Rising IT Labor Costs – What to Know and Do

Updated: Mar 1

Many buyers of contingent labor are experiencing the effects of a tight IT labor market: service providers are hiking prices at a staggering rate of between 20% and 50%. The providers claim it’s difficult to find enough resources and those resources have a high rate of turnover. During the pandemic, some of these firms were forced to suspend or cancel service agreements due to offshore staffing shortages. While the immediate threat of COVID-19 is waning, there is still a labor shortage as workers everywhere re-evaluate their current pay and conditions.

Meanwhile in India, where much of the world’s offshore IT labor force resides, the average billing rate has increased by approximately 14% since 2018. Some suppliers have established “Centers of Excellence” and “Global Delivery Centers” that bill at a premium, but most suppliers are looking to increase rates across all offshore locations, as COVID-19 related illness and death impacted a large swath of this workforce.

Note: The above chart is based on Architect and Engineer bill rates

In the U.S., data scientists and “big data” human resources are in high demand, driven by higher consumption of software and cloud-based platforms. Many enterprise-size organizations are sitting on “data lakes” that need to be put on new analytics platforms, or they want to move massive amounts of data onto new ERP systems. This spike in demand coincides with a period of abnormally high inflation.

To attract more resources, IT service providers are pushing for increased Cost of Living Adjustments (COLAs) based on the rising Consumer Price Index (CPI), but exactly what price increases are justifiable, and how can you make sure that the price increases help reduce turnover?

The CPI is the best metric to understand what a fair COLA would be for any given year, but it is not perfect. The index takes a bundle of goods and services and tracks the price of these goods over the course of a year. While this can be a strong point of reference for understanding what price point constitutes a “fair” price increase, the CPI can and is subject to volatile price changes for any of the goods or services that are included in that bundle.

What You Can Do

Because suppliers claim that their price increases will reduce turnover and attrition, there is an opportunity for customers to hold them accountable in their SLAs and include a penalty if those results are not achieved. In other words, if suppliers want to impose or negotiate an increase in rates, they must be contractually obligated to meet certain metrics, or be subject to financial penalties. We have helped clients create this type of incentive structure, which allows for reasonable price increases, but makes amends for any instance of a resource leaving the team. This plan enables suppliers to pay resources more competitively to ensure consistent staffing and provides the customer a kick-back if outcomes are not attained.

But to truly assure success with 3rd party labor suppliers, IT deal makers must understand competitive market pricing, favorable annual price increases, what constitutes a strong and enforceable SLA, and how to make potential suppliers compete with one another. To that end, we’ve created a five-step process to take back control of IT labor spending and achieve the necessary information and leverage to improve service contract value. The process includes:

1. Conducting and IT Labor Spend Analysis

a. Without a baseline for how and from whom you’re buying IT labor, it’s difficult to assess what adjustments are appropriate in the current environment and what rights or leverage you have in negotiating them.

2. Standardizing Job Title and Descriptions

a. Standardization allows you to rationalize and compare your spend across IT labor suppliers and can provide opportunities to identify or source more competitive rates or terms in a context where costs are increasing.

3. Establishing Rate Cards

a. The risk of overspending is acute in the current tight labor environment. By utilizing centralized rate cards, established through competitive RFPs, that lock in pricing, discount tiers, SLAs, credits, and penalties, you can reduce overruns due to rogue purchasing at a time when both projects and pricing are under pressure.

4. Consolidating Suppliers

a. Thoughtfully applied, this strategy can produce the leverage necessary to ensure competitive pricing and service levels in a challenging labor environment.

5. Establishing Governance

a. An active and ongoing process for sourcing, onboarding and managing 3rd party labor suppliers is crucial to ensuring that existing commitments are met and guaranteeing success with new suppliers should the need to switch arise.

For a deep dive into each of the five steps to succeed with 3rd party labor suppliers, download our guide titled IT Third-Party Labor Contracting Best Practices and sign up for our webinar titled Optimizing 3rd Party IT Labor Spend, or contact your ClearEdge representative.

Jake Lawyer is a ClearEdge Analyst.