Hired guns

Saturday May 1st 1999 by Stephanie Wilkinson
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Beating the IT staff shortage with contract workers


In this article:
AT A GLANCE: Williams Controls, Inc.
Who are they?
Stemming the sprawl
Hire and hire
Lessons learned about using contract workers
The price of independence
When Dayna Aronson signed on as corporate director of information technology at Williams Controls Inc. last May, his mission was clear. The electronic throttle maker's ambitious growth plan required a complete technology overhaul--LANs, WANs, a state-of-the-art ERP system--the works. A rapidly narrowing window of opportunity meant it had to be done fast and it had to be done right. Strategic objectives called for the company to quickly become more competitive by lowering costs, decreasing time-to-market with new products, improving customer service, and responding more effectively to market demands and opportunities, according to Aronson.

Williams Controls Inc.'s Dayna Aronson

In a perfect world, Aronson would hire only the most skilled, most dedicated, full-time employees to staff up the IT department at the $55 million Portland, Ore.-based firm.

But this is the real world. With urgent projects on the table and an immediate need for qualified people, Aronson couldn't afford to spend months sifting through resumes, posting queries on the Internet, interviewing, testing, and conducting background checks on potential employees. Instead, he turned to local IT staffing agencies to find talent-for-hire on a temporary basis.

AT A GLANCE:

The company: Based in Portland, Ore., Williams Controls Inc. is a $55 million, publicly traded manufacturer of electronic throttles for the heavy truck industry.

The problem: An ambitious corporate growth plan called for a rapid, massive overhaul of the company's IT infrastructure and the implementation of an ERP system, without adding overhead with excessive full-time IT staff.

The solution: Williams Controls officials decided to hire short-term contract IT staffers from five local IT staffing agencies, including ATSI Group Inc., of Portland, Ore., to work on Y2K issues, routine corporate IT support, and ERP add-on projects. They were then free to re-deploy full-time workers on major, long-term projects.

"It can take three to five months to hire full-time staff. With contract agencies, it's generally two weeks or less," Aronson says. "That saves us the time and effort of conducting the search ourselves. And with so many of the best-qualified people becoming contractors, you have to go where the talent is."

To supplement his 10 full-time IT workers and his specialized, high-end ERP consultants, Aronson contacted five agencies. These firms--including Automated Technical Services Group Inc. (ATSI GROUP), of Portland, Ore., which furnished the majority of the contractors--provided him with two Y2K experts, a general IT staffer (to fill in for a full-timer re-deployed on another key project), and two programmers for add-on ERP projects.

These days, more than a third of his staff works on a contract basis. The results, so far, are promising: Aronson expects the WAN and ERP system--JBA System 21 from JBA International Inc., of Rolling Meadows, Ill.--to be in place by August, right on schedule.

Hire and hire

The much-vaunted nationwide IT personnel shortage has given an enormous boost to the contract IT staffing industry. According to the National Association of Computer Consultant Businesses (NACCB), a trade organization based in Greensboro, N.C., this $33 billion market is expected to continue its rapid expansion as IT managers struggle to meet time-to-market demands, shorter cycle times, high employee turnover, and rapidly changing IT skill sets. Computer Sciences Corp., a consulting firm in El Segundo, Calif., notes that finding and retaining IT staff is now one of the most pressing issues on the minds of CIOs, second only to the task of aligning IS and business goals.

Who are they?
A picture of the average independent IT consultant:
36 to 50 years old

17 years of IT training and education, on average

50% have advanced degrees

Average annual salary is $105,000

Source: Advanced Technology Staffing Inc. and GartnerGroup Inc.

The use and significance of contract workers will only rise in the foreseeable future, experts say. By 2003, 20% of IS positions will remain unfilled, says Diane Tunick-Morello, a research director at Gartner Group Inc., in Stamford, Conn. And in large enterprises (those with revenues over $1 billion), more than half of IT activities will be carried out by externally sourced workers.

"Ten years ago, using temporary consultants was considered a necessary evil," notes Peggy Smith, executive director of the NACCB. "Today it's a viable alternative for companies that need to maintain lean, permanent staffs and still undertake key projects."

Done right, buying tech talent through IT staffing agencies (also called brokers, suppliers, or vendors, depending on where you are in the country) can be the perfect middle way. Hiring short-term workers through a broker minimizes the legal and financial risks associated with self-employed independent contractors, on the one hand, and the expense of full-blown, Big-Five-style consultants, on the other.

Brokers provide companies with workers who have skill sets that are up to date and hard to find in full-time employees. These "just-in-time" workers can be used to address a short-term increase in workload or to fill a void while the search for a permanent employee is conducted. They can free up permanent employees to work on more strategic, critical, or desirable projects. Newer and smaller companies often use contract workers to quickly ramp up their capabilities during temporary demand surges. The flexibility of short-term hires is a boon to the bottom line, too; unlike full-timers, they aren't a drain on resources once a project is finished.

Best practices

"Over the last two or three years we've started seeing contract resources showing up as a big-ticket item on the IT budget," says Kari Krengel, president of TeCS Management Inc., an IT staffing consulting firm in St. Paul, Minn. "It's not unheard of for 50% of a company's IT resources to be spent on contractors."


In large organizations, this can easily involve sums topping $100 million per year. With that kind of investment, it pays to take a close look at best practices for contract staffing, says Krengel, who helps manage the process for about 20 companies in the Twin Cities area, just under half of which are Fortune 500 organizations.

Stemming the sprawl

The number of contract staffers in large IT organizations can easily range into the hundreds, even thousands. Too often, contract staffing is done in an ad hoc way by IT managers in decentralized environments, notes Kari Krengel, president of TeCS Management Inc., St. Paul, Minn., and a veteran staffing consultant.

Most often, the results are a mess. Just keeping track of contracts made with dozens of staffing brokers is a monstrous task. Firms end up paying too much for contract work, missing out on volume discounts, losing track of how many contractors are employed, and, worse still, losing sight of what those contractors were hired to accomplish.

"Without a centralized function to monitor and facilitate purchasing [of staff], it's not uncommon for an individual IT manager to bring in a contract worker and pay an hourly rate of $5 to $20 more than necessary," says Krengel. "I see it all the time. If an IT manager only calls one or two of his favorite vendors, what are the odds they have gotten the best candidate at the best price?"

And with the average ratio of one agency for every five to eight contractors, the list of agencies being used by a company at any one time can quickly multiply--"more by default than by design," she adds.

One way to fight such staffing sprawl is to centralize the management of contract IT hiring, says Rita Terdiman, research director at Gartner Group Inc., in Stamford, Conn. Another is to consider adopting one of the new breed of enterprise workforce management tools, she says. These products are designed to help companies fill jobs faster by tracking what skills are needed, what projects need to be completed, and what staffing resources--both companies and individual contractors--have been used in the past. Some products have components that link the company looking for workers with staffing brokers via the Internet.

Among the offerings are applications from Evolve Software Inc., based in San Francisco; Icarian Software Inc., of Sunnyvale, Calif.; PeopleMover Inc., of Hermosa Beach, Calif.; and Vivant! Corp., of Oakland, Calif. Starting prices for integrated enterprise workforce planning (EWP) applications range from $50,000 to $100,000. --SW

The first hurdle in hiring contract workers is selecting a reliable staffing agency. Open the telephone book in any major metropolitan area and you'll find dozens of listings for contract IT staffing agencies. How do you pick one? The short answer, according to Dan Carr, director of software engineering at NBX, a network telephony products maker in Andover, Mass., is that they find you. "There are lots of vendors out there and they work hard to solicit business," he says. "My only criteria is [that the agency provide] good, qualified, hard-working people."

At NBX Corp., a division of 3Com Corp., in Santa Clara, Calif., contractors are helping to fill crucial gaps in the young company's IT organization.

"When our company started two years ago, we built a critical mass of full-time engineering talent and then began adding contractors in areas we needed help, like Windows NT, C++, and Visual Basic," says Carr. Several of those contractors were provided by NetGuru Systems Inc., of Waltham, Mass.

Even with reliable agencies--those that have tested and trained their contractors--it makes sense to do your own assessment of candidates. "I don't hire anyone without putting them through an interview process," says Carr. "I don't take a contract firm's word on the quality of the individual or their skill set. My team and I determine that for ourselves. In this respect it's not really much different than hiring a regular employee."

The truth is, no one agency is likely to be able to staff all of a company's projects, from help-desk workers to systems analysts, from software designers and coders and testers to project managers. "It's more common that a company will have a ratio of one agency for every five to eight contractors," says TeCS Management's Krengel, "so if a company utilizes 400 contractors, it's most likely working through 50 to 80 agencies."

Numbers like that prompted Brian Korsmeier to utilize a Preferred Vendor Program during his years as director of technical contract resources at a major West Coast utility.

"When you're hiring in the thousands of contractors, like we were, you need to build relationships with a core group of suppliers," says Korsmeier, who requested his former company's name not be used because officials at the utility consider the number of contractors employed to be strategic information. "Putting them through a formal RFP (request for proposal) process reduces the amount of churn. You end up with qualified suppliers who know your business, won't gouge you on price, and will work with you if there's a problem with a worker."

In some respects, adds Korsmeier, contracting to buy temporary IT help is akin to buying widgets; both require sound contracts. It makes sense to involve your procurement department, he says. Tapping their expertise with contracting principles and pricing dynamics can cut liability and save money.

The art of the deal

The most often negotiated elements in a staffing contract, say the experts, are price and length of contract.

"Cost depends so much on where you are in the country and the experience of the candidate," says Williams Controls' Aronson. "Around here, a junior help-desk staffer might run $30 an hour, while a programmer/analyst could easily ask $80 to $125 an hour. That's still a lot less than the $150 to $250 an hour some of the Big Five firms charge." He notes that Williams Controls pays general support people $28 to $49 per hour, analysts $45 to $80 per hour, senior analysts $100 to $150 per hour, programmers $40 to $80 per hour, and senior programmers $125 per hour.

Of course, the contractor receives only a portion of that amount.

According to Alan Strong, president of Commercial Programming Solutions Inc., a staffing agency in Los Angeles, broker margins hover at around 40%. Agencies that spend a lot of money on training their contractors may charge more than those that do little more than recruit workers and handle their payroll. In addition, some agencies provide extensive oversight of their workers while they're contracted out, sometimes as often as every 30 days.

Most contracts are written to last from four to six months, notes Strong, though the total length of time a contractor works at a firm has been steadily rising over the last five years, often involving more than one contract. Short contracts help companies keep nimble, adds Aronson; he prefers month-to-month contracts that allow him to add and subtract staff easily.


NBX Corp.'s Dan Carr
Once candidates are given the green light, the next question is how to deploy and manage them. In most cases, says NBX's Carr, his company won't use contractors on core technology or in project leadership positions.

"I would not put a contractor in a position that has employees reporting to him or her," agrees Krengel, the consultant. "You get into problems with morale, not to mention liability and confidentiality issues."

In addition, notes Aronson, it may be risky to place contract workers in positions that require them to represent your IT organization to others: "If you're staffing a help desk, for instance, they need just the right interpersonal skills to represent your function to the rest of the company."

At the same time, the best work will be produced by contractors who are treated as an integral part of a project. Says Carr: "I try to manage them like anyone else on my team. To me, they are part of the team, and they should be treated as such."

Try before you buy

There's one more advantage to the contract worker scenario: the ability to test out the fit between employee and employer before possibly making a more permanent arrangement. NBX, for one, has hired several of its early contract workers.

Hire and hire
By 2003, contractors and consultants will represent as much as 50% of the IT workforce in large enterprises.

By 2003, 20% of IT positios will remain unfilled.

Source: GartnerGroup Inc.

Converting temporary workers to full time usually requires some sort of fee to be paid to the staffing agency. Most contracts include a "contract to hire" clause, which sets out the fees to be paid, usually on a sliding scale, when a contract worker is hired inside a company.

"In some cases, we've paid a reduced headhunter fee almost immediately. In others, we commit to contract for a certain amount of time and then pay no fee," says Carr. "I've found that it's best to negotiate these terms up front, especially if I determine during the interview process that the contractor might be someone I'd like to hire."

Caveat emptor

As with any industry that competes for such scarce resources, the IT contract staffing business has its downside, say experts, and it pays to be aware of it.


First of all, the competition among IT brokers to find, sign, and keep contractors with hot skills is beyond fierce. It's gotten so bad, say some, that what was once considered downright unethical has become standard operating procedure in some communities. Such as brokers luring contractors away from competitors. The NACCB sets out standards of ethical business practices, including a ban on inducing workers to breach contracts, on soliciting other company's workers, and on enforcing unreasonable non-compete clauses. The organization has no power to enforce compliance, however.

Lessons learned about using contract workers
Check a contract worker's skill set yourself to avoid a mismatch.

Use contractors as contributors to a project rather than as team leaders.

Create a roster of "preferred vendors" that know your business and have proven ability to provide quality staff. Review this roster semi-annually.

Build relationships with your best contract workers that will last beyond the terms of the contract. They may agree to come aboard as full-time staff, or point you toward other high-quality people.

Consider adding "lease-to-hire" terms into contracts that would allow you to hire a worker as a full-time employee at the end of the contract. Be sure to negotiate any applicable agency fees up front.
"In certain parts of the country, where the market is especially vicious, like San Francisco and Washington D.C., poaching workers happens all the time," says one expert.

"One of the most difficult scenarios for the IT manager is when a contractor wants to switch agencies but keep on working for the same company he or she has been contracted out to," says TeCS Management's Krengel. In such a hot market, contractors are tempted by the prospect of more money at agencies willing to reduce their margins. "It's a lose-lose situation. The contractor gets put through the mill, the agency loses an asset, and the IT department often gets caught in the middle," she says.

NBX's Carr says he's also heard horror stories of contractors who leave in the middle of a project to pursue a better opportunity. Still, he believes that's rare: "People who don't live up to their end of the bargain won't have much success over the long run. This is a small industry and word gets around. Contractor or regular employee, your reputation precedes you."

Another warning from the trenches: Heavy reliance on contract workers, especially when their existence in an organization is owed primarily to corporate downsizing, can demoralize regular full-time staffers.

According to Brad Green, staffing manager at a large West Coast entertainment conglomerate, a shift in corporate philosophy resulted in one-third of his IT staff being replaced by short-term contractors. Almost immediately, he noticed a heightened sense of insecurity among those IT staffers kept on. "The use of contractors fuels resentment, especially when there are offshore contractors willing to work for less than the average American," says Green.

Finally, keep in mind that short-term fixes can have long-term impact on the bottom line. If you lose track of the number of contract workers or the quantifiable benefits they're providing to your business, you may be spending more than you ought to.

"Too many organizations are confused about the market value of good IT professionals," agrees Williams Controls' Aronson. That confusion leads management to deny adequate funding for key IT positions, he says, only to result in overspending on supplemental contract staff. "You can easily spend as much money in four months on contractors as you would in a year for a full-time employee," he adds.

"If you're using contractors in a position for longer than a year, there are compelling reasons to reevaluate your situation," concludes Gartner's Tunick-Morello. "You probably ought to train a full-time staffer to do the work, or else remove the job from your portfolio altogether." //

Stephanie Wilkinson is a freelance writer based in Lexington, Va. She can be reached at stephw@cfw.com.


The price of independence

Ever since 1996, when the Ninth Circuit Court of Appeals in San Francisco forced Microsoft Corp., of Redmond, Wash., to pay hefty benefits to a group of self-employed technical writers working there on contract, the corporate world has become much warier of employing independent contractors.

In this case, because they had worked a significant amount of time at Microsoft as employees before becoming contractors for a staffing agency, which in turn hired them out again to Microsoft, the government ruled that Microsoft was in essence the writers' employer and thus owed them such benefits as health insurance and stock options. Because of the way the tech writers' contracts were written (that is, with some unforeseen legal loopholes).

"There are so many rules governing independent contractors that it's easy to put a foot wrong and be held liable by the IRS," says Brian Korsmeier, former director of technical contract resources for a major West Coast utility. "If you're giving a contractor a 1099 form, the government might come after you and say you're that person's employer and you're obligated for their benefits and withholding. That's why most companies prefer to hire only workers who are W-2 employees of another company. It's one of the best protections you can have."

But it's no guarantee. It remains up to the IRS to determine whether a person is an employee or a nonemployee, no matter what form--a W-2 or a 1099--is submitted.

To combat this and other tax-related issues, the National Association of Computer Consultant Businesses (NACCB), based in Greensboro, N.C., has been lobbying Congress to pass legislation that would install greater protection from unreasonable tax rules for incorporated or LLC (limited liability company) contractors. In addition, says NACCB spokesperson Don McLaurin, new legislation is needed to prevent the IRS from attacking staffing firms that broker out the services of such contractors.

This legislation is needed because ever since provision 1706 of the Tax Reform Act of 1986 took effect, staffing agencies have come under heavy fire from IRS auditors. That provision, in essence, removed an earlier tax provision that protected staffing agencies from liability for back taxes for contractors the IRS determines are actually employees. Craig A. Etter of Greenberg, Traurig is a Washington, D.C., based lawyer who defends such staffing firms. He says his firm alone has represented over 60 staffing firms in the last 10 years.

Current IRS laws that determine who is an employee and who is a contractor, says the NACCB's McLaurin, are based on antiquated rules established in medieval England.

"Not only were [the rules] created prior to the Industrial Revolution, they are only applied today to computer professionals," he says. "Lawyers, architects, and similarly skilled professionals are not put to the same standard."  -- SW


 

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