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Friday, 1 January 2016

Will 2016 become the year in which large and small ICT suppliers "get even" with their corporate and governmental principals for forcing down the hourly rates during the crisis years?

One week ago I was visiting a good friend of mine, “Harry” (not his real name), who works for a ‘Big Blue’ company as an ICT specialist, mainly within the telecom industry. At this moment, Harry is involved in a long-term assignment in a multifunctional role at KPN, the leading telecom company in The Netherlands.

We talked about our business – the ICT business – and about the way in which large principals from the government, as well as the financial and commercial services industries, have (sometimes bluntly) forced down the hourly rates and the general costs of ICT during the crisis years from 2009 to 2015.

This forcing down of the hourly rates and the general costs of ICT happened in a number of different ways: 
  • By outsourcing (large parts of) the ICT department to specialized service organizations within The Netherlands or in the low wage countries inside or outside Europe;
  • By hiring large numbers of ICT professionals from these low-wage countries inside or outside Europe: either as internal personnel or as external consultants;  
  • By stretching the payment terms for invoices and bills from 30 to 90 days or even longer, as a way of cash management at the expense of someone else; 
  • By demanding lower hourly rates from their steady external ICT suppliers, either through negotiating for long-term, fixed cost delivery contracts or through pushing down the hourly rates for individual consultants and (often small) ICT-companies.

No sane person would blame large principals for doing what is described in the first two bullets, as all companies large and small have to watch their costs and expenses.

However, things start to grind when companies and government bodies (!) do what is described under bullet three.

ICT companies – especially the smaller ones – which had often been strapped for cash themselves, were sometimes brought to the brink of bankruptcy with this cash management strategy: especially as they were often in a subordinate position to their large principals and did not dare to blow the whistle and/or enforce earlier payment of their bills. Their personnel required their monthly wages (by far the largest expense for an ICT company), while the money flowed back in slower and slower as a consequence of this darn starvation strategy, thus forcing ICT companies to take huge amounts of working capital loans, until the banks said: “enough is enough”.

However, the most common way for large principals to force down the costs and expenses for their ICT investments was bullet four: demanding lower hourly rates from their suppliers.

And of course every company, financial institution or governmental body has the right – and perhaps the duty towards their stakeholders – to ask for lower prices from their suppliers when the going gets really tough.

However, the latter often happened at gunpoint: mostly in advance – at contract prolongation time – or even afterwards and retroactively (!) in some cases. In most cases the message was perfectly clear: “you’re down – with your prices – or you’re out!”

While the large ICT suppliers had some negotation space left against their large principals, due to their considerable interest for the company or governmental body as a whole and their key positions within the ICT organization, such was often a devastating blow for the smaller suppliers and  freelance professionals, who mostly lacked such negotiation power.

Choosing between ‘yes’ and ‘no’ in such situations was like choosing ‘between a rock and a hard place’. Losing a large part of the hourly rates was often a fierce financial blow, but losing the customer as a whole was even worse; especially in times when there was a blatant excess supply of personnel in the ICT market and new assignments were extremely hard to find. And therefore most small ICT companies and freelancers said ‘yes’ to their principals, when these demand lower rates, until it started to really hurt financially.

The following snippets from a KPN press release from the end of 2014 state in concealed phrases how such negotiations went:

KPN and several of its suppliers have agreed better conditions that significantly reduce the payment terms in return for discounts. These mutual beneficial agreements will give both KPN and its suppliers greater financial flexibility. KPN will record a one-off cash payment of approximately EUR 225m in the fourth quarter of 2014, which is seen as a change in phasing and therefore excluded from KPN’s outlook.

The agreements align KPN’s payment terms and increase KPN’s flexibility in selecting suppliers, resulting in a more adaptable and lower cost base. This agreement is part of KPN’s strategy to use the majority of the cash proceeds of the sale of E-Plus to increase its financial flexibility and support the execution of its strategy in The Netherlands and Belgium.

As said, in concealed phrases, this press release stated the following message: ‘We, as KPN, will not postpone payment of your invoices and bills into oblivion anymore, but in exchange you will earn much less money at our expense, irrespective of your own costs and commitments towards your personnel. About that, we don’t care!’

According to my aforementioned friend Harry, this is how things at KPN went in reality during (early) 2015:

As KPN, we have a large number of ICT suppliers at this moment, but we want to bring this number down to only two companies, which will execute the lion share of our assignments and projects and with whom we sign a long-term framework agreement. All the other suppliers can hit the road, irrespective of the fact whether we had a long-term relation with them or not. Therefore all our suppliers and perhaps a number of new ones, will receive the opportunity to make a tender offer at KPN for our future projects and assignments.

However, if you don’t want to grant KPN at least a 15% discount on your current prices and sales numbers, don’t even bother to send your tender offer for the next period. This 15% discount is our starting position for negotiations and thus it can not be your final offer.

May the lowest priced supplier win this contest! All others can be considered as the weakest link, so ‘goodbye’ will be our message to them!”

As I neither could find official records about these events from KPN nor from their ICT suppliers, I have to believe my friend’s words in this matter. According to Harry, his ‘Big Blue’ company was among the victims of this new round of contract negotiations with KPN, just like many others.

In my humble opinion, when this story is right (about which I have little doubt) this is a blatant example of how some large principals have (ab)used the crisis to force down their ICT expenses, at the expense of their suppliers.

But, as far as I’m concerned, a pivotal point has emerged during the second half of 2015.

To me it seemed as if all the large principals from the government and the financial and commercial services industries had woken up after seven years of ‘hibernation’, in which their ICT efforts had been well below par and were mostly meant to ‘keep the shop open and not lose track of the competition’.

Suddenly, even the formerly weakest suppliers in the ICT business seemed to have hardly anybody at the “reserve bench” anymore.  High quality, specialized freelance professionals were called on a daily basis with new assignments from governmental and non-govermental sources.

Even the steady influx of low-wage workers from Eastern Europe or Asia was not enough anymore to fill the void between supply and demand regarding required ICT services. Negotiations about higher hourly rates, which had been ‘not done’ – or even suicidal –
for a number of years in a row, were suddenly a reality again.

And now it has become 2016. It will be a year of which I believe that the impulse in the ICT industry, that started in the second half of 2015, will gain much more momentum in.
Almost every company, institution and governmental body has a vast backlog of work and projects that have been neglected out of necessity during the last seven crisis years, as money, funding or support from the stakeholders totally lacked during these years.

These could be nice innovative projects and necessary new developments, but also activities that really cannot wait anymore, as the sheer existence of companies and governmental bodies can depend on that.

All these new projects and activities could very well mean that there might emerge a genuine shortage in the supply of ICT workers, where formerly an excess supply of ICT workers existed.

And in every situation in which there is a real shortage in supply, prices go up. This is the simplest and most fundamental of economic laws.

However, what makes the current situation particularly special, is the extent to which some large principals (ab)used the situation during the crisis years, when supply of ICT workers substantially exceeded demand.

Many ICT companies, who could only sell their workers at absolute bottom prices during the crisis years (or even below their cost price), might see this as the perfect moment to take revenge against their disloyal principals and raise their prices a ‘teeny weeny’ bit more than strictly necessary. Just for the simple fact that they can do it and to get even with the principals who bluntly forced them to lower their prices in earlier years.

Or they could decide to play the oldest trick in the ICT industry: delivering young and unexperienced professionals for the prices of older, seasoned professionals, in fixedly contracted projects and semi-permanent maintenance jobs, either hoping that their principals will not notice the difference or simply not caring about that.

And the biggest pitfall for the ICT industry as a whole might also return in 2016: that ICT companies become so strapped for new personnel, that they convince everybody and their sister in other industries, to become ICT-workers. While some of these “side-influx workers” (i.e. “zij-instromers” in Dutch) have become excellent ICT-professionals after all, many of these new ICT-workers simply lacked the quality and the experience to become really good in it.

With that in mind, 2016 might become a very interesting year for both supply and demand of ICT services.

Perhaps, it might even mark the start of an overheating (!) economy in the making, after so many years in which the sun seemingly did not want to shine anymore within the ICT industry and many, many other industries within The Netherlands. 

Can I be wrong? I can be wrong! But when I’m right after all, don’t forget where you read it first!

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