The Pitfalls of Contracting Out

In the year or so leading up to Jan. 1, 2000, most IT organizations relied, at least in part, on contract labour to get the job done, and contractors have certainly been a large part of the e-business ramp-up in many companies.

Despite all this experience hiring contractors, many IT organizations don’t manage contract labour effectively. In fact, they don’t really manage it at all. This wouldn’t be so bad if contractors weren’t so expensive. Their high hourly wages can sap employee morale (and who wouldn’t feel a twinge of hostility toward a person who does the same job as you but makes twice as much?). I have even seen solid performers – the kind of people a company wants to keep – beg to be released as employees so that they can come back as contractors and be paid more money.

Before I get into real trouble here and invite a flood of hate mail from all you free agents out there, let me make this perfectly clear: contractors are not bad, but the way companies manage them often is. Going forward, contractors will continue to play an important role in IT, along with permanent employees, outsourcers, and other workers. That is why getting a handle on how you use contractors is so important.

Not My Problem

Many IT managers seem to feel that they are absolved of all management responsibility when it comes to contractors. In fact, many IT managers cannot tell you exactly how many contractors are in their shop at a given time.

One CIO I recently met seemed taken aback when I suggested that a four-and-a-half-year assignment for a contractor might indicate poor management. My point was that there has to be a more cost-effective and strategic way to source a relatively typical IT position, which this was, than keeping a highly paid contractor around for more than four years.

I also argued that, in this litigious climate and in the face of similar cases, a company must avoid exposing itself to lawsuits in which long-term contractors sue for benefits and stock because they have been around so long that they are really “employees”. (Recall that Microsoft Corp. got into such trouble when long-term temps rallied and sued for benefits and stock.) This CIO’s response was that his company was in something of a downturn, and therefore he didn’t think anybody wanted its stock. What was going on there was an avoidance of dealing with some of the bigger issues associated with their dependence on contractors.

Another CIO told me that shortly after his company’s Y2K work was completed he was going to “get rid of all contractors”. I don’t advocate his slash-and-burn approach either because there was work in his organization that was best done by contract labour.

There’s no magic answer to the question, “How many contractors should we have?” Clearly, it depends on what kinds of projects you are doing, what your current skill set is like, the availability of skills in your market, and other factors. Generally, contractors are ideal when you have an unexpected (and unforeseeable) need for IT labour. They are also great for specific technical skills that you might need only in the short term and for skills that you don’t think your staff can leverage in the long term.

Contractors can also pitch in when there is an unexpected departure in a key area. In fact, that’s likely to be a better approach than allowing existing staff members to pick up the slack during the four months it takes the company to hire a replacement. Another good use of contractors is to offer them a trial engagement before offering them a permanent job. This gives the company and the individual a chance to decide whether they are interested in a more permanent relationship.

If you think you may be too dependent on contract labour, do the following:

• Count the number of contractors, and make sure you track the ratio of employees to contractors on an ongoing basis. If the balance shifts one way or the other, you can then figure out whether this fluctuation is justified.

• Manage the relationships with your contractors. If you have contractors who have been hanging around for more than a year, there’s probably a better sourcing option.

• When you use contractors, don’t do so out of desperation. Manage the demand for skills in your organization so that you can consider other options, such as outsourcing, hiring and teaching new skills to existing workers.

Barbara Gomolski is a research director at Gartner Group Inc., a Stamford, Conn.-based research firm that helps clients achieve their business objectives through intelligent and efficient use of technology. Send her e-mail at