The Organizational Utility of The Organizational Utility of Contingent Work: A Cost/Value Contingent Work: A Cost/Value AnalysisAnalysis    Sandra L. Fisher, Clarkson UniversityCatherine E. Connelly, McMaster University

FlexWorkResearch ConferenceOctober 2011

Study BackgroundStudy BackgroundUse of contingent labor increasing

worldwideWhy?

◦Increased flexibility◦Reduced managerial responsibility◦Extended screening process (temp-to-

hire)◦Decreased costs

Comparisons with “permanent” workers

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What do we know about the What do we know about the cost of contingent workers?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

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Nollen and Axel (1996) Nollen and Axel (1996) ModelModel

• 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) / QW = wage and benefit rate per hourL = hours workedQ = quantity of output produced per hour

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Nollen and Axel findingsNollen 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?

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Our Research QuestionsOur Research QuestionsHow 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?

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Three Types of Contingent Three Types of Contingent WorkersWorkers

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

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Contingent Worker Costs Contingent Worker Costs

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Direct Costs of Contingent Direct Costs of Contingent WorkersWorkers

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

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Direct Costs, continuedDirect Costs, continuedTransaction 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 workersTraining

◦ 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 Indirect Costs: Task PerformancePerformance

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 contractorsSome reports of relatively equal task

performance, depending on situation◦ Temp-to-hire◦ Treating contingent workers as equals

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Indirect Costs: Permanent Indirect Costs: Permanent WorkersWorkers

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)

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Indirect Costs: OCBsIndirect Costs: OCBsContingent 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

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SummarySummaryDirect 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?

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Future Research Future Research DirectionsDirections

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 approachWhat is the dollar value of OCBs?

◦ Literature agrees that there is value here, but how much?

◦ Some estimation done by Orr, Sackett & Mercer (1989)

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