Are the ITSAs still good barometers?

In the last 20 years I have written often about Barometers and Bellwethers. Intel has, in the past, been a good barometer of what is going to happen down the line on PC and device shipments. But perhaps the most useful barometer for the UK IT Services sector has been the IT Staff Agencies (ITSAs).

Basically, when future confidence starts to slide, companies reduce their contractors BEFORE they start programmes of permanent staff redundancies. Conversely, when the first tentative shoots of recovery are witnessed, companies cover the early demand with contractors before the upturn is more proven and they start to take on more permanent staff again. This barometer only works for the ‘commodity’ staff positions as there is always demand for contractors with rare skills.

The ITSA heydays were 1993-1997. Indeed the very best performing companies in our sector in that period were ITSAs like Parity, MSB, Spring etc. They accurately pointed to the bestest times for the whole UK IT Services sector. In 1998 the UK IT Services sector grew by 25%+; a record I doubt we will ever see beaten. But I used the ITSA barometer to greatest effect in 1998 when the ITSA downturn presaged the lockdown in 1999 in the run up to Y2K. The fact that there was no ITSA up-tick in 1999 allowed me to (very accurately) be one of the first to predict that “the Y2K headache will not go away with the Alka Selzers on 1st Jan 2000”. The ITSA up-tick only started to occur in 2003. It was more subdued this time but was a very good indicator of better times for the UK IT Services sector which have been enjoyed in the years since.

So what are the ITSAs telling us now? There was a very interesting update on the market from Spring a few days ago. Read it here. Spring, surprisingly, reports “steady demand for IT contractors in December” and suggests that “any downturn (in 2008) will not be significant and, at worst, will be slightly more subdued than in the first half of 2007”.

I did a ring around the CEOs of some other major ITSAs and got a pretty similar story about current trading. Indeed Parity told me that its Training operations (IT training is another good barometer) had done more business in Q4 2007 than in Q1 2007.

The points of agreement from the ITSAs are that:

- ITSAs are NOT likely to be such good indicators of future trends as they have been in the past. In previous downturns ALL skills and levels were hit. This time there is such a shortage of, for example JAVA skills, that even a deep recession would not satisfy demand. Also, because the UK has failed to invest in training home grown talent, there is a dearth of managers in the £50K+ pa salary bracket. Again, such skills will hold up well whatever.

- conversely, the ‘commodity’/low-skill end of the business (eg IT helpdesk), and any skills that are easily off-shored, are going to face a tough 2008.

- margins/rates will come under pressure particularly in the public sector. As we all know, the public sector has been the lifeblood of the industry of late. Now public sector IT growth is reduced to single digits. On top of that, they have become much more savvy in getting better deals.

My own view is that some ITSAs are going to have a tough time in 2008. Those at the commodity end will find margins, and therefore profits, hard hit. But I think I’ve been persuaded not to read as much into this for the IT Services industry as a whole as, perhaps, I might have done in the past.