This week, the Dutch weekly magazine for the ICT-industry ‘Computable’ had a poorly written, but nevertheless very remarkable article: upon the consequences of the race to the bottom in ICT consultancy and freelance tariffs. This is a topic that I mentioned before on a number of occasions in my blogging series.
The author of the article, Ferdinand Griesdoorn, particularly mentions the so-called ‘follow-up’ discount: freelancers that want to prolong their contract with a large principal via a so-called intermediary firm, need to add an extra discount to their hourly fees. When they refuse, they can hit the road…
Here are the pertinent snips of this must-read article:
The services that are rendered by ICT freelancers are further under pressure, due to the introduction of ‘follow-up’ discounts at various large principals. This is a counter-productive development, when it comes to flexibilization of the labour market.
In 2013, various large principals introduced the so-called ‘follow-up’ discount. This is an extra discount that the freelancer must deduct from his hourly fees, if he wants to receive a prolonged assignment at his principal. In reality, this is a new way to put pressure on the hourly fees of freelance service providers. Often, this is not communicated in advance by the intermediary firms, which act on behalf of the government in the negotiations between the freelancers and their government principals. This is a counter-productive development towards flexibilization of the labour market and it sends a wrong signal to current and future freelancers.
In the current market, the hourly fees have already dropped substantially, due to the usage of tenders with maximized tariffs by local and central governments. When additional discounts need to be applied by freelancers during roll-overs of their contracts, this will eventually lead to freelance-services being a non-viable line of business anymore.
It is comprehensible that principals look for cost reductions in the current market, but it is less defensible when these reductions are introduced like this.
When, for instance, a freelancer offers services for €55 per hour (not uncommon in this difficult market), it is plausible that the freelancer reaches the level of 'a satisfactory salary' within a year.
However, this €55 is not a salary, but an hourly fee. Taxes and social security-expenses need to be deducted, as well as pension fundings. On top of that, the freelancer needs to create a reserve, that helps him ‘through a rainy day’, for instance when he is ill or doesn’t have an assignment for a prolonged period.
The author of this article is right. Of course he is...
You will find these practices not only at principals within local and central government, but also in the financial industry and other industries with a lot of ICT involvement.
The current ICT-market is a ‘dog eat dog’ market and the smallest dogs are clearly the freelancers. Their principals say: ‘my way or the high-way. You pay or you leave’. The principals don’t care much about freelancers not writing black figures at the end of the year or freelancers falling into poverty, when the next assignment stays out for too long.
My steady readers will know that the ICT-business is my daily employment, albeit in my situation with a fixed contract at an ICT-consultancy bureau. Also these ICT consultancy bureaus go through a very tough time, wherein many of them perish.
In the remainder of his article, the author Ferdinand Griesdoorn advocates that freelancers again should be able to directly do business with their large principals, without the intermediary bureaus that require their ‘slice-of-the-pie’.
This is a simple and non-effective sub-solution for a much bigger problem.
A. The banks, insurance companies, large manufacturing and transport companies and the government don’t WANT to do direct business with freelancers anymore. This is due to all kind of government regulation, wherein principals can be seen as de-facto employers of their freelancers, in case of long-term contracts between these principals and the freelancers. Theoretically, this could make principals responsible for the collection of all kinds of social security payments and for continued payments in case of long-term illness of the freelancer.
B. The real problem is indeed, as the author already wrote, that the tariffs and hourly fees in the ICT-business have been reduced to a level that – in the long run – cannot pay the bills of the freelancers and ICT consultancy bureaus anymore. This is a very dangerous development that could not only wipe-out Dutch freelancers, but also the ICT-consultancy bureaus eventually.
About three weeks ago, I wrote this about this development:
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.
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.
Finally, I’m almost going to repeat the lines that I wrote on 24 February 2013:
I hope that the large principals for ICT services come to their senses and cut their service suppliers some slack, regardless whether they are ICT consultancy bureaus or freelancers that desperately need the assignment.
Otherwise too many companies and freelancers will be financially slaughtered in the very near future.