Does the term “external workforce” describe an essential element of the way businesses must operate today? Or is an just an excuse to avoid paying workers full-time salaries and benefits?
One thing is clear: the reliance on workers from outside the organization is on the rise. Research from SAP Fieldglass and Oxford Economics in 2018 found 65 percent of respondents saying their external workforce “is important or very important to operating at full capacity and meeting market demands.” The survey interviewed 800 senior executives from large and mid-sized companies in 16 industries and 14 countries. Nearly half declared that they wouldn’t be able to conduct business at all without the help of outsiders.
The study defined the external workforce as “non-payroll workers and contracted service providers.” That includes the full range of independent contractors, consultants and temps. Together they accounted for 44 percent of all workforce spend, according to Molly Spatara, global vice president of brand experience with SAP Ariba and SAP Fieldglass.
Spatara notes a “significant uptick” in companies’ reliance on external workers since the recession of 2007-08. That would suggest cost as the primary reason for outsourcing labor, given the relief if offers from having to provide full benefit packages and, in some cases, overtime pay. (It also allows management to quickly shed itself of workers without having to justify its action or observe onerous termination protocols.)
But the cost of in-house labor is far from the whole story. According to the study, it’s not even the principal driver. Instead, the authors framed the trend as one that benefits workers.
While businesses like the flexibility and agility of an external workforce, so does labor, Spatara claims. “Workers like to be able to chart their own course, to create their own terms.”
What’s more, as companies undertake the digital transformation of their operations, the need for highly skilled individuals to support that effort increases. At a time when such talent is hard to come by in sufficient numbers, workers can make more money if they’re not on the payroll, Spatara says.
The individuals in question aren’t necessarily the itinerant workers who serve as poster children of the gig economy — the Uber drivers, package deliverers, and Airbnb renters. “It’s not a side hustle,” says Spatara. “These are nurses and IT practitioners — it’s their main form of work.”
The trend doesn’t mean that traditional employment is coming to an end. “I’m certain there are some workers who would prefer to be an employee because they want security,” Spatara says. “But others are much happier working on their terms, not necessarily as part of a corporate construct.” They also prefer the impermanence of specific projects with defined end points.
In identifying business goals for reliance on the external workforce, survey respondents ranked five other factors slightly above “managing costs”: developing or improving products and services (68 percent), increasing speed to market (66 percent), operating at full capacity and meeting market demands (65 percent), increased organizational agility (64 percent), and achieving sustainability goals and shrinking the company’s carbon footprint (62 percent). Cost management came in sixth at 60 percent, followed by reducing risk at 54 percent.
For all their professed enthusiasm over the use of external workers, companies aren’t doing an especially good job of managing them. According to the study, just 27 percent were “highly informed” about how the performance of service providers matches up with milestones or deliverables. Only 25 percent were similarly knowledgeable about the quality of suppliers’ work.
That level of ignorance means that companies often acquire contingent labor in a siloed fashion, without considering its impact on the larger organization. Hiring might also be country-specific, increasing the possibility of running afoul of local labor, taxation and privacy laws. So much for the notion that the use of external resources reduces organizational risk.
Other challenges associated with managing an external workforce include securing high-quality resources at the right time and place, tracking resource and project quality, managing digital systems and cybersecurity, and ensuring that poor performers aren’t re-engaged.
“This lack of visibility is a serious problem for most companies,” the study stated. “A fundamental truth of business is that you can’t manage what you don’t measure, so these new work arrangements require a new kind of management.”
The study offered a number of tips for overcoming the negatives that accompany a high dependence on outside workers. They included knowing the true value of the external workforce, anticipating skills that will be needed in future, and making outside talent part of the organization’s larger objectives.
Companies might have no choice but to follow that advice. Spatara believes the percentage of external workers serving business will increase in future. Many organizations already consist of payroll employees working side by side with outsiders.
“Probably more and more spend will go toward non-payroll employees,” she says, “and that could parallel the type of critical skills that are in demand in the market.”
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