Over the past several years, a lot of organizations have done a great job of dramatically reducing their IT costs by going to the cloud and adopting an on-demand computing model. As significant as that is, however, the fact remains that technology isn’t a company’s largest expense, not by a long shot—labor is. So why not dramatically reduce labor costs by adopting an on-demand labor model?
That’s the question I discussed earlier this week with Jeffrey Wald, co-founder and COO of Work Market, a provider of cloud-based contract labor management services, and a company that’s positioning itself to capitalize on what it sees as an inevitable shift to on-demand labor. I asked Wald to what extent he thinks the savings generated by on-demand computing is leading businesses to ask themselves, why not extend this model to the work force and implement on-demand labor? Wald said companies are making that connection:
For us, this dates back to a guy by the name of Ronald Coase, a Nobel laureate who in the 1930s published a paper called “The Nature of the Firm.” What you see in that is his intellectual exploration of what is the idealized structure of a company. That idealized structure is a very small fixed-cost kernel, and every other cost that can be, should be variablized. Over time, with just-in-time supply chains, with outsourcing different business processes, with the on-demand computing trend, you’ve seen the variablization of that cost structure. The last great bit of that cost structure that hasn’t been variablized is the labor force. And labor is, by far, a company’s largest expense, and is predominantly a fixed expense. So this notion of being able to variablize any cost structure is something that companies have always wanted to do. And the evolution of things like online marketplaces, the ability to telecommute, and a host of other technological innovations in the last 10 years, have enabled that last bit of variablization to occur. Now, people can take this predominantly fixed cost, labor, and turn it into more of a variable cost.
Wald went on to explain the key benefit of turning labor from a fixed cost into a variable cost:
You want to be able to just have costs based on revenue. Why are you going to be keeping assets around that aren’t utilized? The goal for our customers, and for anybody that is looking to use on-demand labor, is, very simply, 100 percent utilization. When you have an employee base, and an IT service flow, that is not busy 100 percent of the time, you are paying people to basically sit there. When you use an on-demand labor force, you are only paying people for actually doing work.
OK, so what are some of the downsides of turning labor from a fixed cost into a variable cost? Wald said this was a fair question, and he gave it an equally fair answer:
Obviously, we as Work Market don’t necessarily think that. But if we’re having a broad discussion here, there are a few downsides. There is the capturing of institutional knowledge—you keep people around because they know the different accounts you’ve worked on, they know your products. There are challenges around the process of constantly on-boarding and off-boarding contractors. Based on our research, and the data we’ve seen, it takes 12 contractors to replace one full-time employee. And the process of on-boarding and off-boarding those contractors is complicated. The third big challenge is compliance-related. The majority of government funding comes from payroll taxes; the way our tax system is constructed around labor really did not anticipate the huge movement that is coming to on-demand labor. So you’ve got things like employee classification, [Affordable Care Act], the Fair Labor and Standards Act that are all in place around a construct that is very focused on full-time labor. So people are very concerned about engaging on-demand labor, and running afoul of different regulatory frameworks.
Wald said the caveat to that entire statement is that Work Market’s software mitigates all of those risks. He explained the compliance piece this way:
What our software does is, first and foremost, it allows you to drive compliance through what your existing processes are. You have to make sure people have the right background checks, sign the right legal agreements, have the right insurance, and have the right licenses. What happens a lot of times, especially in the IT services world, is subcontractors are on-boarded, they fill out a subcontractor on-boarding packet, and then that goes into a file cabinet somewhere. And six years later, when Joe Smith is onsite, say, hanging a sign, and it falls on somebody, he gets a call asking about his liability insurance. And he says, “Oh, yeah, that lapsed three years ago.” That is a compliance issue, and that is one of the biggest pain points of our customer base—making sure that the people they on-boarded maintain compliance. Our software actually enforces that, and that is an area where I can say we completely protect our clients. It is impossible for our clients to send work to somebody who doesn’t meet their definitions and characteristics of what it means to be capable of working.
The institutional knowledge problem, Wald said, is mitigated by means of search algorithms:
I can provide data to Joe Smith about everything that’s happened before at client ABC Corp. and its products—I can deliver that data so that when he walks in to client ABC Corp.’s office, he can see the branch manager is Fred, and his wife just had a baby. He can see there’s a Cisco blade server integration, and what it does. That’s number one. Number two is we have a learning management system that allows ABC Corp. to build up the training and skills verification that they need in order to make sure that when Joe Smith walks in there, he knows everything he needs to know about the products he’s going to fix. With our learning management system, ABC Corp. can make sure it has 100 guys who know its products, and the second that some product spec changes it just updates the learning management system on Work Market, and that pushes an update to every person in the environment that says, if you want to continue to get work, you need to update the test. So if I’m in ABC Corp.’s environment, and I didn’t take the test showing I know about the new spec, when that next assignment comes out, even if it’s right next door to me, I won’t receive it, because I’m not up-to-date and compliant.
Wald also shared some enlightening information about the on-demand labor market in general, and Work Market’s place in it. I’ll cover that in a forthcoming post.