A quick read of any newspaper reveals that the economy is down and many corporations are entering a cost-cutting cycle. It only makes sense that when a business is facing a downturn that all major cost centers contribute to containment efforts. While no one likes cost cutting, it’s important to realize that people costs are likely to be a major focus.
In many industries, up to 60 percent of all variable costs are related to employee costs such as salaries, benefits and training. Unfortunately, HR has a bad habit of waiting until it is told to react and, as a result, is often forced to use the last-
resort tool of layoffs to adjust labor cost. Avoiding large-scale layoffs should be a key priority, because even when done correctly, layoffs can have legal implications as well as a dramatic impact on recruiting, morale, retention and overall workforce productivity. Fortunately, there is a workforce strategy that can significantly reduce people costs without much of the associated pain. That strategy is to develop a contingent workforce.
Having a contingent staffing strategy helps HR avoid traditional (and flawed) approaches such as the freezing of hiring, promotions, pay or budgets. Each of those measures can have tremendous negative impacts on top performers. Nothing frustrates top performers and innovators more than freezing projects that excite them and that allow them to remain on the leading edge. In the same light, the common practice of freezing raises or promotions reduces their motivation. Such efforts cause retention problems among top performers because they can look outside the firm to organizations that would fully fund and reward their work even in the toughest of times.
Contrast those painful choices with a contingent labor strategy, in which a portion of the workforce is easy to scale back (or ramp up). This allows organizations to shift resources rapidly from low-return to high-return areas. The concept is relatively simple. Instead of hiring everyone as permanent, HR develops an approach that designates a percentage of all positions to be contingent. When labor costs must be reduced, this more flexible percentage of the workforce can easily be manipulated.
Because contingent workers are designated in advance as contract workers, part-timers or temps, their numbers can be reduced more easily by just not extending their contracts. While many firms currently use some form of contingent labor, few have developed a strategy to help ensure that such deployments maximize the organization’s return. Recent studies indicate that contingent labor utilization is so ad hoc that more than 70 percent of firms cannot accurately account for total spending on contingent labor despite the fact that it represents nearly 18 percent of the total workforce on average.
There are many advantages related to hiring contingent workers. The first is that managers are more willing to release them. Contingent workers are more available during tough times, and because they don’t require pensions and sophisticated benefits, they’re cheaper. Hiring workers on a contingent basis also allows you to assess them as they work and to convert only the best to staff positions. Knowing that others are designated as contingent can also help ease the security fears of the remainder of the workforce. Leveraging a contingent workforce can also help you maintain a strong employment brand. Releasing them doesn’t garner as much press coverage as large-scale layoffs.
The key element of a contingent workforce strategy is to mandate that a certain percentage of jobs must be contingent hires. The figure can be as low as 5 percent in growth times to a high of 25 percent in turbulent times. The high is based on the maximum conceivable percentage of the workforce that could become surplus in a worst-case situation. Another key step is to determine in advance which jobs will almost certainly be reduced during downturns. They might include call center positions, some sales positions, order fulfillment jobs and customer service positions. These "likely to be reduced" positions should be designated for a larger percentage of contingent hires. Other possible steps include increasing the use of vendors and outsourcers with contracts that allow you to quickly reduce their service levels. In highly volatile environments, managers should be rewarded for leveraging alternative labor types when the nature of the work is short term or directly related to sales volume.
In tight times, HR must increase its workforce planning efforts. A contingent workforce strategy, if used correctly, can reduce labor costs and increase your firm’s flexibility. Now’s the time to start.
Workforce Management, July 14, 2008, p. 58 -- Subscribe Now!