Using a Contingent Workforce Strategy to Avoid Layoffs

When economic times are volatile and businesses are facing a downturn in revenue, many CFOs turn their attention to cost-containment. A logical place to start cutting costs is labor, given that in many industries labor costs account for an average of 60% of all variable costs.

The volatility in the business climate not only dictates that labor costs be contained, but also that organizations become more agile in their use and deployment of labor, a characteristic not generally managed well in the traditional employer/employee relationship.

Successful organizations must develop workforce plans that allow their organizations to shift people resources rapidly from areas of low return to areas of high return, as the business environment shifts.

HR instead needs to prepare in advance and have a viable plan and strategy to ensure that any workforce reduction/adjustment is executed in such a way that it doesn’t damage their image or reduce morale of employees retained.

One approach to consider is developing a contingent workforce strategy that allows organizations to rapidly cut labor costs by releasing contingent contract or temporary workers.

Layoffs Are an Ugly Option

Most of the problems with workforce plans occur because managers consistently over-hire and under-fire.

The net result is that labor costs essentially become “fixed” rather than being variable. That problem is compounded in organizations that have grown holistically with little or no attention being paid to workforce planning or workforce productivity analysis, because they often become headcount fat very early on.

Although layoffs are a commonly used option to reduce labor costs, they are far inferior as a solution compared to the use of a contingent workforce.

Some of the many problems associated with layoffs include:

  • They are highlighted in the press and as a result, they hurt your external employment brand image. When customers read about your layoffs they might also assume that these layoffs mean that the company is in trouble or that the product quality will suffer.
  • Layoffs and their related severance packages are expensive and administratively time-consuming.
  • Releasing talent that you fought to acquire and paid to develop is a waste of resources. In addition, your laid-off workers could end up working for your competitors.
  • Even though head count is reduced the workload is often not, and as a result, employees end up taking on a larger workload and new tasks, which results in higher error rates and slower process time.
  • The process of selecting who will be laid off and the reorganization after the layoff are time drains on managers who should be focusing on the product and the customer.
  • They traumatize everyone including workers who remain and managers that have to let go of talent they helped develop.
  • They cause employees to shift their focus toward job security and away from serving the customer.
  • Even rumors related to upcoming layoffs are productivity killers. Once one has occurred, there will be a lingering fear that it won’t be the last.
  • There is little evidence that they consistently produce a positive ROI.

Some organizations attempt to use performance management to resolve their surplus employee issue, but that process is slow and generally incapable of handling a large number of employees. Instead, a superior option is to require managers to maintain a significant percentage of their workers as contingent workers.

Developing a Contingent Workforce Strategy

A contingent worker is a worker who can easily be released by a firm. Most are contractors, part-timers, or “temps” but there are other variations. They are superior to permanent workers because of the fact that they are easier to “get rid of” when they are no longer needed.

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A contingent workforce strategy is sometimes called a “shamrock” strategy because it splits a firm’s labor force into three distinct leafs. Each leaf of the shamrock represents a different form of labor including permanent employees, contingent labor, or outsourced labor, each of which gets a predetermined percentage of work allocated to it.

To support a shamrock strategy, HR departments must provide managers with a series of related tools that determine the appropriate balance of labor types given projected market conditions. This strategy gives managers an increased capability to cut labor costs whenever product sales decrease or conversely, to rapidly add talent when the business is growing.

Where traditionally having contingent workers meant occasionally hiring a number of “contractors” or temps, what is really needed is a more dynamic and strategic approach that provides managers with more options.

Benefits of a Contingent Workforce

Some of the many potential benefits of having contingent workers include:

  • Lower expectations. When contingent workers are hired they know upfront that they are insured employment only up to their contracted date.
  • Managers are less reluctant. Managers don’t have the same fear or resistance as they do when they fire a “permanent” worker because managers know contingent workers realize they may be let go at any time (managers often lack the courage to release permanent employees!) There is also less paperwork involved in releasing them.
  • Easier to find. As other firms lay off and the unemployment rate rises, there are many more highly qualified individuals willing to accept contingent positions.
  • Easier to add. Because they don’t count as headcount, a new contingent worker can often be added when there is an immediate need in a specific area, even when there is a headcount freeze.
  • Only when you need them. Talent and skills can be added but then released quickly when they are no longer needed.
  • Lower costs. Some contingent workers will work for less and sometimes with minimal or no benefits. In all cases, there are no costly pension benefits and retirement issues.
  • Redeployment. Contingent workers can sometimes be designated as “floaters” and thus be available for redeployment to fill short-term needs much like a utility player does in baseball.
  • Better assessment. Hiring workers on a contingent basis allows you to assess them “on-the-job,” and you can then keep only the best.
  • Legal issues. There is less of a probability of legal action when you release contract workers.
  • Stronger employment brand. Using contingent workers allows firms to cut labor costs without the negative brand-damaging publicity attached to large-scale layoffs. It also allows you to avoid the damage to morale that comes with formal layoffs.

9 Steps in a Contingent Workforce Strategy

There are nine critical steps in developing and implementing a contingent workforce strategy:

  1. Determine when you need more contingent workers. The ratio of contingent workers to permanent workers should shift up and down as the economic situation changes. HR must identify exactly when this contingent percentage should increase or decrease. Start by examining a 5- to 15-year historical pattern in order to identify the critical periods or events that indicate that you should increase or decrease your percentage of contingent workers. For example, this could be when sales fall, when sales are growing rapidly, peak periods (summer, Christmas, etc.), prior to mergers, or if you are contemplating the sale or closure of a business unit.
  2. Determine your ideal target percentage of contingent workers. Examine historical patterns to see what the highest growth rate could be, then do both a best- and worst-case scenario to estimate the maximum and minimum levels of contingent workers you will need for both scenarios. The normal range of contingent workers can be as low as 5% (in medium growth times) to a high of 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.
  3. Assess who should be classified as contingent. Why wait until it’s time to actually do layoffs to determine which individuals and jobs would go? Determine in advance and use the information to begin the process of converting those positions and shifting those people into contingency jobs. By converting individuals who would likely to be laid off to contingent you “soften the blow,” giving employees an advanced warning. The transition gives them time to adjust, though some will quit when their status is changed. Incidentally, shifting current workers into contingent jobs is generally better than hiring “new” contract workers because they already know the company and its culture.
  4. Develop contingent workforce metrics, rewards, and punishments. 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.
  5. 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.
  6. Develop contingent floaters to improve productivity. Contingent workers may include people designated as “permanent floaters” whose day-to-day job assignments are contingent. These contingent floaters are cross-trained in several job areas so 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.
  7. Designate overflow rollover people for peak periods. Determine which business units have occasional “spikes” (benefits enrollment, for example) that require extra short-term help. A”rollover” can handle short-term overload that can’t be handled by the normal staff. If there are “counter cycle” jobs (i.e., 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 “over loads” in lieu of, or in addition to, internal employees.
  8. Use outsourcing as an element of a contingent workforce. Outsourcing firms can be treated as a form of contingent workforce. 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. Your employees keep getting paid but not directly by you.
  9. Shift the work to areas where the laws are more flexible. Consider shifting the little work that you need done to areas where the laws are more flexible when it comes to laying off or firing workers. Replacing workers with technology and equipment is another option to increase your flexibility.

Final Thoughts

As business times become more turbulent, it is critical for HR to increase its focus on workforce planning. One of the key elements of any successful workforce plan should be the increased use of a contingent workforce.

Unfortunately, most HR departments manage their temporary and contingent workforce almost as an afterthought. Instead, the status of this important element of the workforce strategy must be elevated in the process and redesigned to maximize its strategic impact.

The time to act is now rather than waiting for the CFO to come knocking on your door with predetermined head count management solutions that cause as many problems as they solve.

Dr. John Sullivan, professor, author, corporate speaker, and advisor, is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high-business-impact talent management solutions.

He’s a prolific author with over 900 articles and 10 books covering all areas of talent management. He has written over a dozen white papers, conducted over 50 webinars, dozens of workshops, and he has been featured in over 35 videos. He is an engaging corporate speaker who has excited audiences at over 300 corporations/ organizations in 30 countries on all six continents. His ideas have appeared in every major business source including the Wall Street Journal, Fortune, BusinessWeek, Fast Company, CFO, Inc., NY Times, SmartMoney, USA Today, HBR, and the Financial Times. In addition, he writes for the WSJ Experts column. He has been interviewed on CNN and the CBS and ABC nightly news, NPR, as well many local TV and radio outlets. Fast Company called him the "Michael Jordan of Hiring," Staffing.org called him “the father of HR metrics,” and SHRM called him “One of the industry's most respected strategists." He was selected among HR’s “Top 10 Leading Thinkers” and he was ranked No. 8 among the top 25 online influencers in talent management. He served as the Chief Talent Officer of Agilent Technologies, the HP spinoff with 43,000 employees, and he was the CEO of the Business Development Center, a minority business consulting firm in Bakersfield, California. He is currently a Professor of Management at San Francisco State (1982 – present). His articles can be found all over the Internet and on his popular website www.drjohnsullivan.com and on staging.ere.net. He lives in Pacifica, California.

 

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3 Comments on “Using a Contingent Workforce Strategy to Avoid Layoffs

  1. First of all, it’s about time we had an article on contracting.

    However, there are a couple of points I find myself questioning.

    One of the very purposes for using contract resources is flexibility, and if managers are trying to shoot for certain ratios of contract-to-direct, this almost always slows down the hiring process, and speeding up the hiring process is one of the reasons some companies hire contract talent in the first place.

    The other area that has made contract recruiting very frustrating the last few years is that many clients have a hopelessly ‘direct mentality’.

    Those of you who do retained and contingency direct recruiting here have it right – passive candidates with PERFECT backgrounds are just about the only workers that many companies feel justified paying a fee for.

    Very often clients insist that contract employees have exactly the same level of background as direct employees because they don’t want to take the ‘risk’ of starting a contractor who would be ineligible to go direct later.

    Well, guess what – a candidate with such a ‘perfect’ background is probably going to be one of the 80 – 120 calls that the direct recruiters on THIS board are making today and they are going to find that candidate a job with a benefits package that would make your jaw drop.

    No, if the ‘contingent’ workforce is going to be a significant factor in many areas, employers are going to have to completely change their mindset from ‘Who is the ‘perfect’ candidate to fill this role?’ to ‘Who can I STAND to fill this role for the next six months to a year and can get the work done?’

  2. For the most part, Dr. Sullivan, I agree with you but your article seems a little one-sided. True in volatile times and downturns the need for a contingency workforce is accentuated. I also agree, being a victim of several myself, that layoffs are ugly. But there is a positive side to layoffs:

    ? The press highlights the cost savings.
    ? The savings is reflected in the increased stock valuation.
    ? Overtime can be cheaper then a fulltime worker for a short period of time.
    ? Short term ROI is almost always positive.
    ? Wall Street has a way of pressuring management to get this ROI and increased stock valuation.

    When it comes to a contingent workforce (CW) I agree with most of what you stated but again it felt one-sided. Here are some of the issues I?d like to point out:

    ? A CW is not superior when it comes to company loyalty. Being a FT employee of a company usually gives that worker a sense of pride. The CW knows they?re there for a short time and is usually motivate by money. Hopefully the challenges of the job motivate both types of worker.
    ? When there are layoffs it is easier to find both types of worker. If there are a lot of layoffs, you can find both types of worker at a cheaper salary too. In this situation the company would probably hire the FT employee at a cheaper salary, make them work overtime but since they are on salary they wouldn?t have to pay it, and not have to worry about the FT employee leaving because everyone is laying off. I?m not saying this is ethical or even pretty, but we all know this happens.
    ? Lower costs? I don?t know a single CW who gets paid less than a FT employee. The whole point of being a CW is to charge a high enough rate to cover your insurance and retirement costs while still making more than the FT employee. Company?s bring on a CW as hired guns to get them over a hurdle and then get rid of them. That?s why we charge so much.
    ? Pension? Who still gets a pension? These days it?s all 401k unless you?re a teacher or government employee?oh wait, you?re a teacher. Enough said.
    ? Redeployment works only if the jobs pay the same. No CW is going to take a rate cut to do an easier job and if the job is harder then the rate goes up.
    ? You don?t talk about volatile times and upturns. For a CW this is the best of times. Companies can?t find workers so they have to hire a CW and the rates go up fast. Do you remember the 90s? I switched over from FT employee to contractor in ?96 and my salary doubled. From then on my rate increased a minimum of 20% until 2000. Sure FT employees were getting bigger raises than usual but not 20%, that?s why they jumped ship.

    All in all I agree with what you said but I like to have both sides of the coin presented.

    Cheers,
    Art Maurice

  3. John Kennedy wrote in a previous response that ‘if’ the contingent workforce were to become a significant factor that employers would need to completely change their mindset regarding the ‘perfect candidate.’

    Ten years ago I would have agreed, but the statistics on this issue tell us that employers have been changing their perspective for the last decade already. The percent of the workforce that is contingent in the average organization has grown nearly three fold in just 10 years. In 1998 roughly 4.0% of all jobs were contingent in nature. Fast forward to 2008 and that percentage now stands at 11.2%. Keep in mind these are averages across all industries and do not include outsource labor which is also a form of contingent labor.

    In many industries if we add contingent labor to outsource labor, the percentage of work being completed by non wage and salary workers is hovering between 40% and 60%.

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