IT contractors have reason to be cautiously optimistic about surviving the current economic crisis. The financial services sector will create more jobs for them than any other sector over the next 12 months.

IT contractors may not have as much confidence in the sector as they used to, but they do believe that it will still be their dominant client by 2009, according to a research conducted by the Giant Group.

The IT hiring freeze and offshoring of IT jobs has left IT departments in big companies significantly thinner. Contractors tend to profit from economic uncertainty, as they are easier to let go than permanent IT employees if things go downhill.

"What we are seeing is a fairly measured response to the downturn," reads a statement from the Giant Group. "Some IT projects which will not yield a short-term return on investment are being given lower priority, but the market hasn’t fallen off a cliff by any means."

"Large organisations [will] strip the 'perm' workforce down, reduce fixed overheads, and look to opt for more project based or ad-hoc staffing solutions, using staff as and when required, in this case potentially contractors," says Nick Hardisty, managing director of Inspired Recruitment, an IT jobs agency.

Matthew Brown, director of the Giant Group, says that there is no sign of panic among contractors, adding: "Sentiment is on the wane, but few are expecting a repeat of the mass bloodletting we saw in the 2001/02 downturn... The general trend in [contractor] joblessness has been upwards. But the proportion of contractors out of work long-term (3 months or more) has remained relatively static at around 4% over the last year. To put this in perspective, 13% of contractors were jobless for three months or more in 2003, so the market is still in reasonable shape."

Several companies have announced major job cuts and plans to offshore IT jobs to India over the last couple of days.

Barclays' tech staff in Poole fear that their division will close by the end of the year, which would result in a loss of a few hundred jobs, following the announcement the bank made earlier this year, revealing plans to offshore some of its UK IT roles.

A Barclays' representative said: “As each part of the business grows, there will be changes and within those changes there may be an impact on the IT function and there may be some element of offshoring to meet the needs of business," adding:  

“Our business in Africa is growing, therefore we have service hubs that we need to develop to meet the (region’s) growing needs… (which) may require the offshoring of some jobs from the UK to Africa.”

Publishing firm Thomson Reuters will cut 250 out of 650 jobs in its IT, content and operations division in the wake of the results of the consolidation review processes, which showed that many of the jobs in question overlapped.

Staff reviews were part of the consolidation plan since the merger. When the two media groups joined forces, they announced plans to save £383 million by the third year through “synergies in areas such as property and technology.”

The consolidated company does not yet know how many UK jobs across the specific divisions, including technology, will be gone, but expects to have the exact numbers within the next two weeks.

Royal Mail recently made almost a half of its permanent IT jobs redundant following a similar staff review.

Lloyds TSB will outsource about 450 IT jobs - 200 contractor posts and up to 250 permanent positions - to a technical facility in India.

The bank's decision will reportedly affect IT staff in London, Edinburgh, Manchester and other big cities and leave only a fifth of the IT staff in the affected areas in the UK. The offshoring process begins in August. The bank reportedly plans to offshore a total of 655 IT jobs to India over the following nine months.

The workers' union Unite called the decision “unjustified,” saying that it “represents a lack of faith in the IT skills of their UK workforce.”

The bank said that the employees who find themselves redundant would be offered replacement roles. In response, Steve Tatlow, assistant general secretary to Lloyds TSB Union (LTU), commented:

“There is no guarantee that these replacement roles will be on the same pay scale, (in the same) location or even that the job will be in IT; they could be completely unsuitable. A lot of people will be choosing redundancy. We are fundamentally opposed to offshoring.”

Cognizant, Tata Consultancy Services and Wipro will take over the positions.

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The latest industry index shows that the demand for financial IT contractors from the private sector was at a seven-year low last month.

The number of finance positions advertised for contractors was down 16.1 percent according to a recent Computer Weekly survey, which is the biggest drop since 2001.

IT contractors in financial services have witnessed fewer contract extensions, lower daily rates, fewer offers and generally less demand for their services.

David Smith, vice-chairman of the IT and Comms group at REC, says:

“Banks and financial services outfits cutting IT contractor hires should be no surprise to anybody because the sector is in trouble. They are trying to re-adjust to the new economic circumstances.”

PCG policy officer John Kell has commented on IT contractors’ fears of being stuck on the bench indefinitely:

“We are seeing a lot of reports on our forums of interviews being harder to come by, and contractors being more inclined to stick with their current client and aim for a renewal, rather than chase a higher rate elsewhere… It’s certainly the case in financial services, the picture for other contractors is not so clear.”

“Companies are re-evaluating their 2008 IT budgets and cost is becoming a much more fiercely interrogated factor of business cases than it was during the ‘good times,’” says PM3 Consulting recruiter Steve Pragnell, adding that their “new business is slightly down on last year, across the board, though, not just in the finance and technology industries.”

He says that the economic crunch affects contractors in two ways: clients use it to justify reducing rates while workers see it as reason enough to to negotiate. Another factor that will drive the contractors’ pay rates lower is the competition for project management contracts.

“We recently had over 200 applications for a £300 per day PMO role. This is really at the bottom of the range we hire, yet we got a good number of experienced project managers pitching for the work,” Pragnell says. “As the numbers of contractors looking for work grow, inevitably individuals will start to cut their rate expectations so that their CV gets to the top of the pile sooner.”

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A growing number of permanent IT employees are opting for freelance IT jobs these days, in light of the uncertain situation on the market. They are well aware of the fact that companies see flexible hires as a more convenient alternative to taking on permanent IT staff.

Jobs agency Robert Walters has warned that permanent IT employees will face a downturn this year, which indicates that contracting may come with better job security. Consequently, IT professionals who have not yet had any experience freelancing are now much more likely to go after contract jobs when they talk to IT agents.

Paul Elworthy, banking and financial IT recruitment director at Hudson, sees this as a reaction to the state of affairs on the financial market. In order to keep their options open, IT workers no longer only go for permanent jobs as the fear of layoffs has affected the perception of the job security in information technology industry, but they also look for contract roles.

This is particularly the case with full-time technical professionals who have worked in the development sphere long enough to have mid to senior-level jobs – the group generally most likely to start to work independently.

“We’re seeing financial institutions taking stock of their IT headcount, in light of the turmoil. They are being more cautious in terms of hiring, not too dissimilar to five or six years ago,” says Elworthy. 

IT contract manager James Parker explains: “The rise in the number of new IT contractors is all linked to the (economic) uncertainty over the next 12 months.”

“IT staff are perceiving the contract market is going to be more buoyant than the permanent market, which I would agree with.”

The number of permanent IT employees who are making the move to contract IT jobs is growing. As a result, there has been some talk of contractors having to significantly cut their rates because of the sheer number of the new contractors.

Paul Elworthy says: “Overall, we are starting to see the economic turmoil squeeze contractor rates, for new hires, while clients are also looking at how they can justify reducing the cost of (existing) contractors)… Generally, we find established contractors stick to their rates.”

Recruiters and agents say that contractors are in a much safer position in the current recession than their counterparts who have permanent jobs.

“Whenever we see this perceived downturn in the market, it’s always good news for our contract business and not such good news for our permanent business. We find our IT contractor business comes out of these downturns in a much stronger position than when we go into them,” says James Parker. 

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