It probably won’t come as big news to anyone working in IT, but fewer people are working and consultants’ rates have dropped significantly, according to RealRates.com Webmaster Janet Ruhl. Further, the percentage of client billing that consulting firms are taking is going up, she said.

Ruhl is basing her conclusions on the Real Rate Survey, which collected information from Jan. 1 through Dec. 31, 2002. There were 691 rate reports submitted in that time, with 645 from contractors either working in the United States or reporting rates in U.S. dollars. Ruhl sells the data from the survey in download form on her site, but she shared some significant data points from this year’s results with us. We also received commentary about the overall decrease in consulting rates from experts with the Information Technology Services Marketing Association (ITSMA), a research and advisory firm that specializes in marketing technology services.

Reported rates, commissions, and raises
Figure A shows the median hourly rates from the Real Rate Survey reported by consultants working under varying tax arrangements. While the median rate for some specific types of brokered and direct consultants’ rates have seen a slight increase, their cumulative median rates have decreased by $6.50 and $4, respectively.
Figure A


Contractors’ median rates by tax status

Tax Status
2002
2001

All Brokered
 		$61.50
 		$68.00

Brokered contract extension
 		$65.00
 		$70.00

Brokered W2
 		$55.00
 		$60.00

Brokered
1099
 		$73.50
 		$82.50

Brokered Corp
 		$75.00
 		$90.00

All Direct
 		$76.00
 		$80.00

Direct contract extension
 		$82.00
 		$80.00

Direct W2
 		$66.00
 		$65.00

Direct 1099
 		$75.00
 		$75.00

Direct Corp
 		$90.00
 		$95.00
Source: Real Rate Survey from Realrates.com

Ruhl also said that consultants working for firms have reported an increase in their firms’ commissions. The median cut of the client billing consulting firms took was 29 percent in 2002, up from 2001’s reported median, 27 percent. To add insult to injury, consultants reported a median raise of 4 percent in 2001, but in 2002 raises simply weren’t given, lowering the median reported to 0.

Supply, demand, and competition
“It’s clearly a buyer’s market,” said Dave Munn, president and CEO of ITSMA. “Buyers will continue to have the upper hand in negotiating rates with IT consultants until the economic recovery starts building steam. Even the largest consulting firms have had to lower their rates to fend off smaller firms, independent consultants, and overseas providers.”

Beyond the current economic slowdown, growing competition from low-cost consulting markets such as India has had an effect on rates, according to Steve Hurley, ITSMA’s vice president of learning and performance excellence.

“This is a longer-term trend that will continue to pressure consulting rates in North American and Europe because the offshore firms can often do excellent work at much lower rates,” Hurley said.

However, Munn said that while buyers are demanding price concessions and considering alternative sources of labor, they’re still looking for the most qualified consultants for the job. Buyers are looking for proof that you have the expertise to do the job and will live up to contractual agreements, he said.

It’s just that the rules for pricing and negotiation have changed, according to Julie Schwartz, ITSMA’s vice president of research.

“Clients are simply not accepting the traditional three to four times salary markup anymore,” she said. “Many clients are themselves former consultants and they understand how the economics work.”

That insider knowledge can help buyers negotiate the traditional markups since demand for consulting work has fallen off. She said that consultants are more focused on keeping busy and maintaining utilization rates than on maintaining high margins.

“The name of the game is to minimize loss, not maximize profit,” she said.

How have your rates fared?

In January 2002, we asked our members how their rates had been affected by economic conditions. The results indicated that while more than half of the 1,177 participants had not raised their rates over the previous year, 18 percent planned to raise their rates at some point in 2002. We’d like to get an update on our consultant members’ future plans for their rates.Take our short survey and tell us what you’re planning for 2003.