A healthy balance between the numbers of contractors and employees needs to be maintained, for the good of the economy.
Oil and gas contractors are being encouraged to become permanent employees by energy and services firm clients desperate to retain workers with key skills. But what is the likely impact this may have on the oil and gas sector specifically, and how does ‘going permie’ affect the wider contracting sector, and indeed the UK economy? And can contractors be treated as simple substitutes for permanent employees, or do they have an economic role of their own?
Increasing the number of employees with a given skill set and reducing the number of contractors is going to affect supply and demand, which in turn will impact on rates and the financial dynamics of the market. Productivity will also be changed. And in a small market such as oil and gas, small relative to say IT or construction, the number of clients will also result in the market dynamics altering.
If done on a large scale by clients, persuading contractors to become employees may reduce the pool of available contractors if the number of newbie contractors joining the flexible workforce does not increase to replace them.
Assuming client demand is sustained, then the skills of the resulting fewer contractors will be in even greater demand, forcing up pay rates. If client numbers are small, though, then the impact of hiring contractors as employees may be to reduce demand, because the clients now have employees to perform the work and require no, or fewer, contractors. And falling demand means lower rates due to a lack of clients competing to hire contractors.
The impact on productivity could also be significant. PCG sponsored research by Professor Andrew Burke of the Cranfield School of Management shows that contractors can increase efficiency and productivity within their client’s organisation.
That’s not to say employees are not productive, because of course they are. But employees typically don’t spend 100% of their work time delivering their technical skills on output-based projects, as do contractors.
And do ex-contractor employees become less productive because they attend more meetings, undertake training on company time, take more holidays, work fewer hours and maybe relax somewhat, with little fear of being fired? Or are they bribed with promises of more pay and bonuses in the future to work longer hours?
If the new employees do indeed end up in more meetings, etc, then productivity decreases. Furthermore, the outputs delivered by those former contractors reduces, which then leads to an increase in demand over supply, and increased rates.
But there are productivity gains to be had by employing workers permanently, rather than as contractors. Retaining key workers reduces corporate memory loss, and increases productivity. The flip side is that those ex-contractors will probably want a handsome reward for staying put, so costs increase and efficiency potentially decreases.
Because oil and gas is a relatively small industry, albeit a global one, the impact of employing contractors in the sector is likely to reduce the available pool of specialist contractors. This will drive up contract rates and salaries, and reduce productivity and efficiency within the sector. This scenario could persist for up to a decade, before suitably qualified and experienced new workers enter the oil and gas workforce to address its current skills shortages.
However, if the same were to happen in other core contracting disciplines, such as IT, engineering, construction, the interim sector and finance, then the impact would be much less clear cut. Whilst engineering and IT are sectors already suffering skills shortages, there is no evidence that clients are tempting contractors to become employees on a wholesale basis.
All of the above assumes that contractors are merely substitutes for permanent employees, which according to Burke’s research they are not. Burke contends that contractors fulfil a range of roles independent of creating employee-like outputs.
Contractors drive innovation and assist their clients with overcoming challenges they face caused by risk and uncertainty. Burke’s research also shows that contractors also create jobs, with permanent employees stepping into roles which were originally contract-based.
So, the biggest impact of taking on contractors as employees may not necessarily be reduced productivity or changes to the supply and demand dynamics, although those factors may arise.
By taking on contractors as employees, client organisations are potentially losing much more than they gain. They face losing the champions of corporate venturing, entrepreneurship and innovation. And they reduce their ability to compete as effectively as their competitors.
Contractors and employees are entirely different animals, even when they’re doing exactly the same job. Both need to be protected and nurtured, but maintaining the health of the contracting sector is particularly important to underpin the growth of the UK economy. Clients, and those guiding the economy through their strategic business leadership or legislative roles, must ensure contractors can thrive.