Contract labor: Making the business case

Contingent workforce can deliver savings in the right situation


The economy is improving across the globe and orders begin to flow. The discussion across conference rooms of growing companies continues to be focused on the age-old question: Hire full-time employees or hire contract labor? Let’s look at the benefits and potential downsides of moving toward a contingent labor model.
There is a growing trend among baby boomers to move toward a semi-retired lifestyle model. The market is flooded with competent seasoned employees with 20-plus years’ experience who for lack of a better reason prefer to work 6 to 9 months out of the year. They have socked away enough cash for a rainy day, are typically empty nesters, and are utilizing contract gigs to allow quality of life with income flow.

On the employers’ side, cautious senior management is resistant to taking on fixed overhead, and is receptive to the idea of contingent labor. Operations managers are truly between a rock and a hard place. The answer more often than not is to move toward a contingent labor model. Although it is not always intuitive, when you look at the simple chart below, it becomes evident that the cost savings are significant in the long run.

When you study the benefits (which we will outline below), why aren’t hiring mangers utilizing this contingent labor technique more often? There are defendable positions against the movement. The most common response we have heard is that when the contractor leaves our project he takes that knowledge with him. Also, company processes are unique and complex, and it is difficult for a contract employee to fit into the culture and understand process and procedures in a timely fashion. In addition, companies that posses special technology want to protect such technology and keep it in house.

Even when given the go-ahead from senior management to bring on additional head count, hiring managers are tied to their human resources department. The HR team is tasked by the company to protect the company’s business due to conformance to state and federal regulations. This causes slowdown in the execution and securing the proper talents to serve the end customer.

These are valid arguments, but the qualitative data shows that with the proper onboarding and screening, any risk can typically be mitigated with the right partner. The gains that overcome this risk can be put into several categories. Although in some cases the benefits are subjective, with the proper evaluation it is quite easy to create the objective business case.

Internal velocity

In most organizations with any level of bureaucracy, time can be our enemy. Lack of time brings frustration and stress, and costs money. The ability to shorten outages, quickly staff field support, and create customer satisfaction in a timely manner creates “delighted customers.” The contingent labor model can put time on our side.

However, the objection typically brought up when considering contingent labor is that of the increased cost associated with hiring hourly resources. A closer look, however, reveals that this initial “sticker shock” is mitigated once we consider what is included. One advantage is that by turning to a resource provider that has access to a bench of immediately available, skilled, and properly screened candidates ensures that needs can be met much more quickly than through traditional hiring methods; sometimes in as little as 24 hours.

All employment costs, including background screening, taxes, workers compensation, health insurance, vacation, retirement, etc., are included in the rate paid for the resource. This removes a heavy hidden burden to traditional hiring that can sometimes approach 60% to 70% of the employee’s base salary.

For resources that are expected to travel heavily, expense management can become time consuming and complicated. Expenses for contingent labor, including making all travel arrangements, are typically managed by the service provider within pre-agreed parameters. One invoice, including hours worked are fully vetted and approved expenses, can then be submitted. 

Finally, standard relocation costs for a mid-level hire in a Fortune 500 company can often exceed $25,000. The flexibility of a contingent labor hire allows for a much more cost-effective relocation to be included in the hourly rate and amortized over the period of the resource assignment. This removes the relocation expense from overhead and allows it to become directly recoverable to the project. All these benefits improve internal velocity, which equates to cost and time savings.

Effective screening

As the hiring manager earlier in my career for a large multinational corporation, it was appalling to see the large number of candidates that HR submitted through the utilization of a VMS (vendor management system). Clearly, many of the perceived risks associated with using contingent labor can be mitigated through the use of an effective screening program. There are several components to this:

The model of the staffing industry has always been to use recruiters who look more like salespeople than subject matter experts—a junior person is trained in selling techniques and then sent out to contact potential candidates. Technical training may or may not be given.

Our experience has shown that taking a person with solid industry experience and training him or her in recruiting techniques significantly improves the quality of candidates sourced. As a degreed mechanical engineer, I can ask the tough questions and weed through experience more efficiently.

Additionally, an individual screening profile should be developed for each open position. This should be based on the job description but will also include aspects particular to both the corporate culture and the preferred profile of the hiring manager. A technical individual who spent most of his career in the start-up world might not be a good fit for a large, stodgy organization. Typically this assessment is developed in conjunction with the person doing the recruiting so that there is a clear understanding on all sides of what is required.

From this profile a list of questions is developed. Every candidate sourced will be asked the same list of questions, which allows for a very objective evaluation of skill sets and personality fit. The search should be approached in a much targeted way. We have found that it is much more effective to target our search; who are the closest competitor companies? Which competitors are downsizing? What level of person would see this opportunity as a promotion? What skills are transferrable?

Finally, and more importantly, the model of partnering with the customer and taking the time to understand its business by a technically competent team to include technical, administration, HR experience will quickly understand the customer business and include this important aspect in the recruiting process. 

Overall cost

When we look at the job duties of the average hiring manager, there is a common thread across all industries that includes quality, efficiency, employee growth, profitability, cost containment, and sales. Yes, sales. No matter what your position in the organization, the bottom line is if stuff does not get sold, then the sustainability of the business is threatened. Then why would we burden the hiring managers with the stress and pain of vetting out potential full-time employees? By moving toward the contingent labor model, hiring managers are able to the focus on the business of top-line growth, middle-line containment, and overall profitability.

Studies have also shown that full-time core employees provide better productivity, because through contingent labor you are able to create a more stable work environment, free from the cyclical effects of the economy. As we shift gears to the front of the office, we embrace the day-to-day struggles of our HR department. HRHero (a leading HR law website) estimates that less than 10% of the HR department’s daily workday in U.S. companies is actually spent recruiting, negotiating, and onboarding employees (*REF 2). The HR function has become a daily barrage of paperwork, counseling, ethics compliance, reprimanding, OSHA filings, firing, salary and benefits, conflict mediation, and administrative functions associated with complying with U.S. law. In many medium-sized companies the HR department also functions as the executive’s liaison. So, when the hiring manager does eventually jump through all the burning hoops and red tape necessary to get approval for that new requisition, how can the HR department possibly bring you qualified candidates?

Risk mitigation

As a nuclear controls engineer with project management experience, I remember being assigned my first project management job. It was a large project for someone with little experience in managing people. My mentor continued to pound the words “schedule creep” into my head. The contract was fixed price and the margins were fairly thin.

I was not prepared for what happened next. Three days before my 12 field engineers and I were to deploy to the site, our customer called us and decided to delay the outage indefinitely. Forget schedule creep—we had experienced schedule crash.

Our budgets were blown and the inevitable happened. All 12 of these field engineers were full-time at the company. With this large contract indefinitely delayed, seven of them were let go in less than 30 days. With a large pool of skilled, eager-to-work candidates, we could have saved those jobs.

No matter your position, risk mitigation is about identifying what unforeseen circumstances can reach out and bite you on a project or task. As a hiring manager for a large corporation, I have made some poor hiring decisions, and in today’s climate, that’s a ticket that’s hard to unpunch. Contingent labor removes this risk by allowing the “try before you buy” theory. Contract employee not working out in your culture? Remove him instantly while minimizing risk. Great fit, hard worker? Convert him to full-time. With the right compliant partner, background checks, benefits, and insurance are all handled by a third party.

Having a well-run and effective contingent workforce strategy in place will allow you to reap the benefits you need to stay ahead of the competition. Use of contingent labor is on the rise, and those organizations that take advantage of it early and strategically will shine. Contingent labor allows you to find and utilize specialized skill sets, outsource noncritical roles, “test” candidates before fully hiring them, and ultimately move ahead of competition by executing your business strategy in a quick and cost-effective manner.

As a Gen Xer myself, I am reaching that age where my wife and I are beginning to talk about freeing ourselves from the 60-hour work week. We are empty nesters who have been blessed with storing away a few nuts for winter. A 6-month work year is starting to look inviting. Who knows, maybe I’ll work a few contract jobs for your company someday.

Michael Korf is with IS International Services, LLC, a global engineering services company headquartered in Atlanta.

IS International Services LLC is a CSIA member as of 3/5/2015

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