Tag: Employment

Interesting times in the world of software

About a decade ago, I was at a conference and talking to a fellow developer (I still call myself one, even though I don’t code so much these days) when he giddily told me about the funding he’d got for building a new piece of software he was hoping would make it big. It was a two year project and he’d got £100k funding. I asked if it was just him… and no, he had a colleague. So £100k, for two people, for two years? £100k didn’t sound a lot… £25k/yr each, basically. Or what you can earn in a much simpler tech support role. I decided not to say anything and leave the poor guy in peace, although this sort of work seemed a lot like gambling to me.

Today, things are different although there’s still a sniff of gamble about it overall. If you’re a developer it’s relatively easy to find a highly capitalised employer that’s positively dripping with money who will pay you £60k-£90k a year. Potentially quite a bit more. This reminds me of the late nineties dotcom boom. In 1997 I myself quit my safe but somewhat dull job at a multinational to become a freelancer, doubling my income almost immediately, and quadrupling it another year later. The new work was, in some ways, more interesting. It was also a lot more stressful, bad for my health, and definitely wasn’t the most exciting coding work. But it paid. I honestly don’t blame developers who decide to do what I did 25 years ago. It set me up. I think it was also a large part of why I had a heart attack in 2019… living out of hotels for a decade wasn’t healthy, and cheese became far too much a food staple for me as a vegetarian. However, the money was very good and it helped set me up. When you’re poor, it’s very hard to catch up and a good income was necessary for a while.

I bring this up because today I’m not ‘just a developer’ but actually run a web development company that specialises in websites and custom software for clients. And things are happening today that are reminiscent of the dotcom boom on the late nineties. 25 years have passed, but people don’t really change nearly as much as you may think.

The dotcom & Millennium Bug era

The late nineties were a period of post-recession growth and capital release. Banks had been deregulated, money was being created in the way it can be, and we were riding high on increasing productivity. Life felt good. And when money is created it can be invested.

There’s only one little problem in that. Sometimes, people get giddy and start splashing the money out too readily. The boom of the late nineties and early noughties, and the deregulation that encouraged it around the world, eventually led to the financial crisis of 2008. I’m a bit of a cautious soul, so even though I had plenty of income, I resisted borrowing too much to get a bigger house. In some ways I was foolish, because I could now be living mortgage free in the house I have now. But I figured that not having a big mortgage would afford me some other freedoms and I could use my money elsewhere. Mostly I just invested my money in solid companies. Friends, however, were telling me to invest in dotcoms. But I looked at the fundamentals. One example was a firm called Vocalis. They did, basically, telephone voice services software. Small team, and had some crazy valuation that was effectively equivalent of £20m per member of the staff. I rightly reckoned that was mad. My friend went ahead and pumped money in, and I mocked him. For a while I looked a fool. The value of the shares rose and rose.

Right now, there are loads of speculation bubbles. At the café at work I was trying to explain Bitcoin’s fundamental problems to our barista, when our receptionist came over excitedly wanting to know more. Both seemed interested in getting involved. That means the crash is likely imminent. They’re both lovely people, but in the economic chain, they’re nowhere near the top, which means that the speculation bubble is reaching it’s limits.

“If shoe shine boys are giving stock tips, then it’s time to get out of the market.” – Joe Kennedy, 1929 as the stock market was about to crash and lead to the Great Depression

So the dotcom boom and Millennium Bug led to a boom in demand for developers. New software was being created to replace supposedly outdated software that couldn’t be fixed (narrator: “It could”) and salaries were rocketing. I took advantage of that boom. I also knew it wouldn’t last. And it didn’t. My day rate as a PeopleSoft developer went from £200 a day in 1997 to £600 in 2002. It could have been higher. Cisco did an amazing job of raising funds in that era and I remember they kept offering me more and more to go to work for them in the Netherlands. But I didn’t really want to go to work there. I never really chased the money, so that’s about where I peaked. But I remember people with the right skills, experience and self confidence were on as much as £1k a day. That’s getting towards £2k a day at today’s prices. Some skills seen as super hard and rare could command double that. Most people didn’t, of course, make nearly that much, and some people preferred a job with reasonable hours and close to their families – a very valid and decent decision. But I was single with no ties.

There are a lot more developers around today – good incomes have brought many people into the trade. I meet people who called me a nerd in the eighties and now they’re working in IT. It’s a bit weird.

Today’s situation

Now it’s a bit weird. Rates still aren’t at the dotcom level, once adjusted for inflation, but they’re close. You can do very well in tech. But in my little firm we pay typically around £40k for a developer, plus various benefits, kit, resources etc, meaning you’d need to make around £70k as a freelancer to equal it. At least the way I calculate things and always did. I nearly swapped my £600 a day for £60k a year and kind of regret not doing that.

But why have the rates risen? Well, there are a few hot areas, and they can be summarised as AI, analytics, mass market apps, and blockchain. I’ll discuss each briefly:

AI

This is a hot one – the idea we can replace rooms full of people doing dull and not very high value work (from the perspective of the company) such as service desks with AI bots is very attractive. It won’t work though. Most “supposedly AI” bots are just following decision trees and the only bit of AI is in parsing the meaning out of a sentence in a very tightly defined context. AI is useful today for categorisation problems – e.g. looking at a picture and deciding “this is a cat” or “this is a threatening comment”. It’s not brilliant at the job, but I like that an AI can work out which pictures are of my Mum, for example, even if it misses about a third of them… it still makes my life easier. A bit. But what an AI can’t do is right a decent blog post. Sorry, it can’t. They’re awful at it. There’s loads of AI generated content out there and it feels obviously fake. The main job of these AI generated blog posts is to trick other AIs (Google, Bing etc) into categorising a website as useful. And because AI’s make toddlers look worldly wise, they can be easily fooled… and that means you can’t trust them with anything of real importance. Like your business decisions.

But, it’s a hot keyword, and naive venture capitalists like the idea. So in comes the money.

Analytics

Tracking and stalking customers across the internet is very attractive for advertisers believing that doing so makes them seem more interesting to consumers. I’m not convinced. People often find it creepy. They feel like they’re constantly stalked. They visit the website of, say, a printer supplier and they receive ads for a month for printers… but not only for that supplier, but for other printers because the tracking provider is cheerfully using your data as a supplier against you and selling that information to your rivals! I think advertisers are starting to cotton on, but are unsure of what to do… but I know there’s a lot more direct selling of adverts between publishers and advertisers than there used to be.

But, the siren call of analytics is strong, and people love a nice chart on which to justify a decision, so the more nice charts your system can create, the more people will pay to use it and try to gain an advantage over competitors. And advertising is huge, so in pumps the money. For now.

Mass market apps

Can you build the next Facebook, Instagram, or Slack? What’s the potential for an app that lets people read books from any publisher for a fixed monthly fee? How about an app that revolutionises food delivery? Interestingly, some apps are about replacing old and inefficient intermediaries and putting new ones in place. Uber is a nice way of hiring a minicab with flexible pricing that rewards drivers for being available at the right time. They don’t disintermediate, however. The customer is both the driver and the passenger. The new intermediary takes their share.

If you can replace old intermediaries you can make a lot of money. Imagine taking 0.5% of every single financial transaction, like Visa do? That’s a lot of money. Then you have intermediaries between the card firms, providers, and networks, such as Stripe… and then there are those replacing old ones, like Wise, for money transfers across borders.

What other things can be improved? Well, literally anything.

But most attempts to build these apps and the supporting infrastructure are doomed to never turn a profit.

Blockchain

Blockchain is a really interesting concept for a public ledger, using an interesting concept called proof of work to make it hard for any one person to try to dominate the network and win the consensus mechanism on new transactions. There are theoretical ideas out there to improve on this, but at the moment they remain just that and haven’t been proven.

And it’s a scam. Pure and simple. But it’s a hot topic. Bitcoin, Ethereum, Dogecoin and many others are actively speculated upon, as well as being used for the exchange of value – often in a hope to evade regulators. It appeals to the natural rebels amongst us because it’s outside of government control… and given that governments aren’t always a force for good, I get that.

Problem is, Blockchain breaks the rules of good software development… if you look at the big O notation for software, it has to follow certain rules or it will fail at some point and need to be re-engineered. Big O matters. I don’t have academic access to papers, and the internet is full of vested interests pretending that Blockchain scales just fine. I used to see the same in WordPress land, where people said the software scaled fine… but it doesn’t. In WordPress we get scale by putting a layer between WordPress and the internet to balance things out – the work the software itself does goes up in line with the number of people talking to WordPress. We can define that as O(n) so long as you know what you’re doing – that’s OK. We can live with that. But the consensus mechanism required for multi node agreement of transactions as required to track transactions will, by its nature, follow a curve that is likely to be somewhat greater than O(n^2) (each node does O(n) work in a linear fashion but the total work done on the network as each node is added therefore grows as O(n^2) plus a bit for network latency and overheads. Yet bitcoin transaction cost isn’t following that curve in spite of huge interest because, I reckon, most Bitcoin trades aren’t real.

Yes, that’s right. And what does that mean? It’s because wideboys, crooks and the overly-optimistic are involved. Given it is, by design, a pyramid scheme, it will have to fail at some point. But people are motivated to hide that, so there are Bitcoin tracker schemes, rather like gold purchase schemes, that never hold the asset in question. They will pump and pump values as hard as you like. And as long as there are new people coming in, like our receptionists wishes to, all is good.

And there are enormous amounts of money to be made. As in a goldrush, the people making real money are the shovel makers and traders. And they need developers. So for as long as there’s money to be made, coked up wide boys will be gurning their way through stressful meetings, fidgeting and anxious to cash in before it crashes out. You can earn a lot there. For a while.

OK, so thanks for the very long essay. What does it mean then?

Well, it means developers are really expensive right now. Small firms that do actual useful work and aren’t highly capitalised (like mine) can’t grow because we can’t suddenly charge our customers double for the work so that we can compete against these booms. It’s as if a very rich person has moved into your town and hired all the builders possible to create a huge mansion. They even approached builders working for firms and offered them double to come build that mansion. Soon builders are all swanning around town in Teslas and feeling pleased with themselves for being so cunning as to be in the building industry.

Same in software. Locally there’s a Tesla with a crypto referencing private number plate and a young, bearded and muscular techbro driving it. Fine, I’m not going to judge. He’s happy and making good money.

But if builders are all hired by the rich, the rest of us get priced out. Same in software. Small firms are going to find they can’t afford websites unless they just use some cheap web builder platform – it’ll give a less good solution, but it’ll do the job. Ish. And the firms that can afford will do that bit better. And better. And the gap will grow.

At my firm I’ve had to raise salaries, but we still struggle to clear a profit with the raised salaries. I’m fiscally conservative, so we’ve always had decent cash reserves. This lets us ride out the storm. From 1997 to 2002 dev rates went crazy. By 2005 they were back to normal again. We as a firm can’t handle eight years of this. But it’s not quite the same as back then – you can now hire developers globally and have them work remotely, if you really wish to, which can save some money and also help those countries out with extra foreign revenue. I, however, really like quality and good communications and I find that a geographically tight team works the best. It also makes it easier to hire new people into the trade. So, for now, I’m sitting tight. I won’t seek venture capital, or borrow. And if the worst comes to the worst, we’ll add AI to something that does basic statistical analysis, and blockchain to something with two computers in the network and hope someone out there fancies throwing us some money so we join the party. In the meantime, however, there’s still a healthy living to be made as a business doing useful things and avoiding the hot trends. I never set out to be rich, merely secure – I’ll ignore the rich mansions and do my own thing, creating good code for good people.

n.b. about the above – the above isn’t a paper. It’s a set of opinions designed to inform and illuminate about what’s happened. It relies on anecdotes. Don’t take it too seriously and don’t use it as the basis for what you want to do with software and investing in software. Or crypto. Do your own thing with the information you gather from multiple sources. Also remember that a lot of people say misleading things because it’s in their interests to do so, and that you shouldn’t trust a random blog or news source on the internet. Mine included.

The great pension scam, how people were conned, and how young people fixed it

In my previous post, I discussed the importance of separating wealth from income, and to stop beating up a chap called Rob Barber who made the mistake of having a high income but not feeling rich. I get exactly where he’s coming from because I’ve been in the same position. In fact, it was more dangerous, because I made the mistake of thinking I was rich before having a sudden epiphany.

In the hazy distant past of my life, I worked at ICI from 1987 to 1997. It was a good ten years, in many ways, because although it started skint I acquired the skills and knowledge to make life a lot better for myself. I didn’t appreciate it as much as I should have done at the time, but in part because being skint at 18 is equivalent to trying to get out a pool of oil. Slippery and error prone.

In that time at ICI, and in the years when I left to become an IT consultant, I worked on payroll software and corporate financial software. When you code something into software, you have to know the subject intimately. Everything I code, I learned about in great detail then explained to a dumb computer. Programming is a really great way to understand things – a computer is like a very patient, dim student with fantastic memory. And when you teach, you learn. You have to.

So I remember when I was around twenty-five some of my older colleagues would always go on about how they hoped for early retirement. This seemed dreadful to me, because I remember my grandmother’s retirement in poverty. But what I didn’t know was how much things had changed.

These colleagues, you see, had a defined benefits pension scheme and ICI was a company on the wane. It needed to reduce headcount each year. One way that a department could reduce headcount was to retire people early, as young as fifty. Today I’m fifty and the idea of retiring and not being poor just isn’t there. I’d be quite hard up. So how could these guys get excited at the idea?

Defined benefit (DB) pensions vs. defined contribution (DC) pensions

All those guys retiring in the nineties onwards were born around 1940 onwards. They started work sometime around the early to mid sixties. And they won life’s lottery big style. They had two key things going for them. 1: the economy of the country was growing fast after the war, so there were lots of opportunities for work, and 2: because of a difficulty in hiring people, firms needed to find ways to attract and keep staff that was cheap at the time and hopefully kept wages down a bit.

At ICI, we were all on what’s known as a “defined benefit pension.” That means that the pension you get is defined according to a set of rules. If I remember rightly, the rule at ICI was quite simple – you got 70% of your final salary. This kind of final salary scheme exists today in only a few legacy situations or with older staff in some firms.

I remember thinking how it was crazy that a 50 year old with thirty years of experience could then look forward to another thirty years on 70% income. Given the reduced costs of retirement (no commute, no need to keep smart work clothes, etc) it was almost like having a full salary. Not only that, many would take a consulting or part time job and be on substantial incomes. They would earn more money in retirement than they would during their working careers!

I smelled a rat! The maths didn’t work out. As I then worked more and more on corporate finance I got to know a lot of accountants and some financial directors. I asked about this problem and they all said one thing: “Those pensions were promised to people by directors who are long gone, and mostly now dead. Totally unaffordable and the company now has to make up the gap… or go bankrupt.”

If you’ve ever wondered why so many of the giant companies of the UK that existed in the sixties are no longer with us, then that’s one key reason. Pensions. At one point, Rolls Royce was putting over a third of its gross profits into pensions. British Airways was once described as a massive pension company with a small airline attached.

This problem was known about in the seventies, but few people discussed it. It was brushed under the carpet. If you have some time, I highly recommend reading this 1975 letter from Warren Buffet on the subject of pension funds and likely shortfalls.

Moving on to your situation today – now you have a defined contribution scheme, if you start a pension scheme. It’s generally a good idea to have a pension scheme, especially because the UK government encourages it with generous tax breaks on contributions. Both you and your employer can contribute, within limits.

A defined contribution scheme (DC) is based on the money you put in, and that’s it. In many ways, that makes more sense. But how does saving a portion of your salary get you close the pensions your grandparents or parents got from large employers like ICI, universities, and the public sector? A hint… it doesn’t.

The great wealth shuffle

What’s happened, and it’s absolutely not the fault of the benefactors, rather than of cynical weasels that are long dead, is that wealth has been shuffled to the older generation in a very effective way. Not all older people, sadly, but those who had decent jobs in decent employers  and owned their own homes did best, whilst those in more casual employment, rented their homes, and didn’t realise the importance of savings are left with nothing more than a state pension… so they did the worst and can still be in relative poverty. Unfortunately, if you’re not thinking and acting carefully today, your retirement, even if you work in a good employer, could be a lot more like that poor old person’s than you think and a lot less like your grandparents with their motorhome and three bedroom house.

So, I like charts, right? Remember this one from the last article?

That shows my wealth including the value of my property, savings and other bits and bobs like a car up to the age of thirty, with a different line for a middle class person with the same career.

Let’s see how that changes if we take into account the defined benefit pension scheme I had at ICI. I then didn’t contribute to a pension scheme until I was in my forties, mainly because I had other priorities and, well, I knew what I was up to. But for most people that would be terrible advice. Don’t do as I did!

Take a look below:

Now, do you see the change? In fact, for one glorious year in this story I was ahead of the middle class chap called Julian from the previous post! It wasn’t to last, because we’re assuming he worked in the same way I did and had the same sort of career, just a few years later.

Just so you know, I worked out the pension wealth on a simple basis – it was worth, based on my leaving salary, the equivalent of £100k if I tried to buy an annuity, because today, to give the benefits I can still expect from my pension, I would need about a £200k or so fund in order to buy an income equivalent to my defined benefit. I hope that makes some sort of sense. In essence, I count my pension scheme as being a £200k bit of wealth that I don’t think about.

Defined benefits pension schemes made people who started work before the mid-nineties surprisingly wealthy. It’s just not fungible.

What does fungible mean when it comes to assets? It means that the money isn’t readily available. A bicycle is fungible. You sell it for cash, and can sell it quickly. A house isn’t terribly fungible, but still better than a pension scheme because the pension scheme is sort of a bet. It can release some money to spouses, but doesn’t necessarily have to – that depends on that defined benefit.

So my ICI company scheme increased my effective disposable income in those years by more than 100%. I never even realised it at the time, because I only really learned properly about money in my early thirties.

So now you know how that sweet little old lady with the poor education, who worked at a factory, has managed to afford a decent pension with three annual holidays and a mobile home near Carnaerfon.

So this is good, right? We made older people richer!

It is fantastic that older people were made richer. The only slight fly in the ointment is who paid. And why. And why it could be better.

First of all, remember above I pointed out that companies had big shortfalls in their pension funds? Well, if they had to find £5,000 for each year that I worked extra, that had to come from somebody who currently works at the company, and from the dividends. But if all big firms cut dividends, all pension funds (which hold shares in big firms) would have had even bigger shortfalls! And share values would have gone down, making these firms vulnerable to aggressive takeovers.

Reality is, and this is all a layman’s explanation without too much detail, that younger people paid to make older people richer, but without having the same future benefit for themselves. The older generation, realising the problem, and now running companies, took away those benefits wherever possible.

Pension funds also being large shareholders and needing their income, also pressured companies they held shares in to return greater profits! So that meant that younger people’s incomes were pressured in another way!

At least young people have avocados now?

Well yes, they have access to avocados. But not houses – they’ve become more expensive, because with people living longer, and fighting any development that may affect them and their neighbourhood, young people can’t afford houses. A starter home in my home town of Widnes is around £200k. That’s a *lot* of avocados you’re going to need to cut back on to make a dent in the wealth differential. Relatively speaking, my grandmother bought a brand new starter house for £17,000 in 1984. Which is about £55,000 today. Good luck buying anything other than a tiny ruin in Widnes today for that sort of money.

Houses and pensions have led to the following interesting chart:

Now, this chart has its caveats, and I recommend reading the full article here, but let’s face it, with these sorts of gaps, Rob Barber is going to have to earn £85k (a lot less after tax) in order to catch up with a well established boomer. And let’s not discuss how much harder it is if you’re working class and end up supporting the boomers that didn’t do so well on the pensions lottery and had more casual jobs. Life is harder if you started poor.

Photo credit: Photo by Matthew T Rader on Unsplash