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IT Contractors: response to Kurt Cagle of O’Reilly

Kurt Cagle, online editor for O’Reilly Media, has written an extremely interesting article on the need for change in the world of IT contracting. He points out that a large portion of recent IT workforce cutbacks have consisted of the discontinuation of contract workers. He correctly notes that IT contracting continues to be a better way of obtaining programmers and other technical staff, who often work on a contingent basis and are a more economical and sensible choice over hiring fulltime employees. Yet the tax code, health benefit legislation, and legal advantages given to large corporations tend to penalize the IT worker. He fears further loss of IT talent unless these issues are addressed.

I DISAGREE ABOUT . . .

I agree with Mr. Cagle that times are tough for the junior level contingent worker; for example, someone fresh out of college. When I first went into contracting, I was told that it was risky unless I had a prior 5-8 years of full-time experience. In the 1990s the path contractors usually went was to start as a full-timer, get about seven years or so of experience under our belt, then to go into contracting. I did something similar, and have been a contractor for more than ten years, with no interruptions by full-time gigs and no substantial downtime.

During the gravy years of the Bubble, however, many inexperienced people went into contracting due to the desperately lean and hungry job market. What is now happening to many of these junior techs is, in my opinion, unfortunate but predictable. Many contingent people were not worth the money they were paid. Many of them have made their own decisions to no longer pursue IT. In many cases they were never geeks in love with technology – they were in it for the money. Which I feel is generally the wrong reason to be in IT.

I don’t think Mr. Cagle’s characterization of the contingent worker industry applies to all levels of worker. From what I can see, senior, experienced IT contractors are not downtrodden in the least. Most of the contractors I have known over the years are financially much better off than their employee counterparts. The paycheck that the contractor pockets, minus health insurance, can still be about 20% higher than the top salary for the skillset, and possibly a good deal higher. As commenters to his piece note, if a contractor is unhappy with his work, he can usually find full-time employment easily enough.

Contractors can find affordable health insurance easily enough – even after paying for that, the contractor bottom line is generally better than going full-time.

Cagle writes that “They cannot apply for unemployment insurance in many states, because they are technically still employed.” This is not true in Illinois; I’m not sure how it can be true in other states. This might be true if the contractor is on bench with the agency; in that case the contractor is still drawing a salary from the broker agency. So of course you could not apply for uninsurance in that case. But every time an hourly W-2 contract has ended for my colleagues in Illinois, they were immediately regarded as laid off by the agency and became immediately eligible for unemployment. A 1099 contract would work the same way – the contractor’s own corporation would lay off the contractor (himself) and become eligible for the unemployment which the worker has been paying into.

Cagle further writes “They often can’t work for a competing agency without violating their contracts with the first agency, which means that if a given agency has a lock on a particularly large company that dominates the IT industry in a given area, the worker loses any chance to go to work for that company again.” This is also not true, in my experience. Most IT agencies use a a standard eighteen month non-compete contract. You will be unable to work for the same company for a year and a half, not really that long of a period. You are not locked out any longer than that.

I am not saying that contract work is easy. It is not. There is always an element of financial risk in working this way (though that contract risk, compared to the risks entailed in working salary, seems far less than it was twenty years ago). The need to relocate or travel heavily to find work is also a part of the lifestyle, one which many people with family and children would find unpalatable.

BUT I AGREE THAT . . .

While disagreeing with Cagle on a few of the above points, I strongly agree with his central arguments. IT contractors, as I have argued elsewhere, supply better information technology solutions to companies with far lower costs than going the standard permanent employment model.  The current U.S. business management and human resources model continues to be based on what I believe is an outmoded:

  • full-time/
  • employee working monogamously for a single company/
  • forty hour workweek/
  • working in a cubicle in an office model.

This model was born in the factories of the late nineteenth century, and needs to be toppled like Lenin’s statue. I remember back in the nineties a flurry of books came out heralding a freelance revolution that seems barely to have come. I still believe we are in the midst of a freelance revolution, but our government and corporate leaders still don’t get it.  At least not here in the U.S.

Information technology solutions can be supplied with higher quality at much lower cost by mobile, contingent workers, working for variable hours per week/month for multiple, interchangeable clients around the world via telecommuting. It is better for the company, for the worker, and for the environment.

Going beyond Cagle’s remarks, I believe we also need to strengthen telecommuting initiatives both in our society and in the workplace, which will make contracting a less onerous way to live by allowing us to work for any client without an expensive (and sometimes life-wrecking) relocation. We need to make the contractor more limber and agile by allowing the that person to work for multiple clients simultaneously, and for each client only as much as required. I don’t have a contract with my local supermarket for them to supply me milk on a rigidly scheduled basis. I buy milk when I need milk. We need to move toward similar flexibility and modularity in using the IT workforce.

I agree with Cagle that the U.S. needs health insurance reform so that reasonable health benefits are available affordable to all workers. Making our healthcare benefits independent of our employer would be a strong stimulus to workers going contract.

I also agree with Cagle that contract employment brokers are increasingly a problem. It is becoming harder to get past these companies in seeking contract work. Contract brokers typically do nothing for the contractor but eat up 25-40% of the earnings of the contractor. I believe that contract brokers should be required to notify contractors of their margin percentage, so that contractors can steer clear of the more rapacious agencies. I also agree with Cagle that companies should be required to limit the number of contracts fulfilled by any single agency, allowing agencies to better compete, which should improve rates for the contractors.

And I LOVE Mr. Cagle’s ideas about contract worker collectives (as opposed to unionization). IT contract workers can, and should, set up their own contract broker agencies. Such an agency, owned by the workers with complete financial transparency to the workers, would be a big step forward in giving contractors control over their lives and removing the parasitism of the agencies.

IT contractors don’t need unions. We don’t need to coerce corporations for better rates. What we need to do is remove the inefficiency of the contract agency. We need to plug the money leak which these useless companies represent. We need to control our representation and certify our own. For too long agencies have been selling contractors like they might otherwise sell used cars. Brokers, in my experience, usually know very little about IT and harm both the contractor and the client company through their inept attempts to match projects with talent. Because the agency salesman is only motivated to place a warm body in a cubicle so that they can begin extracting cash from the relationship, often less expensive (and inept) contingent workers are placed at a company (which allows the broker to extract a higher margin by paying the junior worker much less). A worker collective with full internal transparency to worker owners would have to present all options to the client company, not just the ones which maximized profit.

One Comment

  1. Some of the points that you bring up were indicative of my own experiences contracting during the 1990s in Washington state, including a couple of stints where I was out of work long enough that I needed to file for unemployment, only to discover the catch-twenty two situation that applied then – if you worked for more than one contracting agency, serially in a given year, your unemployment eligibility was based upon your most previous contract. I had a three month short term contract, and as a consequence, was deemed, by the rather byzantine rules of the time, to effectively have almost no seniority for gaining unemployment, despite having earned more than $75,000 that year. That may very well have changed (I hope so), but it still pointed out the problems in the system.

    Health care varies by state (and again by the time) – at the time I was contracting in the mid-90s, there were few options available; that’s changed considerably since (COBRA didn’t come about until nearly the end of my contracting period in the early part of this decade).

    Additionally, there are now a number of technical organizations that provide health care packages, but they aren’t that cheap. I was paying nearly $900 a month in premiums with a still high deductible when the bottom fell out of the market (this was about eight years ago) – the health care, as much as it was critical for a family of four, eventually went by the wayside when work faded away.

    I remember seeing two-year provisions, which, when you were dealing with a market that had only a couple of dominant players (Microsoft, primarily), could have effectively killed your ability to work. I had a family with two small kids and a wife who didn’t drive, which strongly limited my ability to go to the work. As it was, I spent the time writing books, but it was touch and go for a bit.

    I’d agree fairly strongly with your assertions about contracting being something best done by older workers … indeed, I think that by the time you hit forty, you’re either going to be in tech management, in academia or will be contracting, usually with a small, reputable firm. Most companies are simply not willing to pay senior journeyman and master level programmers for full time work (especially if they didn’t come through the ranks at that company), but would definitely seek to gain that experience on a contingent basis.

    However, I would also contend that there is a profound qualitative difference between these consultants (and I think the term is apt in this case) and the bulk of contract/contingency IT labor, which does consist of younger programmers who either can’t get full time work yet or are in markets that are agency-locked.

    I’ve learned over the years, how to tell when an agency is basically a body shop. I look at the age of the agents, the quality of their tailoring, and the location of their headquarters. One agency which I worked with (regretfully) for about a year had about a dozen agents, the most senior of which could easily have been a student in one of my classes when I taught college. They were usually impeccably dressed, wearing $400 dollar suits, and they had recently moved into a twentieth story floor office in one of the most expensive buildings in Bellevue, Washington.

    As I walked into the office, my first thought was that 30% of my potential salary was going into the lease of this office … it wasn’t a comforting thought.

    It’s hard to get estimates on the size of the contingent work force, especially since there is almost no reporting by the agencies themselves. What this means is that almost all of the evidence for arguments on industry reform require anecdotal evidence. I suspect that while the contingent workforce has aged somewhat, there’s still a small tier of senior consultants that are doing quite well (and may actually do better in this market, given that critical IT personnel may end up being cut in general RIFs) and a much larger tier of apprentice level programmers who are in a far more fragile position … and these are the ones that are most susceptible to being cut as economic positions deteriorate.

    Thanks for taking the time to write this up, by the way – it was very well thought out and overall reflects my experience as a senior consultant as well. I’ll have to address that in a follow-up article.

    – Kurt

    Posted on 30-Dec-08 at 16:24 | Permalink

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