How to Use Contractors as Insurance for Staffing Risk Management

Have you ever sat next to a contractor who you knew was making a better hourly rate than you for doing the same job? They have no long term commitment to the company, often less experience than you, and still you know they are being paid a premium for being there. It makes you wonder what the financial genius who hired them was thinking when they approved that plan doesn't it?

Have you ever been through a layoff process where you watched a few, dozens or even 100s of employees suddenly let go? Perhaps you've even been one of the people let go. It can leave you wondering how a company could be so cruel or plan so poorly as to let this happen.

Well as different as they are, these two situations are not at all unrelated. In fact the former is part of the solution to the latter.

A typical company organization chart starts at the top with the president or CEO, and then spreads out like a pyramid below that. Similarly, the overall cost of salaries is bigger at the bottom of the pyramid then it is at the top. (Yes your manager probably makes more than you but in the big picture your team, or level in the organizational pyramid, collects more total payroll than the layer above you. If you are on a five person team I can almost guarantee that the 5 of you together make more than your manager.) So the layer at the bottom of the pyramid cost the company more than the layer at the top.

As you move from top to bottom in the organizational pyramid you notice something else as well. The people at the top of the pyramid spend their time planning strategy and direction, while the people closer to the bottom of the pyramid spend their time actually doing things for the customers.

So what does this have to do with layoffs and contractors?

One of the harsh realities of business is that no matter how much you plan you don't really know how much work you are going to have until it actually gets ordered. A company can do all the planning in the world but still not foresee all the market changes and actions of your competitors. All business includes risk.

All smart businesses have risk management plans. If and when business slows down eventually your costs exceed the amount of money coming in and action needs to be taken. That action, unfortunately, generally means that not everyone can continue to be paid. This possibility should be considered and planned for.

So let's look at the facts. If business slows down unexpectedly the company will not bring in enough money to continue to pay everyone. The people who won’t have enough to do will be the people who actually do stuff for the customers. The biggest cost to the company is also the people who actually do stuff for the customers. These people are located in the bottom half of our organizational pyramid.

When we look at it this way there are some obvious realities. The company will need to cut the cost of labor and react to the new situation or the entire company will be out of a job soon. The biggest opportunity for saving cash is in reducing the number of people near the bottom of the pyramid. The people at the bottom of the pyramid are also the people who suddenly won’t have much to do. The people at the top of the pyramid will be busier than ever trying to figure out how to correct the situation and turn the business around.

So what do you do? You get rid of some of the people at the bottom of the pyramid. There is not much choice about this.

Now here's what contractors and layoffs have in common. Smart businesses with risk management plans may not know when business will slow down, but they can plan ahead for how they will react if and when that happens. If a business knows there is a real risk that orders could slow down by as much as 30% under certain conditions, then that business has two choices. Hire everyone they need and be prepared to lay people off if trouble hits, or hire 70% of the front line staff they need and fill the other 30% with contractors who are basically willing to trade job security and benefits plans for higher wages.

If the business has planned well then when orders take a downturn there is a plan designed to help its people. Short term adjustments need to be made but instead of laying off staff that are depending on a weekly paycheck, the company simply does not renew all of their current contracts. The full time staff keep their jobs, and the contractors have no hard feelings because they always knew they did not have job security. Contractors accepted this risk because they were getting paid enough to save up for this rainy day.

This risk management plan is good for everyone. The people doing the work have been taken care of. The managers that would have had to lay people off have been taken care of (believe me, no one likes to be the one to deliver that bad news to people they work with every day). The company reputation has been taken care of, since no business wants a reputation for repeatedly laying off staff.

So the next time you find yourself sitting next to a higher paid contract worker, don't see it as an insult to your position and abilities. Recognize it for the insurance policy that it is to keep your job secure.