Gig or Job?

First Posted at Management Matters Network (Link)

Reid Hoffman, the founder of LinkedIn, has been proselytizing that most work in the future will be done by “independent contractors” or “freelancers.” This is the Uber model, where all the drivers are self-employed. It’s also common in Silicon Valley—many engineers are not employees, but rather contractors hired to work on a project. Engineers are there for a gig, not a traditional job. The idea also fits LinkedIn’s business, a professional network that identifies and connects these workers.

But Hoffman’s assertion—the whole world of work will go this way—challenges my sensibilities. My experience in building businesses, plus living near Cambridge’s Kendall Square with all of its high-tech firms, tells me that not all businesses can operate on the “contractor” or “freelance” model. Kendall is filled with pharmaceutical company laboratories, where thousands of very smart people try to solve very big problems. None of these companies would succeed without dedicated scientists, on the job for 10 or more years, sharing the company’s culture and high sense of purpose. The world of work cannot simply be filled with transients.

For Those Who Love Gigs

The argument supporting Silicon Valley’s gig phenomena is that many young engineers aren’t interested in the security and benefits of a “job.” They want to be doing interesting work—and there is plenty of that work  in Silicon Valley and other places with a high density of start-ups.

I always ask my Uber driver why he or she is driving. They like the flexible hours, the way driving can fit into life’s other commitments. Many drivers also have a primary job somewhere else, and see Uber as a supplement to their income. Very few of them are professional drivers, but it’s a legitimate formula that works for Uber.

As for the young engineers who are enjoying their gigs, I often wonder what will happen to them if work starts to dry up. I saw this issue happen in the consulting industry when work dried up for independent consultants. There are agents who help engineers or consultants find the next gig, but it can eventually become a hand-to-mouth existence. Where will the next gig come from? I also worry about what will happen when contractors want to stop work and have no savings. Gig income is good, but life in the technology lane is expensive. All is good for now, so I should not rain on the parade.

And for Companies

The gig economy has benefited many tech start-ups. Full-time engineers can be hard to find, and if you’re in the early stages of developing a product, the right contractor can do the job and keep costs down. For established companies, contractors have always been a way to make labor costs variable. If business slows down, it’s much easier and cheaper to tell a contractor that the gig is over, than to lay off a long-term employee.

Contract work has been around years—the garment industry used to have people working at home doing “piece work.” The work model serves companies well. But there is something to learn from companies that have gone through cycles of outsourcing whole business processes, which you can think of as the wholesale engagement of hundreds of contractors. Thirty years ago, outsourcing became a market phenomenon that promised to secure rare talent and make costs variable.

GM was at the forefront of outsourcing when it made a deal that all its IT functions would be conducted by EDS (now part of HP). But over time, GM started to take the work back. GM wanted more direct control over the work being done. It’s a trend that’s worth watching and understanding. The need for control is only one of the questions to ask when deciding whether work should be done by contractors, employees, or an outsource service provider.

The Redfin Story

Redfin, a real estate agency, made news when it launched with agents who were full-time employees. The model was counter to that used by most real estate companies, where freelance agents did the work. Redfin’s model jarred the sensibilities of venture investors. The company’s founder, Glenn Kelman, says the decision to have realtors as full-time employees didn’t always make things easy. In the 2008 downturn, the company was carrying many employees and fixed costs. It was, according to Kelman, a “near death experience.”

Redfin’s model has also been hard and slow to scale. But Kelman believes his model has served the company and its clients well. Redfin has more than 1000 agents and they know there will always be food on the table, which makes them remain committed to the company and stops them from selling a client the wrong house just to earn a commision. Redfin also maintains about 800 contractors to assist agents, so the worker model is actually mixed—as it will likely be for many companies in the future.

A Successful Mix

The work of a company today will not be done wholly by full-time employees. Costs and scarce talent require going outside the company for skills. Plus, the work model of a company that offered a “job for life” went away many years ago. So workers are going to move around more, in one form or another.

For some industries, Uber-like business models make sense. But I am a believer that a company needs a committed core of full-time employees. Even Uber has full-time employees doing important work at its headquarters.

How big should that core be and how far into the work of the company should it extend? For a pharmaceutical company that core will be large. For a company providing elevator repair services, a contactor model might work.

Why a Core

It may sound old-fashioned, but there’s still a strong case for keeping a core group of full-time employees, possibly a large core. In critical functions, a company needs dedicated people who share deep knowledge of the business and its customers. These are the people who share in the company’s culture. When a company is in trouble, it’s not contractors who turn it around. After all, loyal employees saved Johnson and Johnson during its Tylenol crisis.

From an individual’s perspective, a full-time job may be the only way to build net worth—either through a tax sheltered savings plan or equity. A company that really understands the value of its people will find ways to broadly share the creation of wealth.

If you’re building a company to grow, you need dedicated people. If you are building a company to sell, you can do with something less. I admire the skills and work of contractors, but a company often needs more.