During economic downturns CEOs and CFOs come to HR looking for ways to cut labor costs. As sales go down, labor costs must also go down proportionately. Unfortunately, HR’s responses to requests for labor cost reductions frequently come well after they can have a real impact. But HR must learn to prepare for the inevitability of cost cutting. The most commonly produced labor cost reducing solutions offered by HR include:
- Hiring freezes
- Pay and/or promotion freezes
- Mass layoffs
There is, however, another solution that is often underutilized by HR, one which can be quite effective in cutting labor costs and in increasing management flexibility. That solution is a better utilization of a contingent workforce strategy. In a constantly changing world, successful organizations must become more flexible. Just as the human body can react and “shift resources” when an infection strikes, successful organizations must also develop contingency plans that allow them to shift their resources rapidly. What Is a Contingent Workforce Strategy? A contingent worker is a worker who can easily be released by a firm. Most are contracts or temps, but there are other variations. They are often superior to permanent workers because of the fact that they are easier to “get rid of” when they are no longer needed. The reasons that they are easier to release include:
- They themselves have lower job security expectations, so they resist less when the time comes.
- Managers don’t have the same trepidation as they do when they fire a “permanent” worker because 1) managers know contingent workers realize they may be let go at any time (managers are chicken!), 2) there is less paperwork involved in releasing them, and 3) a new contingent worker can be hired at any time, since they don’t count as “headcount.”
- There is less of a probability of legal action when you release them.
A contingent workforce strategy means that the HR department provides managers with a series of related tools that work together to allow managers to increase the ratio of contingent workers over permanent workers. This integrated strategy gives managers an increased capability to cut labor costs whenever product sales decrease. Where traditionally having a contingent workforce meant just hiring more “contractors” or temps, what is proposed here is a more dynamic and integrated approach, which provides managers with new ideas and more options. Benefits of a Contingent Workforce Some of the many potential benefits of having a contingent workforce strategy include:
- Firing. Releasing contingent workers fast is relatively easy because contingent workers have short-term contacts that expire or they have agreements that can be easily terminated in any business downturn.
- Avoid layoffs. Avoiding the publicity that comes with laying off permanent workers (which must be reported to the SEC) allows you to avoid the damage to morale and your external image as a good place to work that comes with formal layoffs.
- Peak help. Contingent workers can be utilized during peak hours, days, or seasons. They increase your short-term capability while keeping long-term costs low.
- Costs. Some contingent workers will work for less (and sometimes without benefits).
- Training. Most contingent workers come already trained.
- Redeployment. Contingent can also mean that some employees will be designated as “floaters” and be available for redeployment to fill short-term needs much like a utility player does in baseball.
Contingency Workforce Plan Steps Step 1: Determine what percentage of contingent worker you need. The ratio of contingent workers to permanent workers should not be a static number. It should shift up and down as the economic situation changes. HR must identify the possible range of highs and lows in workforce headcount (considering both contraction and growth) by examining a 10-15 year historical pattern. Smart firms increase the percentage of contingent workers:
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- With a rising unemployment rate. As the unemployment rate rises above five percent, more workers are willing to take contingent jobs.
- As sales fall (or are projected to fall). A firm should increase its contingent ratio to prepare for the upcoming sales downturn (and to avoid having to layoff permanent staff).
- Prior to mergers. Before mergers and acquisitions (because large mergers result in massive redundancies) firms should prepare by increasing their contingent ratio.
- When the economy is exploding. Because jobs are easy to get, some people are actually more willing to take contingent jobs.
- When sales are growing rapidly. Most recruiting systems won’t be able to keep up with rapid growth and you will need contingent firms to supply you with talent until recruiting can catch up. In addition, because all rapid growth must eventually end, smart firms assume it is an anomaly and use contingent workers that can be easily released when the boom slows down.
- During peak periods. During peak sales months (summer, Christmas, etc.) contingent workers should increase. Some firms increase contingents based on the specific hours and days of peak demand.
- In times of uncertainty. In any upcoming period of uncertainty (when new technology is introduced, industry consolidation occurs, scandals occur, the stock plunges, a new CEO arrives, etc.) it is wise to increase the contingent ratio to increase flexibility.
- During a sale or closure. If you are contemplating the sale or closure of a business unit it is wise to begin transferring out some of the individuals you want to keep and replace them with contingent workers.
Contingent workers should comprise between 5% and 25% of your workforce. Most of the problems with workforce plans occur because managers consistently overestimate growth rates and, as a result, over hire and “under” fire. That problem is compounded by the fact that there is no quick and easy way to reduce labor costs with “excessive” headcount. Some organizations attempt to use performance management to resolve that “surplus employee” issue. But a superior option is to require managers to maintain a significant percentage of their workers as contingent workers. Because managers are less hesitant about releasing part-timers and contractors, having a fixed percentage of your workforce designated as contingent workers makes it easier to cut costs and employees in a relatively short period of time. You can determine the “right” contingent percentages by first examining historical patterns to see what the highest growth rate could be. Next, do both a best- and worst-case scenario and estimate the maximum and minimum levels of contingent workers you will need for both the “best” and “worst” growth scenarios. The normal range of contingent workers can be as low as 5% (in medium growth times) to as high as 25% of the total workforce. The high is set based on the maximum conceivable percentage of the workforce that could be laid off in a worst-case situation. Step 2: Do a “mock layoff” to determine who should be classified as contingent. Why wait until it’s time to actually do layoffs to determine which individuals and jobs would go? If you determine in advance the people and jobs that are likely to be eliminated, you can use that information to begin the process of converting those positions and shifting those people into contingency jobs. An effective contingency plan suggests that the percentage of workers in contingent jobs be equal to the percentage of workers that would be laid off in a worse case scenario. By converting individuals that would likely to be laid off to contingent you soften the blow by in essence giving employees an advance warning about what are and are not your priority jobs and people. Instead of requiring immediate cuts, however, the contingent workforce “set aside” gives workers an additional step between one day having a “permanent job” and the next day having “no job.” The transition gives them time to adjust and prepare for themselves for a contingency position. And yes, some will quit when their status is changed ó but that just means you can now more easily fill the position with another internal person or with a new contingent hire. Incidentally, shifting current workers into contingent jobs is generally better than hiring “new” contract workers because they already know the company and its culture. In order to determine who should be put on contingency status you must go through a mock layoff that pre-identifies the individuals, positions, and the business units that would be reduced if there actually were to be layoff. You can get ideas from previous company (and competitor) layoffs about what jobs and level of performance would qualify you for a trip out the door. Other tools to consider include performance appraisal scores, forced ranking, 360 scores and production/output data. Incidentally, because overhead and other less essential functions are most likely to be cut, they are generally the first to be designated as contingent positions (or people). Step 3: Develop contingent workforce metrics, rewards, and punishments. Companies and managers that use a large number of contingent workers often get “lazy” over time and fail to maintain their target contingent workforce numbers. Rather than waiting for that to happen, HR must proactively develop effective metric or measurement systems to report the percentage of contingent workers in each business unit or department. To further ensure compliance, managers must receive punishment and “embarrassment” when they fall below their contingency targets and rewards when they meet or exceed them. Step 4: Use contingent worker status as an element of performance management. Effective contingent plans are integrated with performance management programs. For example, under some contingency workforce plans, bottom performers are transferred into contingency jobs as a step before termination. If they are not in a low priority job or if their performance improves they can be returned to “permanent” status. This interim step makes it easier for managers with less courage to begin the process of getting rid of bottom performers. Step 5: Develop contingent floaters to improve productivity. Contingent workers may include people designated as permanent floaters. Their employment status may actually be “permanent,” but their day-to-day job assignments are contingent. These contingent floaters are cross-trained in several job areas so that they can be instantly redeployed when there is a sudden need for talent. Because they already know the firm, their performance will likely exceed those hired from temporary help agencies. Step 6: Designate overflow “rollover” people for peak periods. Some departments “over hire” in order to be prepared for peak periods. Another element of the contingent strategy is to determine which business units have occasional spikes in their workload (benefits enrollment for example) that require extra short-term help. Rather than hiring for these peak levels, workers (or whole teams) in other departments are designated as “rollover” people. These individuals are cross-trained so that they can pick up any short-term overload that can’t be handled by the normal staff. If there are counter cycle jobs (where peaks in one department occur simultaneously with slow times in other departments) contingent rollover plans can be even more effective. Outsourcing firms (with call centers) can also be contracted to handle overloads in lieu of, or in addition to, internal employees. Step 7: Use outsourcing as an element of contingent workforce. Outsourcing firms can be treated as a form of contingent workforce. You can the outsource firm’s employees to do your work. Outsource in those areas that add little value or are likely to be reduced during a layoff. In addition, as more and more consulting firms expand their outsource business volume, the possibility of outsourcing firms actually “absorbing” your administrative workers (from your payroll to theirs) increases. Some firms will accept your employees as part of a long-term outsourcing contract. You employees keep getting paid but not directly by you. Other Contingency Options To Consider Smart managers consider the many alternatives that are available to cut costs or increase your firm’s productivity long before they consider hiring new permanent employees. Here are some alternative steps to cut labor costs and increase flexibility before you add more headcount:
- Require for all key jobs that a pre-trained person be designated as a back fill for sudden vacancies.
- Allow contingent workers to maintain their “permanent” status but reserve the right to reduce their hours to as much as 90% time. They get added security while you can increase your capability to reduce labor costs.
- Cut costs by eliminating benefits for contingent workers (note there are some legal issues involved in using contractors with a differential in benefits).
- Contingent can also mean a “temporary demotion” or lateral transfer.
- As an inducement to go on (or stay on) contingency status, career help, re-training or severance packages for those that stay on contingency status for 4 months can be offered. People that are returned to “permanent” status can be guaranteed no break in seniority or vacation accrual.
- Require a percentage of your workers to be cross trained in two jobs for increased “fill in” potential.
- Temporarily reduce sick and vacation day accrual rates to increase the number of hours worked or force people to take unused vacation to cut costs (due to accounting rules).
- Offer productivity incentives to your team and offer individual productivity incentives.
- Hire part-timers that are willing to work only during your peak periods of need.
- Lower the pay of new hires.
- Shift work to low-cost labor areas (countries and geographic regions) that can do the same volume of work that is now done in a high labor cost area.
Conclusion HR can become a corporate hero through effective workforce planning, and one of the most important elements of workforce planning is the use of contingent workers. Contingent workers, if used correctly, can reduce labor costs as well as increase your firm’s flexibility. During the boom of the last decade they may have been underutilized for a period ó but their time has come again!