Contingent Work Force Spurs HR Planning

July 1, 1994
Mention the word temp to people, and the image that usually springs to mind is an eager, ever-smiling clerical worker. You know the type: the one who, looking for a little extra income, would step in at a moment's notice to help with typing, filing and answering phones.

Yesterday's temporary worker was called on to provide vacation relief, to fill the shoes of someone on maternity leave or to take the weight off a department's workload. She—for the overwhelming majority of temps were and are women—required little training or advance notice. The promise of benefits and a regular position rarely influenced her decision to accept an assignment.

Enter the 1990s, where you're as likely to find a just-in-time employee on the factory floor, in the lab, behind a computer and in the executive suite as you are at the company switchboard. Today's contingent workers wear suits, hard hats and plastic pocket liners. They carry briefcases, juggle family responsibilities and worry about career advancement. Sure, the temporary work force is still weighted on the clerical end of the spectrum, but today's rank of contingent workers is beginning to swell.

Today, they represent just under 20% of the work force, estimates Jeffrey Schmidt, principal with Towers Perrin in Chicago. Contingents comprise temporary hires, independent contractors, leased employees and part-timers. And if the current growth rate continues, Schmidt predicts that up to a third of all individuals will be employed on an as-needed basis within 10 years, creating an HR headache the likes of which few companies have seen.

Although there's no consensus on the merits or liabilities of contingent workers, the reasons for hiring them are the same as those driving every other major workplace initiative: downsizing, increased global competition, technology and the need to respond quickly to an ever-changing marketplace. Instead of staffing up in good times and laying off during down times, many employers are finding it makes more sense to operate with a core group of regular employees whose skills are critical to the business, and then expand and contract the work force as needed. Also, it's relatively easy to find qualified and eager workers, regardless of the position. But, once the job market tightens up, companies that have relied too heavily on contingent workers in critical-skills positions may find themselves at a competitive disadvantage. "My question is," Schmidt says, "are we buying a short-term gain at the risk of long-term security?"

In order to minimize the risks, HR professionals will have to learn how to staff and manage the contingency work force to the benefit of the company and all its various employees. Human resources personnel also will have to learn to evaluate a company's staffing needs and determine, in advance, which employees should form the core work force and what positions can be more fluid. Whether your company benefits from the advantages of a flexible work force, or suffers from its inherent problems, will depend largely on the way contingent workers are managed.

At the Aerospace West division of McDonnell Douglas in Huntington Beach, California, for example, a cross-functional team led by the HR department has developed a strategy for increasing the use of contingent workers. In fact, by 1996, the company plans to have 10% of its work force operating on an as-needed basis.

McDonnell Douglas has always used contract labor to some extent—right now, about 4.3% of employees are considered complementary—but this marks the first time the company has adopted a formal complementary-work-force policy.

"My question is are we buying a short-term gain at the risk of long-term security?"
Jeffrey Schmidt,
Towers Perrin

According to Chuck Straub, director of human resources, using contingent or complementary workers—as the company prefers to call them—will help minimize the impact of industry ups and downs on regular employees. Like other companies in the defense industry, McDonnell Douglas has had to suffer through more demoralizing downsizings than it cares to remember. In the last two years alone, the company lost 33,000 employees, 4,000 of them in the aerospace division. "We see complementary workers as a way to stabilize the work force," Straub says. Instead of hiring more regular workers when work piles up, only to fire them when contracts are completed, the company will rely more on long-term temps and independent contractors. About 85% of the employees will work primarily in technical disciplines, with 15% of complementary workers also slated for clerical jobs, he says.

But in addition to stabilizing the work force, just-in-time employees have the potential to save employers such as McDonnell Douglas a great deal of money by allowing them to pay for labor only when they need it. The cost of benefits including health care, pension, life insurance, workers' compensation and unemployment insurance now accounts for 30% to 40% of payroll expenses. Reducing employees to part time or hiring subcontracted labor eliminates some of these costs, especially if it's not company policy for such employees to receive benefits.

Hiring just-in-time employees from an agency gets rid of these costs altogether because the agency becomes the employer of record. Although companies may pay more per hour, they save on training expenses because many agencies provide worker training at no cost, as well as the severance packages often associated with downsizing.

Aligned Fiber Composites (AFC) in Chatfield, Minnesota, has discovered that contingent workers also can help lower the costs of recruitment and testing. "We use temporaries as a way to prescreen employees for permanent positions on our manufacturing line," explains Cheryl Nelson, HR manager. "We bring temporaries on for 90 days, and if they work out and we can use them in permanent positions, we roll them on to our payroll." Every new person hired by AFC over the last couple of years was recruited for a temporary position by a local office of Express Personnel, which also tests job candidates on their reading and math abilities. "Our plant is involved in continuous improvement and statistical process control, so our employees need to have a certain level of math skills," Nelson says. "We don't have satisfactory means of testing employees in-house, so we turned to Express. I avoid some major headaches by allowing them to screen and select the candidates for us."

Today at AFC, 34 out of 200 employees are temporary workers who have been brought on to help the business get through a busy period. Not all temps are offered regular positions, but all employees hired within the last year for regular positions have gone through the temporary-employment process.

The ability to expand and contract the work force like folds on an accordion also allows companies to innovate and experiment without a lot of the costs normally associated with innovation. "In this economy, we want to promote risk taking, and contingent workers allow companies to do this cost effectively," explains Audrey Freedman, an HR consultant in New York City and the first person to coin the term contingent work force. "Productivity is measured in terms of output per hour paid for," she explains. "If employees are paid only when they're working, as contingent workers are, overall productivity increases. Furthermore, contingent workers are usually not involved in office politics, which can be a great productivity robber."

Freedman's contention that contingent workers are more productive is supported by Bureau of Labor Statistics studies, which claim temporary employees produce the equivalent of two more hours of work per day than their permanent counterparts. The gap is narrowing, however, as all employees—regardless of their status—realize that consistent productivity is essential to keeping their jobs. "Even permanent workers realize their jobs aren't permanent," says Bob Funk, president and founder of Express Personnel Services in Oklahoma City. "Everyone has to be more productive in this economy."

Not everyone agrees that supplementary workers are the be-all and end-all answer to corporate America's cost and productivity problems. Jerome Rosow, president and founder of the Work in America Institute in Scarsdale, New York, for example, believes contingent workers are an unstable and unsatisfactory way to manage a business.

"Employees are not a commodity," he says. "People have an emotional and psychological reference point to their place of employment. Once you put them in the contingent category, you're saying they're expendable and not a vital part of the business. Over time, there will be diminishing returns because you lose company loyalty. Contingent workers are good from an emergency staffing standpoint, but they shouldn't form the basis of a company's long-term strategy."

Hiring contingent workers can have a down side.
Another reason contingent workers can present such difficulty is that many human resources departments manage them as they did two decades ago. That is, a panicky department manager calls human resources, requests x number of bodies to help with a work emergency, human resources finds those bodies and then goes away until another crisis hits. By many accounts, there's little, if any, strategic staffing going on.

But managers who do decide to create a contingent staffing strategy can usually work through any challenges, says Phil Reed, account leader with IBM's Workforce Solutions Southern Resources Operations in Atlanta. "The difficulty comes in when they're behind the curve and have to react."

Reed suggests that in developing a strategy, human resources professionals first look at the overall objectives of the company's business plan, both on a short- and long-term basis. Is it to save money? Increase profitability? Expand operations geographically? The kinds of contingent workers you hire will depend on your industry and the answers to these questions, he says. A manufacturing company looking to expand overseas, for example, will have different staffing needs from those of a retail outlet trying to get through a busy selling season.

The next thing to consider is the skills workers currently have compared to the skills your company will need in the future. Typically, Reed says, regular workers are those who have skills critical to your particular industry—skills that will be needed over the long run. Lower-skilled administrative or manufacturing employees are more easily brought in on a temporary basis.

Third, take a look at the cost of compensation per position, including salary and benefits. "Many companies think temporary workers save them money, because they're not paying for such things as social security and workers' compensation," Reed says. "But these costs accrue to you through the agency's markup."

Finally, take a look at the nature of the work that needs to be done, the volume of the workload, the timing required to complete a typical project and the cyclical nature of the business. If you can determine when and how the workload will expand, you can plan ahead for temporary staffing increases.

The process Reed suggests is similar to the one followed by McDonnell Douglas when the company developed its contingent-staffing policy. In doing so, the human resources staff worked closely with department managers across the company to get a bird's-eye view of the expected workload and the skills needed.

"We took our existing job classifications and job codes, provided those listings to management and asked them to do a manpower forecast for us," Straub says. "Managers were asked to forecast their needs on a quarterly basis and then tell us, of those jobs, which ones they felt could be filled with complementary workers and which could not."

How did the company determine which jobs could be done on a complementary basis? "There are certain key or critical skills in an industry like ours that are difficult to come by, and those professionals are generally not available as complementary employees," he explains. "They know full well that their skills are critical and that they can demand certain rates of pay and benefits."

One of the challenges in developing a complementary work force, Straub adds, is finding enough qualified individuals to fill all the available positions, and then retaining them long enough to maximize the benefits they can provide. In recruiting complementary workers, McDonnell Douglas uses a variety of outside staffing firms, including its wholly owned subsidiary, McDonnell Douglas Technical Services Co. (MDTS), which was created in 1989. Then, to retain the best possible complementary employees, the company provides incentives in the form of long-term assignments—three-year temporary jobs are not uncommon—as well as first dibs on regular positions, should they become available.

"Managers who decide to create a contingent-staffing strategy can usually work through challenges. The difficulty comes in when they're behind the curve."

"Contingency workers fail when they're hired as a last-ditch effort rather than being used as a planned, integrated resource," explains Ron English, president of MDTS. Today, the company supplies temporary workers in technical disciplines to several employers, with McDonnell Douglas being its largest client.

"All too frequently, a manager will discover he or she is behind three months in production, panic and call HR for some bodies to throw at the problem," English says. "This isn't only detrimental to core employees, but the complementary workers hired to help are destined to fail. When this happens, human resources wants to blame the failure on engineering or manufacturing, when in reality, if everyone worked together to anticipate the upcoming workload, they could have avoided problems altogether."

Disparity between workers can create tensions.
Without a planned strategy for using contingent workers, such as that created by McDonnell Douglas, the potential exists for the development of a two-tier labor force, in which regular workers receive all the best assignments and contingents get the grunt work. A 1992 Massachusetts Institute of Technology (MIT) study of contract workers in the petrochemical industry showed that just-in-time workers experience more accidents because "they are more likely to engage in higher-risk work and because they receive less safety training."

This disparity inevitably creates tension in the workplace between regular and contingent workers. In the same MIT study, nearly one-third of direct-hire workers perceived contract workers as a threat to their jobs, and more than 25% of both groups reported tension or conflict between regular and contract workers at their plants.

"In these uncertain times, there's growing resentment between core and contingent workers," agrees Richard Belous, chief economist with the National Planning Association in Washington, D.C., the organization that in 1989 came out with the first large-scale study of contingent workers in the United States. Contingent workers are upset, he says, because they don't receive the same benefits as regular employees. Conversely, core workers think contingents may take their jobs away—and their concern is not without merit. According to the National Association of Temporary Services in Washington, D.C., 76% of temporary workers view their assignments as a way to get a full-time job, and 38% of them actually do find permanent work this way.

There are several ways companies can mitigate the tension between these two groups of employees. First, "You need to communicate to your core work force that what's being done is in their best interest...that operating with a smaller group of regular employees and a larger group of contingents will keep the jobs of regular employees more secure in the long run," Belous says. "Contingent workers should be part of a batten-down-the-hatches kind of strategy."

Straub agrees. "You must have effective communication with permanent employees so they understand their jobs will not be replaced by temporary workers. The key to doing that is that you have to have bottomed-out in your downsizing efforts before you start bringing in complementary workers. That way, it doesn't appear as if you're replacing existing employees with contract labor."

Next, to alleviate the view of some temps and independent contractors as being second-class citizens, companies should treat them the same way as they do regular employees. At Metropolitan Water District of Southern California, contingent workers have been brought in on long-term assignments to help with two major capital-expansion projects. They work as engineers, project managers, draftspeople and in other engineering-related positions.

According to Sheri Shaffer, administrative analyst, the company keeps productivity up and friction to a minimum by giving temps schedules and work that's similar to those of regular employees. "Additionally, we request that the staffing agencies we use give temps a minimum level of benefits that includes vacation, paid holidays and some medical benefits."

Another way to keep productivity high among contingent workers is to hire only those who truly want to work on an as-needed basis. Workers who take temporary assignments hoping for full-time jobs may perform well in the beginning, Belous says, but as the "temporariness" of a position stretches on, the quality of their work may decline. Hiring employees who only want to be temps also helps cut absenteeism, which can be high with contingent workers in the middle of a job search.

The temporary-services industry responds to the flexible workplace.
As corporate America grapples with the shift to a place where jobs and the people who do them come and go, the temporary-services industry is shoring up to help companies adapt to the change. In fact, some companies are beginning to allow temporary services to manage all of the temporary workers on a given site. "We have to make sure they're well matched to the permanent work force," says Mitchell Fromstein, CEO of Manpower Inc. But "human resources people have to feel comfortable in terms of giving temporary-service representatives the responsibility to run the process inside."

Also, in terms of training, employers may say they need contingents with greater skill levels, but they're still reluctant to invest in training them. "If someone is here today and gone tomorrow, you don't want to give him or her a lot of training," Belous says. Fortunately for employers, the fierce competition among employment agencies has caused many of them to cover the costs of training employees for their clients.

A recent article in Fortune magazine detailed the training provided by Norrell Services in Memphis, Tennessee, for example. As home of Federal Express and a national distribution center for many manufacturers, there's great demand in Memphis for workers who can process orders and pack them accurately. Norrell responded by adding a 4,000-square-foot training center to its regional office, complete with warehouse equipment similar to that used by several of its clients. It was here that the organization trained temporary workers bound for Nike to pack 267 pairs of sneakers an hour. The regular workers at Nike pack just 210 pairs an hour.

Another way temporary-personnel firms are responding to the needs of a contingency-bound work force is by helping clients evaluate their contingent staffing needs and then coordinating that staffing for them. Sentry Group, a personal-safe manufacturer in Rochester, New York, for example, has established a partnership with Kelly Services in which Kelly works with other agencies including Olsten, ADIA and Manpower Inc. to supply all of Sentry's temporary workers. "We used to work directly with all the agencies," says Roger Murphy, plant manager. "But that became too time consuming as our use of temporaries increased. Now, instead of making several calls to fill open positions, we make just one call to Kelly."

"A lot of our customers are looking not just for replacement personnel, but for creative solutions to their staffing needs," explains Eugene Hartwig, senior vice president of Troy, Michigan-based Kelly Services. "We're working directly with HR professionals to help them evaluate staffing, screen potential employees and coordinate the placement of those individuals with other agencies."

Although temporary agencies are eager, and for the most part qualified, to help with all facets of contingent staffing, some companies may decide to take on this responsibility themselves through the creation of an in-house temp pool. For example, AT&T Universal Card Services in Jacksonville, Florida, a winner of the Malcolm Baldrige National Quality Award, felt it couldn't continue to deliver world-class customer service using outside temporary employees. To survive the inevitable business swings, the company created an in-house pool of employees who are interested in working in other departments when the need arises.

A person in customer service, for instance, may have expressed a desire to learn about accounting. During a slow period for both departments, that person may be loaned to the accounting function. Later, when the accounting department needs extra help, the customer service representative can be called on to lend an appropriate hand, providing that department also isn't facing a heavier work load. A special data base tracks each employee's internal assignments and records the individual's progression up the skills ladder.

HR must guide the transition to managing contingent workers.
When the National Planning Association conducted its first study of the contingent work force in the late 1980s, few companies had a handle on their use of contingent workers. At the time, most HR people hadn't a clue how many contingent workers the company used, what positions they filled and whether they were saving the organization money.

But as contingent workers become a larger and more vital part of the work force, "leading corporations are learning how to manage them better," says Belous, who is now in the middle of updating the NPA study. "Still, we have a long way to go."

There's a certain stigma attached to the use of contingent workers, he says, and few organizations that "purchase" contingent work want to talk publicly about it or acknowledge that this is the direction our work force is heading: "Many corporations still view the strategy as if they were providing something less than a real job—a McJob, as it were."

What this means is that we're in an awkward, inbetween stage. Most people—employees and employers alike—are choosing to ignore the fact that the way we work and the way organizations are structured are changing drastically. But to manage contingent workers effectively, we have to acknowledge the realities of today's workplace and find a balance between what we're used to and where we're heading. The paradigm shift between life-time employment and just-in-time employment is difficult to understand, but HR professionals who acknowledge the transition will be better able to manage it.

Personnel Journal, July 1994, Vol.73, No. 7, pp. 52-60.