Cost Benefit Analysis of Full Time Employee vs. Contractor Utilization

The use of contract labor continues to grow across an ever-growing list of industries as companies of all sizes turn to contingent workforce planning as a means to develop more nimble, cost-effective overall workforce plans. What was once a highly debatable proposition – whether or not the use of contingent labor was worth the potential liabilities – has all but been settled. Companies of all sizes, aided by workforce management technology and service providing organizations, have arrived at the conclusion that a non-employee workforce is as critical to their success in today’s highly competitive business environment as the traditional workforce. However, that does not mean there won’t be those organizations that lose more than they save by leveraging contractors. Here’s what you need to consider before you decide if using contract workers is right for your organization.

First, we’ll examine the benefits commonly associated with contingent workforce management usage. Organizations that engage contract labor can typically yield cost savings from:

• Leaving the payment of employee benefits (like healthcare, unemployment and others which are not typically paid to temporary laborers) to the staffing agencies
• Avoiding the administrative costs associated with sourcing and onboarding contractors which is typically handled by staffing suppliers instead of internal HR
• Improvements in staff utilization enabled by leaning on contractors for seasonal, project and non-essential job roles while avoiding overstaffing
• Increased productivity across the entire workforce – contingent and full time

Next we’ll examine the potential liabilities inherent in using contractors as part of the overall workforce mixture. Some of the potentially costly ramifications of contractor usage include:

• Increased exposure to compliance issues such as worker misclassification, co-employment risk, failure of suppliers to properly insure candidates, tax implications
• Poor management of contract resources leading to high turnover and training costs, lack of dedication among contractors, negative impacts on full time worker morale
• Higher potential for intellectual property theft/leakage as contractors come and go

In spite of the liabilities, many organizations opt to leverage contingent labor in pursuit of the benefits examined above and others. The difference between success and failure in the deployment and management of contract labor lies in how the contingent workforce program is designed and managed. Clearly, the proliferation of solution providers with automation technologies like VMS systems and expert service offerings such as human capital MSPs speaks to the extent to which the practice is valuable if properly executed.

The Cornell HR Review does an excellent job of explaining how finding the right solution providers to help field a well-designed and maintained contract labor program is essential to success. Cornell’s Chelsea Vandlen says, “Human resource professionals must undergo careful analysis to weigh the benefits against the costs for their respective companies, particularly with regard to fixed costs, flexibility, and productivity. Fortunately, for companies who already engage in the hiring of contingent workers, vendor management systems can help track the volume and costs of these employees, as well as ensure compliance with all regulations. They range from simple tools that focus on process automation to sophisticated systems that help companies learn more about their temporary labor force. Once HR is armed with a closer approximation of the costs of contingent workers, they will be better positioned to make decisions about who to hire.”

We couldn’t agree more. If you’re considering the use of contract labor or wish to assess whether your existing practice is as effective as it can be, talk to your nextSource representative today to perform a cost-benefit analysis specific to your unique workforce requirements.