Can Temps Drive Profits?

     Part 2

"Using temporary employees reduces costs!"

So say the proponents of temporary staffing services. However, critics charge that these cost savings frequently fail to materialize, and worse yet, they claim using temporaries is a risky strategy that results in reduced quality, productivity, and employee loyalty.

So who’s right?

Until recently, no one knew for sure. While anecdotal evidence could be found to support both claims, no empirical data had been gathered to prove or disprove the value of using temporaries. In the Fall of 2001, Decision Sciences magazine published a research paper by Nandkumar Nayar of Lehigh University and G. Lee Willinger of the University of Oklahoma. This paper was the first to systematically examine the financial implications associated with increased reliance on contingent labor.

So which side is right? Here is a synopsis of Nayar and Willinger’s background research and findings:

More than a decade ago, Miles (1989) observed that "increasing international competition and the rapid pace of technological change are favoring organizations that are lean, fast, and flexible." From a basic microeconomic perspective, to compete successfully, companies must maintain the lowest possible cost structure.

One of the easiest and highly visible methods is to control labor costs through downsizing. However, several papers have examined the impact of downsizing on stock prices, and contrary to expectations, research has shown that downsizing has had a negative impact on stock prices. The stock market appears to view layoffs as a managerial response to lower expected future demand for a firm’s product. A study conducted by Cascio, Young, and Morris (1997) evaluating the financial consequences of changes in employment at major American corporations found that firms that adopted pure employment downsizing did not perform any better than average firms in their respective industries.

Throughout the 1990’s an increasingly popular labor cost control strategy has been the use of contingent (temporary and part-time) workers. The business press has depicted using temporary employees as a method for reducing cost because, in contrast to full-time employees, contingent workers are not provided employment benefits and may not be members of a union. In addition to these factors, temporary workers provide managerial flexibility, allowing companies to adjust workforce strength to match product demand without any costly hiring or firing.

Based on a seven-year performance study, Nayar and Willinger concluded that:

• Firms that increased their reliance on contingent labor experienced statistically significant increases in earnings before interest, taxes, depreciation, and amortization (EBITDA).
• Firms that increase their reliance on contingent labor experience higher performance because their costs are lower (on average).
• Stock returns are increased through the increased use of contingent labor.
• While many perceive that increased reliance on contingent labor will result in increased risk for the firms involved, no increase or decrease in systematic risk could be documented.

So who wins the argument about the value of temp help?

According to Nayar and Willinger: "Our evidence supports the contention that the practice of using contingent workers improves gross margins. This, in turn, causes the stock market to respond favorably with respect to the stock price of those firms, thereby resulting in higher stock returns. The lack of risk changes implies that the stock market does not incorporate any detrimental consequences from the increased reliance on contingent workers into stock returns."

Source:
"Financial Implications of the Decision to Increase Reliance on Contingent Labor"

Decision Sciences, Fall 2001, pp. 661 - 681