Organizations are under unrelenting pressure to reduce costs. Research from consulting firm Aberdeen found that roughly three in four companies (74%) face calls to reduce operating costs.
Because labor is often the biggest single cost category, reductions in workforce are often a key target. The report found that, among companies trying to reduce operating costs, 47% are focused on reducing labor costs. However, they might not be looking at the whole picture.
Aberdeen’s report found that 85% of companies allocate talent resources at the department level depending on forecasted product or service demand, creating siloes and inefficiencies that are difficult to identify from a top-level view. Under pressure to reduce costs and be more productive, individual cost centers often turn to contract and contingent labor.
In a separate survey, Aberdeen found that this “workaround” has led 51% of companies to expand their use of contract and contingent workers hired on an as-needed basis. Contracted labor is typically hired “out of house” per project for a term of 1 year or less with an option to renew. Contingent labor is hired “in-house” for a term of 1 to 3 year to fill a defined role on demand.
Because workers are tied to specific, time-delineated projects or objectives, managers can shift the cost reporting to a capital spend and reduce the financial liability associated with a permanent hire, which usually requires a long-term business planning need (more than two years). This seems like a clever solution to meet labor needs, especially in a tight labor market where talent is at a premium, but there is more to the story.
The combination of permanent and contingent/contract workers allows companies to meet short-term labor needs, but performance management, financial analysis, and workforce optimization ultimately suffer. There is no clear view of exactly how much companies are spending or how performance is improved.
Aberdeen’s “Best-in-Class” respondents—those which are in the top 20% of respondents based on company performance—were 41% less likely to consider any expansion in contingent hiring over the next 12 months. Fourteen percent plan to expand full-time hiring and 23% intend to build a means for contingent and contracted hires to become full-time employees.
In fact, best-in-class companies are more likely to crave data integration and transparency to help them optimize their workforce performance and spend. In particular, top-performing companies are seeking:
As best-in-class companies analyze this data, some are realizing that short term hires are more expensive than adding permanent employees due to the lack of continued training and career mentorship. Such considerations influence the understanding of the true cost of labor, leading to the potential expansion of employee rosters instead.
Contract and contingent hiring have seen enormous expansion since the 2008 financial crisis, often as a result of cost-cutting pressures. But the reality is that such labor may be penny-wise and pound-foolish. Top-performing companies are, instead, slowing their hiring of short-term workers and taking a holistic view of their labor needs. Increasingly, managers, executives and HR teams are realizing that measured and strategic workforce expansion, coupled with thoughtful talent deployment, may be much better for long-term organizational health and growth than short-term solutions driven by cost classification.
For more on the results of the Aberdeen research, read the paper, “Bridging ERP and HCM to Answer the Labor Cost Question.”