A year ago, I blogged my predictions about the acute IT and engineering talent shortage busting budgets and explained the situation would get worse in 2022. We’re there now, and wages and attrition are spiking at enterprises and at third-party service provider firms. In this current blog, I want to share what executives need to know about how to handle this situation.
We at Everest Group closely monitor all issues around the talent shortage in the services industry, and our research shows the average rate of post-COVID attrition among third-party service providers is currently 23%. This fact alone should be incredibly concerning to any companies with engineering operations.
Another concerning fact: In our study, respondents ranked the talent shortage as their number-one business challenge in 2022 (up from its #5 rank in 2020 and 2021). Unfortunately, this challenge will not go away soon and is likely with us for the foreseeable future. I blogged before about the long-term view of the talent shortage, describing it as “the cow in python.”
Although outsourcing to service provider firms used to be an easy way to access talent, this is no longer the case. India is also experiencing an acute talent shortage, ranking third in the world, at 39%, behind only the US at 45%, and Western Europe (including the UK and Ireland) at 43%. These firms have an impressive ability to onboard new recruits from college, but this does little to alleviate the need for experienced talent, which is where the true shortages exist.
In addition, services from 70,000-100,000 workers (including highly qualified engineering and IT skills) are disrupted because of the Russia-Ukraine war.
The elephant in the room
Although some enterprises and service provider firms rank higher or lower on the attrition average of 23% for turnover rate, this average is significant. It means companies lose approximately one-quarter of their talent each year – the elephant in the room.
This makes it extremely daunting to keep persistent teams. These are IT and engineering staff that remain on a team focused on the same tech stack or digital platform over time. Companies have demonstrated that persistent teams are far more productive and capable in supporting and evolving their technology.
Persistent teams’ increased productivity happens because they reduce the learning curve over time. The team accumulates knowledge of how the components of the tech stack (or platform) work and how the technology works with the business. This is essential today, as companies have a more intimate relationship with their platforms than other technologies; they become more dependent on the technology because they use it to compete and grow.
When people leave, a company loses the vital learnings of the team, which took years to acquire. It significantly diminishes a company’s ability to keep its platforms dynamic so they can compete through them.
Companies cannot afford to lose a quarter of their talent to attrition each year. This simply is not sustainable. If technology is to continue to have a powerful role in companies’ competitive positioning, they must reduce the attrition rate.
How to reduce attrition
The talent shortage is a global issue. The first step for enterprise executives is to recognize that the wage inflation rate for IT and engineering talent far outstrips the demand for talent. Along with this fact in their own business, they must recognize that the same situation is happening in the service provider community. Therefore, they cannot expect to replace their exiting employees with cost-effective contractors.
Furthermore, old expectations of wages rising due to inflation are simply going out the window. For IT and engineering skills, we now see market changes of 20-40% in wages. That means people can walk out the door and get a different job with a wage more than 30% higher than their current wage. So, it is not surprising that people choose to leave.
The next step for enterprise executives in combatting attrition is to realize they must pay significantly higher wages (substantially above inflation) for their own IT and engineering people as well as pay more for third-party providers that supplement their staffing. Simply put – otherwise, the company won’t have the talent it needs.
At the end of 2021, I blogged about a study we conducted at Everest Group about the Great Resignation and why people are leaving their jobs. It revealed that more than half of the engineering respondents were actively looking for a different job, realizing they could get a substantial raise in pay.
Next, executives need to rethink their company’s talent models. This is especially true regarding how companies promote and reward their people for good performance. The study I just referenced about why people are leaving their jobs found that career paths and promotion opportunities are important reasons to stay or go.
Historically, many people got promoted (and received higher wages) by moving into management. That can no longer be the case for IT and engineering talent that needs to remain as part of a persistent team focused on a particular tech stack or platform, as I mentioned above.
Companies are highly dependent on these technologies and need their engineers to stay with a persistent team and nurture and bring other new engineers up to speed in the learning curve for those technologies. So it is essential to create a career path that supports that and motivates the engineers to stay.
Finally, a step in reducing attrition is to redesign the work environment for post-COVID expectations. In the study, I referenced earlier (why people are leaving their jobs), we found that many people don’t want to work full-time in offices. They seek jobs with either remote or hybrid work environments. They find the commutes to the office onerous. They also want the quiet and comfort of their own homes, where they feel they can be more productive.
The study also found that only 5% of the respondents wanted to work in a more social environment. However, companies seek to force people back into the office in part to build a social environment. Their priorities are upside down if they listen to a few highly vocal players around social agendas. They please only a small percentage of their workers and alienate a large percentage.
Instead, executives need to spend time rethinking compensation, the working environment and career paths. These are the primary reasons why people stay or look for a different job. Again, simply put – companies that do not focus on these issues and take steps to change them substantially will face increasing attrition and not have the talent they need to grow their business.
For companies that believe that a coming recession will alleviate these talent issues in engineering and IT, our research findings at Everest Group are not encouraging.
It is undoubtedly true that a recession, particularly a severe recession, will go some way to mitigate the imbalance of demand and supply that drives wage inflation and constant employee churn. However, as we examine the size of the demand that is building and has yet to manifest (driven by the ubiquitous move to utilize technology more aggressively to compete and run companies, aka “digital transformation”), it is clear that we face a long-term secular increase in demand for IT and engineering.
The long-term increase in demand will cause any mitigation due to an economic downturn to be short-lived, and it likely will be overwhelmed by the building secular forces at play. In short, most companies should view a market downturn as a time to build capacity and get ahead of what looks to be a long-term issue that will challenge us for a long time.