The Organizational Utility of Contingent Work: A Cost/Value Analysis The Organizational Utility of Contingent Work: A Cost/Value Analysis Sandra L. Fisher, Clarkson University Catherine E. Connelly, McMaster University FlexWorkResearch Conference October 2011

Study Background Use of contingent labor increasing worldwide Why? ◦ Increased flexibility ◦ Reduced managerial responsibility ◦ Extended screening process (temp-to-hire) ◦ Decreased costs Comparisons with “permanent” workers 2

What do we know about the cost of contingent workers? Claims about decreased costs rarely examined empirically, and then at firm level ◦ Improve gross profit margins (Nayar & Willinger, 2001) ◦ Greater return on equity and market-to-book value (Lepak, et al, 2003) ◦ Overtime may be more effective than use of temporary workers (Easton & Goodale, 2005) Focus is typically on direct costs ◦ Labor rates (DiNatale, 2001) ◦ Benefits 3

Nollen and Axel (1996) Model Early model of individual level costs and benefits of contingent work – focused on value, not just lower direct costs Acknowledged “downside risk” (p. 71) where costs may outweigh the benefits Analysis built around unit labor cost, including wage/benefit rates per hour, training costs, hours worked, output per hour Basic formula: Unit labor cost = (W x L) / Q W = wage and benefit rate per hour L = hours worked Q = quantity of output produced per hour 4

Nollen and Axel findings Cost effectiveness varied based on the type/length of assignment  Scenario A: Hourly part-time workers, variable schedules, high training costs, relatively short tenure  Organization did not recoup costs  Scenario B: Temporary workers, low wages, minimal training  Organization profited  What other parameters do we need to consider? 5

Our Research Questions How does the use of contingent labor translate into firm-level financial benefits? How do indirect costs affect the cost/value relationship? ◦ Productivity losses ◦ Transaction costs Will the cost/value relationship vary across different types of contingent workers? 6

Three Types of Contingent Workers Temporary agency workers ◦ Legally employed by an agency but perform their tasks at a client organization ◦ Agency is paid a percentage of the workers’ wages Independent contractors (ICs) ◦ Self-employed worker completes tasks for several different clients (sometimes simultaneously) ◦ Significant autonomy and control over own work Dependent contractors (DCs) ◦ Self-employed worker completes tasks for a single client (sometimes a former employer) (Connelly & Gallagher, 2006) ◦ Less autonomy and control over own work 7

Contingent Worker Costs 8

Direct Costs of Contingent Workers Wages ◦ Independent contractors are paid more than permanent workers (Kunda, Barley & Evans, 2002) ◦ Temps are paid less, often quite a bit less (DiNatale, 2001) Benefits ◦ Contingent workers (all types) rarely receive benefits ◦ High pay for ICs often considered as a trade-off for providing own benefits 9

Direct Costs, continued Transaction costs ◦ Range from 25-30% of temp workers’ direct wage (Nollen & Axel, 1996) ◦ Lower for ICs, lowest for DCs ◦ Integration costs (Feldman, 2006), low for DCs ◦ Turnover costs can be viewed as transaction costs for permanent workers Training ◦ Typically minimal for all types; very low for contractors ◦ More for familiarity than skill building Direct costs appear highest for permanent workers, followed by ICs 10

Indirect Costs: Task Performance Some evidence of lower task performance ◦ Temps 7-30% less productive than permanent workers (Nollen & Axel, 1996) ◦ Contingent workers 42% less productive in a call center (Lautsch, 2002) ◦ Little information about performance levels for contractors Some reports of relatively equal task performance, depending on situation ◦ Temp-to-hire ◦ Treating contingent workers as equals 11

Indirect Costs: Permanent Workers The presence of contingent workers can cause reductions in task performance of permanent workers ◦ Negative attitudes toward the organization (Davis-Blake, et al., 2003; Broschak & Davis-Blake, 2006) ◦ More withdrawal behaviors (Way, et al., 2010) ◦ These types of outcomes often depend on the type of contingent worker and the reason for using them  perceived threat Permanent workers often required to help train new contingent workers, taking them away from their regular jobs Consider: there are usually many more permanent employees than contingent workers (so these effects might be more significant) 12

Indirect Costs: OCBs Contingent workers typically exhibit fewer organizational citizenship behaviors (VanDyne & Ang, 1998; Liden et al., 2003) Dollar value of OCBs is unclear ◦ Related to enhanced work group performance ◦ Approximately 20-40% of variance in performance criteria (Podsakoff, et al, 2000) Contingent workers can exhibit OCBs under the right conditions (e.g., fair treatment, high POS; Connelly et al., 2011) DCs likely to display OCBs; ICs less likely 13

Summary Direct and up-front costs for contingent workers are generally lower, however… We believe there are costs to using contingent workers that are not currently considered in the typical cost/benefit analysis ◦ Differences in task performance ◦ OCBs ◦ Permanent worker performance Key question: How do the reduced costs compare to the reduced productivity? 14

Future Research Directions Need empirical tests of these ideas ◦ What are the tradeoffs? ◦ Can organizations create the right conditions to maximize contingent worker performance without increasing direct costs or putting themselves at legal risk? ◦ Starting with a utility analysis approach What is the dollar value of OCBs? ◦ Literature agrees that there is value here, but how much? ◦ Some estimation done by Orr, Sackett & Mercer (1989) 15