Hidden Costs of Contract Hiring

I wrote this today in response to another article more favorable to contract employees as a resource alternative. Because I've both worked with contract employees and been one myself I thought my perspective offered insight that was lacking in the other article. I'll try to cite the original piece if I remember.

Contract Hiring is touted as a remedy for an uncertain economy and high costs associated with hiring permanent employees. For some companies this can be true, but there are situations where the hidden cost of contract employees can far outweigh the benefits of hiring an employee on a permanent basis.

Benefits and Drawbacks

For businesses whose work functions are highly standardized and those who have kept pace with the changes in current technology and workforce, contract hiring can be utilized most effectively to achieve a desired result with cost savings. For others, contract hiring can easily be oversold as offering the following benefits.

Agility: Today’s business environment is characterized as fast-moving, quick to change, and requiring companies to be “responsive” or even “agile”. Contract hiring promises a “quick fix” to the need to rapidly shift business functions, by making available a wide variety of expertise from the “agile” contract workforce.

HR Cost Savings: A contract employee does not require benefits such as health insurance, paid vacation, sick time or other perks associated with full-time employees. In addition costs associated with recruitment purportedly are minimized, as are severance costs.

Training Cost Savings: A contract employee can walk in off the street, sit down and begin working.

Risk Management: Because contract employees do not work for the company directly, liability for business risks can be spread or externalized.

Productivity: Because contract employees work in commoditized areas, theoretically they can “hit the ground running”, arriving with the needed skills in place. In addition they can be hired and released in whatever numbers are needed to complete a project in a particular timeframe.

Focus: Contracting out “non-essential” functions provides a way to allow permanent employees to concentrate on the essential parts of their jobs, to the extent those can be separated.

Barriers to Successful Contracting

For all of these benefits to be realized certain background assumptions must be addressed beforehand. As with most rational activity, successful planning is the key to achieving successful outcomes.

Standardized Processes and Technologies: In order to find a contractor with a particular skill set, it goes without saying that the needed skills must be available in the marketplace. Companies and departments whose internal processes are “home-grown” or ad-hoc may find it difficult to articulate their exact requirements to those outside the immediate area. And companies leveraging obsolete or uncommon technology platforms tend to have a large number of adaptive legacy business processes that increase training burden required to make any new employee effective, whether contract or full-time. Worse, an ad-hoc business process employing a standard technology may lead to the impression that a standard skill set should be sufficient to understand the unique local parameters of the job.

Failure to Plan: Does the hiring manager understand the exact requirements of the job? Can the necessary knowledge be transferred to someone who walks in off the street with no understanding of the company, its policies and procedures, or its culture?

Lack of Process Orientation or Understanding: The inability to see your business activity in terms of processes is a sure indicator of the difficulty a contract employee will have learning what is needed to do a successful job. If the contracted function contains a large number of inputs or near-upstream variables, this may indicate that a sub-function may need to be developed for contracting purposes.

“Quick-fix” mentality: Often an employer relies on a contractor to think creatively how to fulfill the requirements of a job, especially in situations where manpower is constrained and deadlines are close. In this situation the employer runs the risk of cost and time overruns as the contractor struggles to fill in the preparatory work needed to understand facets of the job that should have been explained up front. In addition, the risk of failure is increased by the arms-length relationship that contracting entails: the contractor knows the job will end with the contract term, and will be prepared to leave at that time, whether the work is completed or not. The liability for flawed or broken processes can hinder the success of a contract relationship, but unlike internal liability for completing a project cannot ever be shared with a contract employee.

Variations among Contract Employees: no two contractors are alike. Some are highly skilled, some less, some are professional and service-oriented, some individualistic and indifferent to the needs beyond the stated job description. Some have more people skills, some more technical skills. These human factors cannot be specified in a contract to the extent needed to make a difference. A job relying on any of these personality traits—and most do—may need to bring in several different contractors for the same position before a good fit can be established. Not only that, the more competent and professional contractors tend to be in greater demand and therefore less available than those less stellar performers.

Solutions for Successful Contracting:

Know your business: Managers who do not understand their own business processes cannot rely on contract employees to fix them. Identify the areas of your business most likely to require additional temporary resources, and invest time in activities such as process mapping or risk assessment to evaluate whether the jobs are ready to be handed off to a contractor.

Know the contract market: Some skill sets are readily available, some are harder to find, and some are virtually impossible. An informal survey of potential contract firms can help assess what functions can be contracted readily, and at what cost.

Establish relationships: A mutually beneficial relationship with a contracting firm is characterized by the same features as a good relationship with any other supplier, or with a customer or an employee for that matter. A sense of common goals, mutual understanding and good communication cannot be commoditized, but must be developed through repeated interaction. This is where a full-time employee justifies the additional cost devoted to recruitment, development, and other employer commitments—unlike a contract employee, a full-time employee has a vested interest in the continuing success of the employer.

It takes additional commitment on the part of management to achieve a level of trust and responsiveness with contract firms or, even better, with a set of contractors themselves. Initially it is important to establish rapport with contract service providers. Beyond simply knowing the skill sets they offer, it is important to gain a sense of their commitment to satisfying your needs. Do they respond promptly to your communications? Do they answer your questions? And for your part, is your business likely to be a good customer for them in the future? Do you understand your own needs and requirements? Can you articulate what is important to you? These are the kind of informal benchmarks that indicate potential for a successful contract relationship that lives up to the promise of an agile resource base available at a competitive cost.