Number of suppliers
Many
One or two
Management of staff
IT department
Supplier
Location of staff
Normally within the IT Can be either on- or off-site
department
Measurement of success
Individual project tasks
Service level agreement
Key to success
Individual contractor
Entire service provider
company
Pricing
Time and materials
Fixed fee
Right to hire supplier’
s staff Occasionally
Infrequently
Characteristic
Staff Augmentation
Outsourcing
Co-employment concerns
Possible
No
Flexibility
High
Low
Overall program
Tactic al
Strategic
STAFF AUGMENTATION CONSIDERATIONS
When would an IT department use staff augmentation? Although the answers vary, most staff augmentation projects fall into one of the following categories.
1. The department is unable to hire or retain sufficient staff to meet its normal workloads. The booming economy of the late 1990s created a shortage of qualified technical staff in many parts of the United States. For companies that were installing large software suites such as SAP and PeopleSoft, the situation was exacerbated by the demand for IT staff with this specialized expertise. Other companies have a perennial problem retaining qualified staff for a variety of reasons, ranging from compensation policies to corporate culture. In these cases, contractors are brought in to fill the gaps. They can be viewed as temporary staff, used until permanent employees are hired.
2. IT needs additional staff for a specific project. During large system development projects, IT may need more designers, coders, and testers than it has on its staff. Rather than hiring permanent staff when there is no long-term need, IT organizations can use contractors to fill the gaps. Similarly, many companies used outside service providers to assist with their Y2K
remediation. Unlike the first case, which had an indefinite term, this use of staff augmentation is for a specific period.
3. The department seeks staffing level flexibility. Some companies and industries have a history of boom-and-bust staffing. As economic conditions change, major projects are cut and staff levels are reduced. To avoid having to periodically lay off employees, some companies keep only a core staff, and use contractors during the boom times. Although they pay more on a daily basis for contract staff, they avoid the expense and pain of severing employees.
4. IT needs specialized skills or knowledge. During a period of rapid technological change such as the current “E-biz craze,” IT may want to initiate projects using new technology. In most cases, it will not have existing staff with the needed skills. While it could contract with an outside firm to do the development, an alternative approach is to rent the expertise in the form of contractors who will work with in-house staff, providing on-the-job training and knowledge transfer. A primary advantage of this approach is the fact that short-term staff augmentation results in a permanent upgrading of in-house skills.
5. The company wants to retain day-to-day control of all staff. Some corporate cultures are not compatible with the transfer of responsibility and task level accountability that outsourcing demands. For these companies, staff
augmentation can fill the gaps in staffing levels and expertise, without requiring a cultural shift.
The primary advantage to staff augmentation is the flexibility it gives the IT
department. Because of the short-term and ad hoc nature of hiring contractors, IT
can move quickly, bringing on additional staff for specific projects and removing them as soon as the work is complete. Flexibility extends to the actual hiring decisions. Although many companies have a list of preferred suppliers, the IT
manager normally has a choice of several vendors, and can choose the firm whose employees most closely meet the manager’
s requirements.
While staff augmentation may solve many problems, it also raises several concerns.
The first is cost. It seems intuitive that, because a service provider seeks to make a profit while most IT departments need only charge out their expenses, contract help would cost more than in-house staff. When hourly or daily rates are compared to the salary and benefits costs of employees, contractors do appear to be more expensive.
For short-term projects, this may not be the case. As shown on Exhibit 2, a true cost comparison includes more than salary and benefits.
Exhibit 2. Evaluating Costs of Staff Augmentation versus In-house Staff Add:
__Salary
__Benefits (life and health insurance, pension, etc.)
__Training (course fees and travel)
To determine annual cost.
Subtract:
__Vacation
__Holidays
__Training time
__Illness
From 2080 (40 hours per week times 52 weeks) to determine the number of working hours in a year.
Divide the annual cost by the number of working hours to determine the hourly rate.
Add:
__Recruiting costs
__Severance and other termination costs
To determine the one-time employment costs.
Determine the length of the assignment in hours.
Divide the one-time costs by the assignment length to determine the hir ing/firing surcharge.
Add the surcharge to the hourly rate.
An example:
Assume an annual salary of $60,000, a benefits cost of 30 percent, and annual training costs of $2000. The employee receives 10 days vacation, 12 holidays, 5days of training, and 5 sick days.
His hourly cost, without considering recruitment and severance, is $43.86. If a typical contractor’
s hourly rate were between $60 and $80, it would appear that the company was paying a substantial premium for the flexibility involved in staff augmentation.
However, if the employee was hired for a six- month engagement (1040 hours), with recruiting costs of $20,000 and termination costs of $10,000, the hourly sur charge would be $28.85, making the total cost $72.71.
The situation is different on long-term assignments. When used for extended periods, contractors normally cost more than permanent staff. In this case, although there is no economic justification, the IT department may decide that staff augmentation is preferable to hiring permanent staff because of the flexibility it provides.
The second concern, which is also related to long-term use of contractors, is co-employment. In several high-profile lawsuits, contractors successfully argued that they were entitled to employee benefits because they functioned essentially as employees. As a result, companies have become wary of what is termed co-employment. To avoid this, some have started to limit the length of time a contractor can work for them, in some cases to terms as short as six months.
Although this does not impact limited-length assignments such as the provision of specialized skills at a critical phase of a project, the use of contractors for semi-permanent staff augmentation becomes difficult. This is particularly true when the assignments have a steep learning curve, as can be the case with support of company-specific applications. It is at this point that some IT depart ments first consider outsourcing.
OUTSOURCING CONSIDERATIONS
Even when an outsourcer’
s staff works on the client company’
s premises, IT is not
vulnerable to claims of co-employment. This is because of the fundamental difference between staff augmentation and outsourcing. In outsourcing, the company contracts for a service, not a person. It is the outsourcer’
s responsibility to
determine how many people will be required to perform the service, and what technical background they must have. The company normally does not interview them, and it does not direct the staff. In short, IT specifies what is to be done, not how to do it.
Although some companies believe that the primary benefit of outsourcing is to avoid the co-employment issues associated with lengthy staff augmentation engagements, there are other reasons why an IT department would outsource one or more of its functions, including:
§ The work is not a core competency. For example, a manufacturing company may decide that its core business is manufacturing widgets rather than distributing them, and may therefore outsource the warehousing and distribution components of its business. Similarly, an IT department may decide that some functions are not part of its core competency, and may choose to transfer responsibility for them to a service provider. An example of a non-core competency is support of legacy applications while implementing a new system or integrated suite that will replace them. In this case, IT may have decided that its core business is being a systems integrator rather than an application support function.
§ The skill is a commodity. Some functions, such as mainframe operations, help desk services, and telecommunications support have become commodities.
The work provided does not vary substantially from industry to industry, or even from company to company. Because of the standardization and economies of scale, various suppliers have established themselves as experts in these functions, and can perform them at least as well and often cheaper than the IT department.
§ IT has a major skills gap, with no short-term plan to close it. As noted above, an IT department may use staff augmentation as a way to obtain specific expertise, and transfer that to existing staff. This approach is desirable when the skill is one the department seeks, such as an emerging technology. If, on the other hand, the department has difficulty retaining experts for key systems, such as SAP or PeopleSoft, it may choose to turn responsibility for the entire system over to an outsourcer rather than struggle to keep the department fully staffed.