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May 01, 2013

Just Another Downturn...IT Consulting Will Recover

May 27, 2010

I have been involved in providing supplemental IT consultants to many hundreds of clients since 1970. In that 40 years there have been 5 economic slowdown events including the current one.

Each was caused by something different. Each inflicted economic pain in different ways. Each impacted the IT consultant's world differently. Each ended in its own time. Going through it was often stressful and painful for both clients and contract consultants alike. After the early downturns ran their course there were many positive benefits for clients to using contract consultants within companies. Some examples are; higher level skills to deploy as needed, more flexibility in project staffing planning and better working relationships between contract staffs and in house staffs, among others.

There is a very important demographic fact about America that has impacted our economy to this day and especially impacted the IT industry over the last 40 years. There is not now and has never been enough high qualified IT educated talent entering the work force on a year over year basis to meet the on going demand. These are Dept. of Labor and Census Bureau statistics. American universities didn't even begin offering BS, MS, MBA, and PHD degrees in IT to students until the early 90s. Ask yourself why there were tens of thousands of H1b workers throughout North America for the last 20 years. Additionally many of our best and brightest students who might have chosen IT careers opted instead for the glamour, big bucks, and power of Wall Street. Today we see what 15 years of that reality has brought to the market. This decade has seen repatriated H1b's that are instrumental in building the software industries of India and others countries and the US still is not producing enough qualified IT professionals. I will share my views on software and IT education in future posts.

Below is a brief recap of the past downturns and there impact on contract consultants and what the world of IT contractor use will be as we come out of the current downturn in the months ahead and into 2010.

Some history of downturns

1974: Unemployment hit about 8.5%. This slowdown was caused by the impact of the Vietnam War, price controls by the Nixon Administration, Watergate, Oil Shock, and companies having excessive inventories as the war wound down. The slowdown lasted 18 months. We were still in the IBM 370 Cobol era and talent was home grown. When FTE hiring freezes came on, IT managers switched directly to using contractors. When oil prices came down and inventories were sold the economy resumed. The inpact on IT was marginal since the impact of technology on business was only just beginning. Demand for FTE talent became strong and availability was short. The result was thousands of contract opportunities were created. The IT contract industry was born.

1979 to 1982: Inflation in the US reached 15% and the FED raised interest rates pushing 20% to combat it. Result, money dried up, excess inventories resulted and the economy stalled. Companies froze FTE hiring, but back filled with contractors. Contractors did not go out of demand and we began to bring them in from England and Australia to meet that demand. Unemployment peaked at 12% in 1980 as the economy declined, led by aerospace and only began to grow when Reagan and Congress pumped up the economy starting with defense. This resulted in even more demand for IT skills and a large rise in demand for skilled contractors. The great 80s bull market was on.

1991/2: The 80s brought forth the biggest technological changes in the history of mankind up to that point. Major changes in computing power per dollar spent. Easier languages, vastly higher productivity, the list goes on. The cause of this down turn was excessive inventories in US manufacturing and lack of price competitiveness with Japanese and other Asian countries due to expensive dollars and artificially cheap yen. What did American manufacturing do? The liquidated excess inventory, worked hard to devalue the dollar against the yen and began to off shore as much manufacturing as they could to cheap labor markets. We have both the benefit of that change with cheep goods but the negative is that China has lots of our money now. Again clients froze hiring, this time demand for contractors slumped. Many predicted that Japan would own the world and software would be developed there. Well, it didn't work out that way. In comes Clinton and tight fisted Republicans and the 90's boom was on. Demand for FTE talent grew and demand for contractors grew at 1.5 times faster than that.

Then came dot.com!! Talent pillaging went into overdrive as new so called businesses with no income wooed thousands of IT professionals with cash, stock options and BMW's. Demand for contract talent exploded as a result of Y2K, the dot.com irrationality and real demand from real companies. It all came to a screeching halt beginning in March of 2001. Y2K was over, the dot.com bubble on Wall Street burst, and 911 hit 8 months later. The perfect storm. Thousands of H1bs had no extensions and went back home. Nation wide this recession was mild by prior national standards but if you were an IT employee, contractor or staffing provider in the Bay Area you were hurting worse than ever. All those dot.com failures put thousands of highly paid IT professionals on the street within months. Demand for contractors declined by 50% for 8 months after 911 but came roaring back by the end of 02. Once again IT contractors took their places in the "knowledge worker" work force.

September 2008: Since 07 talking heads were warning that the real estate bubble was due to burst and that Wall Street and the world economy was in danger. Well, it all happened one day in September as firms with household names collapsed as their insane highly leveraged investment strategies failed, cash and credit froze solid, and everyone was gasping for air. I won't bore you with what you already know, you have lived through for the last 8 months but I will share my opinion on what coming out of this downturn is likely to mean to you, the contract IT consultant.

The fact is that economic dislocations happen about every 7 to 10 years whether we like or not. There are corrections in the system necessary to right imbalances. In life things are never as bad as they appear nor are they as good as they may seem. The $14 trillion American economy and the $55 trillion world economy is not going to disappear. This event, as eye popping as it is, is already correcting. The common thread in this narrative is that downturns are part of the system and will be with us for a long time. They have been caused by many different circumstances and conditions in their own time. This time, as in the prior 4, demand for IT talent will continue to outpace our ability to educate it. The result of that fact will be that for those who have chosen to make IT contract consulting a career choice, the demand will rebound, even more so, just as it has each time over the last 40 years. In life demographics are everything. More to come on why we will see this rebound.

David Hicks is the founder of Hicks Professional Group. If you would like to contact David Hicks about this article please e-mail him at .