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
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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
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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
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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?
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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?
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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
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Contingent Worker Costs
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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
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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
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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
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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)
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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
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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?
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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)
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