The costs of teams in IT

The cost of teams in IT

Inflation is a hot topic at the moment – always on the news and trade unions are quite rightly raising people’s concerns.

There is, however, a misunderstanding in terms of the extent to which inflation is actually affecting individual people.

Inflation doesn’t affect everything we buy, therefore, a percentage of people’s income is affected by high inflation, but it’s different for different people depending on what their salary is.

Most of the inflation is related to fuel, electricity and energy costs. The percentage of one person’s earnings spent on food and fuel will be very different to another’s.

Similarly, in our industry there’s misunderstanding around how the cost of an IT team increases each year.

Budgeting vs productivity

Lots of businesses budget for the cost of CPI inflation across all of their overheads and increase budgets accordingly – They also assume they can increase the budgetary costs of their people by CPI, however, that’s taking only one consideration into account.

Normally, with software development capability, the aim is to end up with an increasing level of productivity and increasing volume of output. To do that, an organisation tries to create long term relationships between team members, and therefore is it advantageous to keep people working together for reasonable lengths of time (accepting that people do need to change jobs when they feel the time is right to move careers). ?

In an ideal world, an organisation would retain a team for a number of years so that the team members become better at understanding each other, relationships grow stronger, knowledge grows and most crucially, they become more productive… More productive it turns out, than the CPI rate of inflation.

Over time, their productivity has increased beyond the normal rate of inflation – which is fantastic, however, the classic business financial models often only recognise that CPI rate of increase is what is required.

There are two other factors affecting the dynamic:

1.????The salary career growth rate of people

2.????Salary trend data across the industry

Please note that these graphs are approximates based on data from IT Jobs Watch.

If someone starts a job with no experience (and have the amount of capability of someone with no experience), five or ten years later, things will be different. As time moves on, they will have gained a lot more experience and therefore if they were to get a new job they might be earning as much as 50-100% more than when they first started.

If we think about this across an entire team that’s becoming increasingly capable and learning new skills, the skill level and salary level incurs an increase within the cost of that team by more than inflation.

In reality, this doesn’t happen. It’s important to recognise that once people reach a certain level – a point where they are really experienced, the salary increments tend to drop off. In terms of capability, it doesn’t go on year on year, but certainly in the early stages of people’s careers it can be quite significant.?

So, what does this actually look like in percentage terms? If we go back a year or two when inflation was around 2%, we could see that general salary trends including inflation were increasing by 5% per year (IT Jobs Watch).

So, there was a 3% per year salary trend increase in the industry and a 2% increase in CPI inflation.

If you then take a team of people – a typical team with a mix of different people, different amounts of experience, you’d probably see another 4% average growth rate in terms of their career progression.

From a business planning leadership perspective, these numbers make for uncomfortable reading. The result tends to be that those with financial responsibility within a business halt an increase in the cost of teams, claiming it isn’t feasible to increase the cost by 9 or 10% each year.

What usually happens then, is that after a period of time in a career - could be a short amount of time in the early stages if someone is highly capable, or a longer period of time if somebody is more experienced - people’s value of what they are worth and what they should get paid exceeds what they are actually paid. When this happens, people leave for a job that pays many, many thousands of pounds, even tens of thousands of pounds more than where they are.

The organisation has lost that knowledge; the bigger the gap between what somebody can expect to be paid in the real market place vs what they’re actually being paid represents the amount of knowledge capability they’ve grown and developed – that’s huge extra value being added into the business.

What’s the answer?

From a financial budgeting perspective, we need to control this in a different way and there are three different approaches with relative outcomes:

1.????You don’t make changes and you increase the budget by CPI. This route results in the loss of people in a relatively uncontrolled way (you don’t get to decide who leaves and finds a better paid job). I’ve heard of entire teams leaving at the same time, which has a huge negative effect on knowledge retention.

?In terms of trying to increase the original objective of an ever-increasing software development team, this route is fraught with problems and presents a lot of challenges.

2.????You increase the budget – the cost of the team, by several percentage points above the CPI inflation figure. Staff can be rewarded for making significant gains in their technical expertise and contribution.

As a result, you stand a better chance of retaining those people and increasing the productivity and capability of those teams. The financial leaders in the organisation will likely raise an eyebrow and be concerned that you appear to have a cost that’s out of control, but actually, you are controlling the knowledge retention and therefore productivity that is being kept in the business.

Whilst it appears cost is increasing significantly, so is the productivity and so is the capability and the quality - potentially at a greater rate than the budget increase rate.

Of course, you can’t measure quality and productivity in percentage terms – it’s a qualitative assessment. Whilst this route makes it difficult to make accurate judgements, it should be clear that the business value is increasing a lot more than inflation.?

3.????This is the route we’re exploring at Headforwards. If you are trying to maintain a budget level of a set percentage and your total costs are increasing several points above that, then the solution is that you need to move people from one team into another team.

?A team that’s looking for someone with a lot more experience and has a higher cost can take an individual who’s replaced by another individual with far less experience.

?The control element of this route is extremely useful. It’s common to get gaps in teams for weeks or months; four weeks’ notice is given but it takes more than four weeks to recruit and the team suffers quite significantly. Follow this route however, and as person A moves on, person B is brought in to start at the point where A left off, so there is no a gap.

?What’s even better, is person A is still retained within the organisation, on hand to answer questions and share legacy historic knowledge.

?There are pros and cons for each of the three approaches, but the third way helps with continuity challenges within teams and knowledge retention.