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.
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 whn 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.
By Dr. John Sullivan
