspicuous luxury and (even) decadence in the ICT business had been so bad in the nineties, that some companies invited job applicants at a large car-dealer for their job interview, so they could pick their new company-car immediately after signing their contract.

      Golf-clinics, week-long €5,000 courses at an afforested location, €1000 euro seminars for a day: the sky was often the limit;
  • In bad economic times, however, the large principals remembered what the consultanty firms did to them a few years earlier and turned the thumb-screws on:
    • “We want to talk about your hourly rates. You are doing a lot of business in our company. A lot… We discussed your case and we came to the conclusion that we want a discount of 20% on your hourly rates. For all workers, that is… Else, we are forced to reconsider your contract the next time it needs to be rolled-over and that might be very soon already. Thank you for your cooperation”.

    • Especially during the last 5 years, the large principals in the financial industry and at the local and central governments had a big stick to hit the consultancy firms: the ample availability of trained knowledge workers from the Far East and Eastern Europe. 
      While the first ICT-workers from India often were hired as ‘one trick pony’s’ who did only the easy routine work (“engraving Cobol”), the quality of their labour strongly improved as their experience started to overcome the cultural differences and mutual misunderstandings. Now there isn’t a large principal in The Netherlands that hasn’t dozens of Indian and East-European workers to their full satisfaction.

    • For the consultancy firms it seemed that the golden goose had been slaughtered when the foreign knowledge workers came to The Netherlands: an event that most consultancy firms still didn’t overcome yet. 

I know that many large consultancy firms, like for instance the ones mentioned earlier in this article, messed up at some projects in the past: asking too much money for people with too little qualifications and skills, not sticking to agreements and deadlines, not ‘practicing what they preached’ to the principals and sometimes even delivering bad work in overdue projects.

However, also the principals could often be blamed in this matter: for sometimes being too bureaucratic, too fuzzy and too slow, for starting unrealistic projects with unfeasible deadlines, for changing the specifications a number of times halfway the project and for supplying too fuzzy or (to the contrary) too detailed specifications that could not be changed in effective software.

ICT is human’s work and unfortunately human’s make errors. It's of course a cliché, but this cliché is very much true in our line of business.

Whatever was the cause, at this moment there is not a healthy relation between the large principals in the financial industry and at the government (the demand side) and the large and small software houses (the supply site). 

The latter categories are currently going through very tough times and many of them might perish in the process. Especially the price pressure that is put on small consultancy firms, which have little options when their principal dismisses them, is often close to unreasonable.

I’m very much opposed to wage-reduction, as it scoops out the salary of workers that have often obligations that are in synch with their previous salaries. Besides that, when these people might become unemployed after all, they receive much less Unemployment Benefit than if their salary would not have been altered.

On the other hand: I understand and know by heart that many ICT consultancy firms have no other option than reducing the salaries of their (sometimes overpaid) workers, as they are ‘stuck between a rock and a hard place’.

From my position, I want to ask the large principals to cut their consultancy firms some slack! 

When the economy will make a turn for the better in a number of years, the current excess quantity of ICT workers might soon be replaced for scarcity of specialized and experienced workers, who cannot be replaced by workers from all around the world. Some jobs simply require local people with knowledge of the local situation. 

When half of the consultancy firms would have perished then, it would be extremely hard for the principals to find the right people at the right price.

At that time, the remaining ICT consultancy companies might remember 2013.


  1. Interesting article!
    I am looking at it from the perspective of public government.

    There are strong forces in Dutch politics that want to merge local governments in order to take advantages through economies of scale.
    There is strong opposition from local governments but they do realise that they need to take austerity measures. One of the easiest ways to do this is through going back to core business and outsourcing non-core business activities to seperate organisations. This organisation could do the same work for a number of local governments. It means costs can be cut for all local governments that participate. You see this developement in fire services, police, emergency, healthcare, environmental law enforcement (RUD), etc and also in ICT. centralisation for economies of scale.

    ICT is not necessarily core business for local government. Decission making IS. Sure, local governments base their business on steady streams of information but if this can be obtained cheaper by outsourcing they will do it. It might save local governments a good deal of money.

    Another development that is effecting the ICT-sector and local governments over the past 5 years or so, is the infrastructure of nationaly standardised 'basis registraties'. (look at programmes like I-NUP, GEMMA, etc)
    This standardisation of information infrastructure makes it much easier to outsource ICT services because all local governments have the same standardised information needs...! It's a very far reaching development! a lot less customised ICT work will be needed. Think about it...

    If this proces of merging and cooperation between local governments continues in the near to midterm future inevitably this will lead to a lower demand/need in the public sector for ICT services.

  2. Thank you for your valuable comment. I will come back to it very soon.