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 semipermanent 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 departments first consider outsourcing.

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