February 10th, 2009
Think before you fire: The cost of replacing IT talent
There’s currently a certain sense of déjà-vu within the IT community, as companies look at shaving even more cost out of a function that has been battered since the 2001 dot-com bust. However, when we look at the lessons of the past, you do have to question companies which decide to sharpen their knives once more when they address their IT costs. Companies need to offset the cost of every layoff with the cost of replacing that talent when the economy improves. It is not so much who is left standing, but rather who is in position to grasp the brass ring of prosperity when it returns.
If economic conditions improve in 2010, then the amount of costs saved by releasing an employee may only be $50-100K by the time all the lay-off costs are incurred. 
How can you put a price on replacing the inherent business knowledge of that staff member when you re-hire a replacement? It may take another year or two to get the replacement up-to-speed, and will not only end up costing you more, but may also impede your executives from accessing critical data in a timely fashion. The overall cost of replacing that staff member could easily be three times the costs saved by laying her off. And these easily-identified direct costs are only the beginning; the costs incurred to your culture and morale can prove even more damaging.
There are lessons to be learned from those who did it right and those who failed to do so during the recession of 2001. The frequently cited observation by George Santayana warrants consideration, “Those who do not remember the past are condemned to repeat it.” Furloughed IT employees in the RIF of 2001 were often reluctant to return to their previous employer. Having been viewed as expendable, the trust and bond between the two may have become a casualty. Often the company belatedly discovered the employee was not at all expendable.
Companies often failed to realize that internal technology is an ongoing work in progress with parts of the past moving forward into the future. With essential team members no longer on board, projects bogged down due to a loss of internal expertise. If new employees were brought in, there were reduced capabilities with a learning curve to scale brought on by a unique IT environment.
IT is the glue that provides the connectivity within an organization and stakeholders. Every environment is unique, often featuring proprietary software and customized legacy systems. The complexity and diversity that results are best left in the hands of those who understand and are familiar with it. In 2001 firms laid off across the board only to discover that when times improved and IT projects resumed, many key people needed to implement them were no longer available. When entering into new engagements, some companies discovered that the chickens had come home to roost and that they were in the coop.
Whether outsourcing or aligning with business partners, management teams are built involving IT. And while outsourcing provides access to technical skills to support your tactical software support and maintenance, it rarely provides the inherent understanding of your business processes and environment that several of your key staff have.
Companies facing the challenges of 2001 with the foresight to prepare for renewed business opportunities in the future fared well. Instead, being reactive to the recession, they became proactive in their business. As opposed to across the board cuts, they applied due diligence and root cause analysis into their business. They prioritized strategically. In so doing, they were able to make adjustments to reduce unneeded expenses. Much of this involved taking advantage of global labor arbitrage for routine work. They also invested in initiatives to improve the business, often involving technology. It became apparent that the success of these initiatives was very much tied into keeping their key IT in-house people on the team.
There is a form of a parable concerning competitors who are prepared and those who are not. Two friends were walking in the forest when a bear came after them. They both turned and fled. One was not in very good condition and he breathlessly called out to his fit friend who was jogging along ahead, “You need to outrun the bear!!” “No I don’t,” came the reply. “I only need to outrun you.”
The current economic morass will not produce winners, but it will produce companies that are in more favorable positions to take advantage of opportunities at the expense of their more sluggish competitors when times improve. Cutting people that shouldn’t be cut can be cutting your own throat.
Feel free to check out my personal blog “Horses for Sources” for more articles,
Phil Fersht
Phil Fersht is an acknowledged industry analyst and advisor across Outsourcing and IT services worldwide, having worked extensively in Europe, North America and Asia as an advisor in Business Process Outsourcing (Finance/Accounting, Human Resources and Procurement), IT Outsourcing, Shared Services and Offshore Services. Over the last 14 years, Phil has served on over 70 major outsourcing and offshoring engagements. He currently serves as Research Director for analyst AMR Research for Global Business & Outsourcing Services. See his full profile and disclosure of his industry affiliations.
