Magazine article Personnel Journal

Calculating the Cost of Contingent Workers

Magazine article Personnel Journal

Calculating the Cost of Contingent Workers

Article excerpt

Managers in the United States are great at jumping on bandwagons without stopping to evaluate whether the direction the wagon is traveling is the right one for their particular company. Ask your HR colleagues about highly publicized management initiatives--diversity training, total quality management and reengineering, for example--and chances are they're involved in such efforts or are thinking about becoming involved in them.

The reason business people tend to follow each other's lead is because, when done right, strategic initiatives do save money and create more efficient organizations. The press reports on successful programs, people take note, and in an effort to improve their own organizations, they follow suit.

And so it goes with contingent staffing. You read surveys indicating that 44% of CEOs say that they rely more on contingent workers now than they did five years ago, and you don't want to be left out. You hear how companies such as McDonnell Douglas and Georgia-Pacific use contingent workers as an integral part of their staffing strategies and assume that what's cost effective for them might also be profitable for your company.

But is the use of contingent workers as cost effective as everyone claims it to be? How much money do temporary workers really save a company? And how do companies that rely on contingent staffers substantiate their savings?

In seeking to answer these questions, PERSONNEL JOURNAL searched for national studies comparing the costs and returns of contingent workers with the costs and returns of permanent employees. We found none. There's no way to calculate an average cost benefit for contingent workers, we discovered, because of great differences in the type of work they do, the length of their assignments, the nature of the employing companies and so on. The cost effectiveness of contingents, therefore, not only varies from company to company, it's likely to vary from department to department.

Unfortunately, we also couldn't find a single company that was able to document the savings provided by their contingent work force. Instead, most managers who rely on complementary workers told us something like, "It's apparent intuitively that temporary employees who are brought in to handle unpredictable bulges in work are cheaper than maintaining permanent employees on standby," as did David A. Riggs, first vice president and director of purchasing for Mellon Bank located in Pittsburgh.

He's probably right, but HR professionals today must account for their actions and demonstrate the bottom-line benefits of HR strategies. How do you prove contingent staffers are saving your company money?

Calculating the cost effectiveness of contingents. "You must evaluate the 'true productivity' of contingent workers," says Myrna Hellerman, senior consultant with Chicago-based Sibson & Co. This is the output of goods and services produced per hour by contingents, divided by the input, which is the cost of employment per hours worked. Cost effectiveness depends not only on wages and benefits, you see, but also on productivity. High-wage labor might be cost effective if it's also high output, whereas low-wage labor may not be if the output also is low.

Although the equation seems pretty straightforward, in the real world there are additional factors. such as training costs and the length of time on a job, that must be considered to calculate the true productivity of contingents. Stanley Nollen, professor of management at Georgetown University and author of the study Exploring the Myth: Is Contingent Labor Cost Effective? published in 1993 by New Ways to Work, suggests HR professionals looking to calculate the return of contingent workers do the following:

1) Compare the agency's charge or the wages paid to contingent workers with the wages and benefits paid to regular employees doing the same kind of work.

2) Compare productivity between the two groups. …

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