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Utilization of Contingent Workers and Firm
Performance
Paula Alexander Becker
Stillman School of
Business
Abstract
The nature of the employment
relationship between employers and employees is undergoing
transformation in the new economy. Approximately 30 percent of the
civilian work force works in "non-standard" work arrangements, including
agency temporary workers, direct-hire temporary workers, on-call
workers, leased employees, contract company workers, independent
contractors, self-employed workers, and regular part-time workers.1 Workers employed in these
non-standard work arrangements are referred to as contingent workers.
Employers have various reasons for utilizing contingent workers, ranging
from cost control and flexibility in staffing to screening for qualified
direct hires or finding specialized talent.2 This phenomenon is the focus of a
number of studies, and conditions under which externalization of
employment occurs have been identified.3 The question arises whether the
utilization of contingent workers affects firm performance.
Research Methodology The
American Management Association (AMA) conducted a survey of its member
organizations in June 1999 regarding the utilization of contingent
workers. The questionnaire included information on firm size, whether the
firm was engaged in manufacturing, extent of unionization, and percent of
the workforce which is contingent, as well as questions relating to the
reasons for using contingent workers, the departments in which the
contingent workers are used, and the type of contingent worker employed.
Over 1,200 human resource managers of the AMA member organizations
responded to the survey. This analysis was conducted among the publicly
traded firms that responded to the Contingent Worker Survey.4
Firm performance was measured in terms of traditional financial analysis:
earnings per share (EPS), dividends per share (DPS), and price-earnings
ratio (P/E ratio). The null hypothesis, that there are no differences
among firms that use more contingent workers, compared to firms that use
fewer contingent workers, was tested using two-tailed statistical tests,
since this author felt that there was no compelling theory to predict the
direction of observed differences in financial performance.
Results Utilization of
contingent workers IS related to firm performance.
Firms with a higher utilization of
contingent workers (equal to or more than 10 percent of their workforce)
had significantly higher price-earnings ratios in 1999 than firms with a
lower utilization of contingent workers (less than 10 percent of their
workforce). Firms with a lower utilization of contingent workers (less
than 10 percent of their workforce) had significantly lower price-earnings
ratios in 1999 than firms with a higher utilization of contingent workers
(10 percent or more of their workforce). There are no differences in
either EPS or DPS between firms with a higher utilization of contingent
workers compared to firms with a lower utilization of contingent workers.
See Table 1.
Cost as a
reason for using contingent
workers. Companies for which cost
reduction was a more important motivation for using contingent workers had
significantly lower P/E ratios in 1999 and distribute significantly higher
DPS compared to firms for which cost reduction is less important. See
Table 2.
Firms that cited
payroll cost reduction as a very important or somewhat important reason
for using contingent workers had significantly lower P/E ratios than firms
that state that payroll cost reduction is not at all important. This
result is particularly significant for non-manufacturing firms. See Table
3.
Companies that
cited healthcare cost reduction as a very important or somewhat important
factor had significantly lower P/E ratios in 1999 compared to firms that
stated that healthcare cost reduction is not at all important. This
difference is greater among non-manufacturing firms and among companies
whose contingent work force is comprised of more than 10 percent of its
total work force. See Table 4. Furthermore, companies that stated that
healthcare cost reduction is very important or somewhat important had
significantly higher DPS in 1999 compared to firms that stated that
healthcare cost reduction is not at all important.
Firms that stated
that pension cost reduction is very important or somewhat important had
higher DPS than companies that stated that pension cost reduction is not
at all important, but there were no significant differences in P/E ratios
or earnings per share among firms that stated that pension cost reduction
was an important motivation for using contingent workers. See Table 5.
The question
arises whether firms that invoke cost reduction as a reason for using
contingent workers are in worse "financial health" than firms for which
cost reduction is not an important reason for using contingent workers. To
test this hypothesis, firms were compared on measures of firm financial
health, independent of the outcomes measures for firm financial
performance, for the periods 1997, 1999, 2001, and 2002; that is, periods
before and after, as well as during, the time reference period for the
utilization of contingent workers. The measures of firm financial health
included cash flow from operations relative to common shares outstanding;
total debt relative to common shares outstanding; extraordinary items;
extraordinary items and discontinued operations; Earnings Before Interest
and Taxes and Depreciation (EBITDA),5 beta calculated on a calendar year
basis; and Z scores, a predictor of bankruptcy.6 Comparisons were made between
companies for which cost control, including payroll cost reduction, health
care cost reduction, and pension cost reduction, was an important reason
for using contingent workers, and firms for which cost control was not an
important reason for using contingent workers. For the years 1997, 1999,
or 2001, there were no significant differences in cash flow from
operations relative to common shares outstanding between companies for
whom cost control was important compared to companies for which cost
control was not important, but in 2002 the companies for which cost
control was important had higher cash flow from operations relative to
shares outstanding (ANOVA p ¾ .035). For the years 1997, 1999,
2001, or 2002, there were no significant differences in total debt
relative to common shares outstanding between companies for whom cost
control was important compared to companies for which cost control was not
important, using analysis of variance, but in 1997 the companies for which
payroll cost reduction was important had higher total debt relative to
shares outstanding (T test p ¾ .007) and the companies for which
health care cost reduction was important had higher total debt relative to
shares outstanding in 1997 (T test p ¾ .026). There were no
significant differences for extraordinary items or extraordinary items
including discontinued operations between companies for which cost
reduction was an important reason for using contingent workers compared to
companies for which cost reduction was unimportant in any period. There
were no significant differences in any year in EBITDAM, Earnings Before
Interest, Taxes, and Depreciation on an Annual Basis, between companies
for which cost reduction was an important reason for using contingent
workers compared to companies for which reduction was not important. For
the years 1997 and 1999 there were no significant differences in beta
between companies for which cost reduction was important compared to
companies for which cost reduction was not an important reason for using
contingent workers. But in the years 2001 and 2002, companies for which
cost reduction was an important reason for using contingent workers had
lower betas (p ¾ .05 and p ¾ .02, respectively). A Z score
analysis showed that companies for which cost reduction was not an
important reason for using contingent workers had significantly higher Z
scores than companies for which cost reduction was important for all
years.7 Moreover, companies for which cost
reduction was not an important reason for using contingent workers had Z
scores that were significantly higher than 3.0 for all years 1997, 1999,
2001, 2002, 2003. In addition, companies for which cost reduction was an
important reason for using contingent workers had Z scores in 2002 and
2003 that are not significantly different than a Z score of 1.81, and that
are significantly lower than a Z score of 3.0. It is not likely that cost
control reasons are directly related to company poor financial health
several years later, but rather that the managerial decision-making
processes themselves are causally related to a poorer long term
consequence. Overall there are no significant differences between firms in
"financial health" that would be predictive of differences in firm
performance.
Finding specialized talent as a reason
for using contingent workers. Firms that
stated that finding specialized talent is very important had higher P/E
ratios than companies that stated that finding specialized talent is
somewhat important or not at all important. Furthermore, firms that stated
that finding specialized talent is very important or somewhat important
give higher DPS than companies that stated that finding specialized talent
is not at all important. These results suggest that firms that use
contingent workers for strategic reasons relating to the acquisition of
human capital gain a competitive advantage. See Table 6.
The temp to
perm track: screening for qualified direct hires as a reason for using
contingent workers. Companies that stated
that screening for qualified direct hires is very important or somewhat
important had significantly lower P/E ratios in 1999 compared to firms
that stated that screening for qualified direct hires is not at all
important. In addition, companies that stated that screening for qualified
direct hires is very important or somewhat important distributed
significantly more DPS in 1999 compared to firms that stated that
screening for qualified direct hires is not at all important. These
results suggest that more effective firms have other mechanisms for hiring
qualified employees than converting temps to permanent employees. See
Table 7.
Earnings per
share. Earnings per share, an outcomes
variable, was not significantly related to the independent variables
measured in the
questionnaire.
Dividends per
share. Distribution of quarterly
dividends (dividends per share) is generally higher among firms with lower
P/E ratios. This suggests that distribution of dividends is used as a
means of holding investors. If a firm has a lower P/E ratio, it tends to
offer higher dividends instead. This finding may indicate the strategic
use of dividends distributions by firms with lower P/E ratios; namely, in
order to serve as an attractive opportunity for investors, those firms
with lower P/E ratios distribute more dividends than firms which are more
attractive investments in terms of their price-earnings
ratios.
Unionization. Unionized
firms have lower price-earnings ratios and pay higher dividends per share
than non-unionized firms. See Table 8.
Manufacturing. Manufacturing
firms had significantly lower price-earnings ratios in 1999 than
non-manufacturing firms, and paid higher dividends than non-manufacturing
firms. See Table 9.
Discussion and Conclusions This
analysis relates the utilization of contingent workers to firm financial
performance among publicly traded companies which participated in the AMA
1999 Survey on Contingent Workers, concluding that greater utilization of
contingent workers is related to better firm performance, particular P/E
ratios. Relatively few investigations relate firm performance to the
utilization of contingent workers. However, Nayar and Willinger (2001)
recently examined the relationship between firm performance and increasing
use of contingent workers. Their study shows that firms which increased
their use of contingent workers have higher stock return measures than
firms which do not use more than 10 percent contingent workers.8 Their study used a different time
period (1978-1991), a different group of companies or databases, and
different measures of firm performance. Their conclusion, that increased
reliance on contingent labor increases firm profitability, however, is
consistent with the findings of this
study.
Shulamit Kahn, at Boston
University, and her colleagues have also investigated the relationship
between the utilization of contingent workers and firm financial
performance. Although they interpret their findings as "mixed," 9 firms that used more contingent
workers had higher EPS and higher stock prices than firms which used a
lower percentage of contingent workers (Kahn et al. 2001). In a follow up
study, Kahn (2000) found that greater utilization of contingent workers
was related to higher firm productivity.10 The work of Professors Nayar,
Willinger, Kahn, and Kahn's colleagues concurs with the results reported
herein.11 The convergence of these four
different studies provides confidence in the conclusion that companies
that use more contingent workers have better financial performance than
firms that use fewer contingent workers.
Factors relating to use of temporary workers have been identified by
Davis-Blake and Uzzi (1993). Davis-Blake and Uzzi found that independent
contractors12 were used in jobs requiring
"firm-specific or complex technical skills," whereas (other) temporary
workers were used in situations where there were "variations in employment
needs," requiring flexibility in employment on the part of the firm. Kahn
(2000, 242) also found that the human resource managers interviewed in her
study appreciate the flexibility that the utilization of temp workers
provides to a company. The use of contingent workers, both as independent
contractors and other temporary workers, provides a firm with the ability
to meet variations in employment needs, without incurring higher fixed
costs associated with regular employees, thereby adjusting to variations
in the firm's market, and creating a competitive advantage to such firms.
Matusik and Hill (1998) theorize about the reasons that a competitive
advantage might be created by firms' use of contingent workers. Their
rationale, that contingent workers bring more up-to-date market-based
knowledge to the firms employing them, comport with our finding that it is
particularly the strategic use of contingent workers that is related to
more effective firm performance.
Cost
cutting as a reason for the use of contingent workers was not related to
better firm performance in this study.13 Indeed the human resource
managers interviewed by Kahn (2000) acknowledge that the costs of using
contingent workers may be the same as, or greater than, the costs of
regular employees. Although firms may not pay their contingent workers
medical or pension benefits, temp agencies supplying the contingent
workers charge a fee that may be equal to, or greater than, the costs of
the benefits. This study found that firms which state that the reasons for
their use of contingent workers is to lower costs, payroll and healthcare
costs in particular, have lower P/E ratios. On the other hand, firms that
use contingent workers for the purpose of finding specialized talent, a
strategic approach to the use of contingent workers, have higher P/E
ratios. The utilization of contingent workers likely creates a competitive
advantage between firms; hence industry-wide measures might mask
differences in competitive advantage between firms within the same
industry.
Given the positive effects of
the utilization of contingent workers on firm performance, it is unlikely
that this trend will be reversed. Therefore, the negative effects of
contingent work should be managed.14 Specifically, policies and
programs for contingent workers whereby benefits and pensions adhere to
the individual worker and are portable across employers or even agencies
that place temporary workers should be developed, with a particular
emphasis toward "low end" contingent workers.15
In conclusion, the strategic use of contingent workers is associated with
better firm performance, whereas cost cutting approaches to the use of
contingent workers is not associated with firm competitive advantage.
Since many contingent workers are relatively disadvantaged in terms of
access to healthcare and pension benefits, policies and programs should be
developed to address these relative disadvantages, rather than attempt to
reverse the trend toward the increased utilization of contingent workers.
Acknowledgments The author thanks the University Research Council, the Institute
for Work, the Institute of International Business, and the Stillman School
of Business for research support of this project.
Notes 1. The number of jobs in the temporary-help supply
industry rose 577 percent, while the total number of jobs rose 44 percent
between 1982 and 1998 (U.S. General Accounting Office
2000).
2. See for example American Management Association
1999.
3. See, for example, U.S. Department of Labor, Bureau
of Labor Statistics 1995; Washington Senate Democratic Caucus 1999; U.S.
Department of Labor, Bureau of Labor Statistics 2001; and Carre et al.
2000.
4. Of the 1,248 employers responding to the AMA
survey, 220 were publicly traded
companies.
5. The COMPUSTAT definition of EBITDA
is:
![]()
The annual
concept is Earnings Before Interest and Taxes and Depreciation Annual,
Quarterly, or twelve-month moving, divided by Sales<->Net.
This total is then multiplied by
100.
The quarterly concept is
Operating Income Before Depreciation divided by
Sales<->Net<->Quarterly. This total is then
multiplied by 100. If no value is available for the current quarter, the
value for the previous quarter will be
calculated.
The 12 Month Moving concept
is Operating Income Before Depreciation 12MM divided by
Sales<->Net<->12MM. This total is then
multiplied by 100. If no value is available for the current quarter, the
value for the previous quarter will be
calculated.
6. Z score is a bankruptcy prediction model developed
by Edward Altman at New York University. Data were obtained from Standard
and Poor's COMPUSTAT database, which defines Z score as:
![]()
If a value less than 1.81 is returned,
than there is a high probability of bankruptcy. If a value greater than
3.0 is returned, than there is a low probability of bankruptcy. This item
is designed to forecast failure in the short-term (up to two
years).
7. A higher Z score indicates a lower likelihood of
bankruptcy.
8. Nayar and Willinger define the use of contingent
workers by a notation in the COMPUSTAT database at note 25 that "a firm
has 10 percent or more seasonal or part-time workers in that particular
fiscal year" (2001, 666). They measured profitability in terms of stock
returns comparing "buy-and-hold excess returns in a 250-day period
subsequent to the fiscal year in which the reliance on contingent labor is
revealed . . . [with] a prior 250-day period" (2001, 678). Buy and hold
excess returns are defined on pp.
673-74.
9. Kahn, in a more intensive case study of two
companies in the South, found that in the textile industry the companies
which had made "sudden, radical shifts" to the use of temp workers had
declining financial performance, or financial performance that was no
different, in comparison with control companies which had not made such
shifts to temp workers (2000, 235-36). She interprets the case studies to
indicate that her findings reveal a mixed relationship between the use of
contingent workers and firm financial performance. However, extraneous
variables at work in the single company which made the "sudden, radical"
shift to the use of contingent workers and which subsequently experienced
a significant decline in financial performance, may also have accounted
for the decline in its financial performance; for instance, the shift in
employment policy may have been triggered by a need for sudden cost
reductions, which factor also accounted for the reduction in financial
performance. As discussed infra, cost as a motivator in the
utilization of contingent workers was not related to better financial
performance in the present
study.
10. In the same study, Kahn (2000, 256-57) found
that the use of independent contractors, but not other categories of
temporary workers, was negatively related to firm profitability; however,
change in the use of independent contractors between 1995 and 1997 and
change in profits between 1995 and 1997 were unrelated. Moreover, her
study was based on industry-wide measures. Thus, differences between
companies which are more or less competitive based on firm management
practices may be masked by the level of
measurement.
11. The author feels that the findings reported
herein are particularly robust since two-tailed tests of statistical
significance were used. See, supra, the section on research
methodology.
12. Independent contractors were included in the
definition of contingent workers in the AMA Survey used in this
study.
13. Similarly, control of labor costs by downsizing
is negatively related to stock price. See Worrel, Davidson, and Sharma
(1991), who found that downsizing by itself was related to declines,
rather than increases, in stock price. Casio, Young, and Morris (1997)
examined the effect of employment downsizing on stock price for the period
1980-1994; they conclude that employment downsizing alone, in the absence
of asset re-structuring, was related to lower average return on stock
price compared to stable employers in the short run, but related to better
returns in the years following the
downsizing.
14. The U. S. General Accounting Office (2000) study
of contingent workers notes that medical benefits and pensions are
significantly lower for temporary workers, other than independent
contractors.
15. Many temp agencies offer benefits packages to
the temporary workers which the agencies contract out. However temporary
workers sometimes rotate between and among temp agencies, often at the
suggestion of the temp agency client organizations where the temps work,
so that portability of benefits is still important for agency temp
workers.
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