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Surviving the I/T labor shortage

• By Shawn Bohner
• June 25, 2001

A year after the I/T industry recognized its mounting labor shortage, the realities of its impact are emerging. With labor accounting for more than 50% of most I/T budgets, and staff compensation increases potentially reaching 20% per year through 2000, I/T budgets need to grow at least 10% each year just to keep up with labor increases. While the year 2000 is getting much of the blame for the I/T labor shortage, the problem has its origins in the continued demand and dwindling supplies that will persist well beyond 2000.

For example, nearly 190,000 I/T jobs went unfilled last year, and increasing demand could double this figure by next year. Couple this with a rise of more than 21% for I/T products and services in the U.S. vs. a 5.9% rise in the Gross Domestic Product (GDP) in 1996, and there is little evidence that additional sources of I/T labor will be available to respond to the situation. Rather, demand (normal increases plus pent-up demand after year 2000 efforts) for software work will continue to outstrip the labor supply through 2002 or 2003.

The natural consequence of this labor shortage is increased turnover as organizations compete for a limited supply of I/T staff. While our research shows that worldwide I/T staff turnover averaged only 11% in 1997, the figure is accelerating. We therefore expect the turnover rate to reach 18% to 24% by 1999.

With turnover costs for an individual (for example, lost time for notice/ramp-down, acquisition and ramp-up, as well as direct costs such as salary increase, termination, severance and out-placement) running roughly between 60% and 135% of their annual compensation, executives need to plan on increased staffing budgets. Those organizations that are vulnerable to increased turnover will have an additional 3% to 5% growth in their total I/T budget unless measures are taken to retain staff.

I/T recruitment firms will enjoy a lucrative business as companies attempt to fill their staffing needs from the competition's stable. While I/T recruitment firms aggressively seek to assist firms in acquiring staff, caution should be exercised. They may use the opportunity to recruit existing staff for other clients. Therefore, only reputable recruitment firms should be selected.

While new employees may come with some of the skills necessary to take on a position, there are often requisite skills that are missing. This, in turn, affects productivity, which is a function of domain (an understanding of the business area that I/T supports), system (knowing the system structure and its idiosyncrasies), and programming/software engineering expertise (programming languages and development/maintenance experience). Typically, new employees do not have strong domain or system expertise. These two factors alone comprise more than 50% of the productivity equation for maintenance of existing systems and more than 35% of the productivity equation for development. Additionally, costs cannot be measured in just effort -- lost time must also be accounted for in the economic analysis.

Shrinking talent pool

While computing curriculum enrollment (computer science, software engineering and information systems) was up nearly 40% in 1996, the number of computer-related graduates has dropped significantly in the past decade. In addition, few computer curriculums adequately prepare students with courses on large-system development, object-oriented development, enterprise architecture, software process, reuse and the like. Rather, many universities still focus on programming-in-the-small courses, such as programming languages, compilers, file systems and operating systems. The result is a pool of graduates that is insufficient to meet the growing labor demand, and that lacks the requisite skill set to respond to the changing needs of the I/T industry.

The rise of the offshore labor force, coupled with industry downsizing, had masked this labor supply issue. As a result, few HR organizations are prepared for the pending shortages. Instead, they have been hunkered down controlling staffing costs to national industry averages.

But recent recognition of the I/T labor shortage by government, industry and the press, has caused a rubberbanding effect. This has resulted in I/T salary increases that have jumped to 20% for some key positions, significantly driving up labor costs. Companies must now plan creative staffing strategies to avoid being thrown into a world of cutthroat competition for I/T skills. [See "I/T labor shortage recognition."] Likely scenarios show cross-training and global sources being exploited to augment the dwindling supply of I/T resources. However, most organizations do not have adequate training capabilities in place to educate or retrain staff to meet evolving software needs.

Less staff, more productivity

To respond to the I/T labor shortage, companies must now turn from acquiring new technology expertise to aggressively training and retaining current I/T staff. Executives must improve the productivity of their staff (effectiveness => throughput, not more activity) using better processes, methods and tools. Moreover, managing scarce I/T staff resources will require effective measurement programs to serve as progress and improvement indicators, as well as early warning systems for detecting and resolving development and maintenance problems. These types of programs will allow executives to catch costly situations early, thus saving valuable time and effort.

With the labor shortage driving I/T budgets up to the tune of 10% to 15% per year, executives may be tempted to examine outsourcing options. However, with outsourcers facing the same labor shortage, executives will find outsourcing contracts that have cost/risk terms and conditions that protect the outsourcer.

From a vendor perspective, the I/T labor shortage will drive up the cost of existing outsourcing agreements and cause new outsourcing contracts to be very conservative. Outsourcers therefore need to couple aggressive staff training and retention strategies with better software engineering practices. Effective performance measurement and benchmarking programs will be essential in demonstrating outsourcing's value to clients, as well as in differentiating outsourcers from each other.

"Golden handcuffs"

While creative sources of new talent look appealing, retention of existing I/T staff offers a better payoff since the costs associated with turnover can be exorbitant. Increasing demand for systems, the high rate of technology change and the demands of the year 2000 crisis will also continue to be major forces driving the I/T labor market. To manage the risks associated with this labor shortage, we recommend that the following critical actions be taken:

*Retain valuable I/T staff with an aggressive compensation and reward program

*Stay current with I/T staffing compensation levels and emphasize incentives

*Create "golden handcuffs" to bind employees to the company (stock options, attractive training and bonus programs)

*Specifically reward needed skills and loyalty

*Examine working environment options (telecommuting, office space)

*Attract new sources of I/T staff

*Use existing staff to attract new staff (incentives to acquire loyal staff in critical areas)

*Create a number of cross-discipline (re)training programs

*Develop new sources of labor through university relationships

*Exploit global labor sourcing options

*Leverage existing staff for better productivity

*Manage I/T skills inventory as a portfolio -- use forecasting and projections

*Invest in software process improvement for "in-the-large" productivity gains

*Invest in training and reskilling to improve the effectiveness of individual staff members

*Improve productivity/quality through reuse (harnessing internal knowledge and exploiting external packages)

*Develop and maintain an aggressive program of benchmarking, performance calibration and performance management

Solutions to the I/T labor shortage will be a combination of creative labor supplies (global options, cross-training from other disciplines and university alliances), productivity improvements (training, process improvement and effective management), and measurement programs that act as early warning systems. Additionally, HR must team with I/T managers to initiate effective staff attraction, training and retention strategies that will increase labor costs in the short-term, but control future business risks.