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The Elephant in the Room: Contracting or Consulting?

Contractor, Consultant or Permanent Employee? In today's resource constrained world, it's not an easy choice. But when getting it wrong can cause budget blowouts and an unhealthy reliance on costly engagements, what can the Public Sector do about it?

Contractor or consultant?

The efficiency and cost implications of what, at face value appears to be a pretty simple decision, have been on my mind for a while now. These implications can have a tangible impact on the recruitment business and on the taxpayer. So, leading a Wellington based recruitment agency, I have a personal and professional stake in how it plays out across the Public Sector.

Our recent Whitepaper – The Rise of the Contingent Workforce – focused on two prominent trends emerging in the New Zealand job market. Firstly, that we’re headed towards a more contingent workforce, and secondly that businesses are failing to properly manage and track that contingent workforce. This rings especially true for the Public Sector.

Government agencies employ large numbers of contingent workers; including contractors and consultants, many of whom are not included in staff headcount, being paid from the budgets of projects instead of payroll. As it stands, Hiring Managers face a number of challenges that can cause their decision on which engagement to employ on a case-by-case level to be inefficient. And with Government agencies becoming increasingly aware of the expensive nature of these contract and consultant engagements, and yet seemingly not addressing them, what, if anything, can be done about it?

Defining Engagement

In order to clearly define the difference between a contractor and consultant engagement, we spoke with Emma Hillman, Senior Procurement Analyst from Ministry of Business, Innovation and Employment, who gave us the below definition used for AoG contracts:

"A contractor is an individual who is either hired directly or via a third party to perform duties that would normally be provided by an existing staff member. The contractor is under the direct supervision of the client and the client is responsible for managing any risks associated with the contractor’s work.

"A consultancy service is where a client is paying for a consulting company for the delivery of an outcome. A consultant is an expert in a particular field, who can demonstrate relevant skills and experience not readily available from within a Government agency. In this case, the consulting company is responsible for all the risk as well as the outcome.”

She added that "When identifying which service should be applicable, Hiring Managers need to ask; who will carry the risk? Are we paying for outcomes or is the exact detail of the work uncertain? Would this job normally be done by a permanent member of staff and will the role require drawing on the IP of the Government agency?”

However, if this definition is so easily accessible for Hiring Managers, what’s the cause for concern and confusion when it comes to deciding on an engagement?

Understanding the Difference

The engagement of contractors or consultants usually occurs through procurement functions or Hiring Managers, and is typically not owned or controlled by HR or an internal recruitment function. There’s currently a lack of clarity around the difference between each type of engagement, and when one should be favoured over another. This lack of clarity can lead Hiring Managers to apply the wrong type of engagement. To help separate each engagement, check out the below graphic.

What-are-the-differences-between-permanent-employees-contractors-and-consultants

The Path of Least Resistance

Aside from the lack of clarity around which form of engagement should be used in which situation, Hiring Managers face a lot of pressure to fill skills gaps under tight timeframes. The competitive talent landscape coupled with the Government’s drive for efficiency can cause Hiring Managers to take the path of least resistance. However, this leap to a solution without properly understanding the parameters that have caused the problem will only continue to add to it further down the line. The cause and effect of this is more confusion around whether a permanent employee, consultant or time and materials engagement (contractor) is the appropriate way forward, especially when a consulting agency can provide the last two services. When an inefficient engagement is arranged, this can result in significant additional costs to the Government and the taxpayer.

Tracking Spend and Efficiency

With poor tracking of spend and efficiency, these engagements can often prove to be even more expensive. When a time and materials engagement (contractor) is arranged between a Government agency and a consultancy, that consultancy has to provide an employee. Consultancies, like the rest of the market, face the same challenges posed by the lack of talent. When an employee isn’t available to fill a position, they’ll often turn to a recruitment agency to secure a contractor to complete the work instead.

Effectively, when a contractor is engaged through a provider via a consultancy in such a way, a margin upon the margin appears. This causes the Government agency to pay more than they would have if they secured the same person though the recruitment agency directly.

In addition, the aftermath of an engagement needs to be brought within scope. As I previously mentioned, the procurement of contractors is often the responsibility of Hiring Managers and not Human Resources. Contractors and consultants aren’t usually included in headcounts and subsequently, in payroll budgets. Instead, their expenses are buried deep within project budgets. This means that the tracking of the efficiency and expenses of these engagements can often be challenging, especially in the long term.

Contract or consulting engagements may start as short term engagements but, due to the difficulties of finding talented people, can often be extended to a year and beyond. The original purpose of the engagement can be lost with the contractor becoming a de facto team member, vested with significant organisational IP and effectively inhabiting a role which should be filled by a permanent employee at a much lower cost. The longer they’re there, the more seemingly indispensable they become.

What we’re seeing now however, is an awareness emerging from the Public Sector of the expensive nature of these engagements, and a desire to step back. Due to the talent shortage, these engagements will still be needed to fill in the gaps, but a greater level of transparency is required to properly track and manage them appropriately.

The Return on Investment

75%-percent-of-employers-dont-measure-how-much-is-being-spent-on-contingent-workersAlthough there isn’t an immediate perfect solution to this systemic issue, there are some things Government agencies can do, and in some instances, are doing with the future in mind. The first is properly tracking spend. Our recent Whitepaper revealed that a staggering 75% of employers don’t measure how much is being spent on contingent workers and whether it’s being spent effectively. The key to finding a solution here is ensuring that the cost of contractors doesn’t become buried in project budgets; for example, by making someone accountable for the tracking and management of it internally.

95%of-employers-don't-measure-the-ROI-from-contingent-workersAdditionally, 94% of employers do not measure the return on investment of contingent workers and use the data to help determine which jobs should be filled with contingent labour or permanent employees. In order to allow Hiring Managers to do this, they need to be better prepared and able to identify the most effective way of filling a vacant role, whether it be through a contingent worker or a permanent employee. If a contingent worker is required, then decide on whether a consultant or time and materials engagement (contractor) is the appropriate way forward.

The skills gap has made finding good talent hard, which in turn has made fully capitalising on specialist consultants hugely beneficial. The risk of ignoring these benefits is that you could find yourself stuck in a loop of consistently needing expert skills and having no choice but to turn to expensive engagements. A consultant’s time is quite literally valuable. Strike a balance between having them complete the work you hired them to do, while ensuring a part of that requirement is to transfer their knowledge to a permanent employee. Including the contractor as part of your succession plan should play a pivotal role in your permanent hiring strategy. When it comes to recruiting full time employees, aim to acquire people with the right attitude and the drive to learn new skills.

Summary

As taxpayers, we all have a vested interest in improving the efficiency of these engagements for the Public Sector. But as Recruiters we also understand the challenges Hiring Managers face when deciding what type of engagement should be used.

Ultimately, due to the lack of talent to fill these gaps without use of contingent workers, the above solutions won’t solve this issue overnight. These kind of engagements will still be needed. However, if Government agencies are serious about increasing efficiency while cutting costs then the first step is to talk about them. Start with those accountable and empower your Hiring Managers to be able to identify which recruitment solution is the best fit for each individual case.

When contingent workers, whether contractors or consultants, are engaged, the premise of knowledge transfer needs to be instilled early on. This will help avoid the cases where a time and materials engagement has been used to fill a gap where a permanent employee should have been, given enough time.

If you’d like to know more about the rise of contingent workforce, how to effectively manage them and what it could mean for your business, contact me today to get your copy of our recent Whitepaper.

Shane Mackay

Shane Mackay | General Manager Wellington

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