The Overlooked Expense

Cutting Costs in a Down Market

Jim Honefenger, Consulting Assets

When a market such as the Oil and Gas industry goes through a painful re-adjustment of costs to weather a downturn, every line item should, and generally is, under consideration for cuts.  The first targets are travel and expenses, followed by service sector costs.  The service sector must respond with their own cost cutting which actually becomes more drastic.  Then the inevitable slashes in staff take place which many believe is where they can make their biggest savings.

How those decisions are made could be viewed as rational or irrational depending on your point of view, but we know they are always painful.  As has been regularly pointed out, the age bubble has caught up with the industry and the “Big Crew Change” is taking place.  The industry has either laid off or retired its older workers.  Much of the intellectual capital that the industry has invested in for years has been displaced.

What does that mean for the industry?  Has risk now increased as a result?  Has technical knowledge walked out the door?  Are we dumbing down our industry?  Are there fewer mentors to guide and develop the younger professionals?

Despite the changes in the current make-up of our industry workforce, that older talent pool has not disappeared.  That particular form of intellectual capital remains available as independent contractors.  How can we effectively tap that valuable resource, control our risk, and minimize future monetary waste?

Hiring a contractor poses direct risks for the company through exposure to the very complex legal landscape of potential misclassification of that person as an employee.  This can happen when the law would impose on the company the obligations of an employer to an employee.  The risk of having future financial risk is real whether it be taxes or other potential benefits owed the hiree.  One of the ways to avoid misclassification of contractors is to contract through a third party whose job it is to provide contractors on a time and materials basis.

Nevertheless, there are major cost advantages when bringing on a contractor rather than hiring an employee which should be considered.  Many think hiring an employee is cheaper but is it really?  Consider the direct benefits that are generally paid by the employer:

  • Insurance (medical, dental, life)

  • Annual bonus

  • 401K contribution

  • Employee Stock Options

  • Company’s payroll tax payments

  • Paid vacation

 

These expenses frequently double the employee’s effective compensation and cost to the employer in real terms, but there are costs that go even beyond these listed above.  There are indirect costs such as infrastructure costs, insurance costs and future liability costs.  These are real costs and should be worked into the equation when considering operational savings.

 

Examples of infrastructure costs:

  • Accounting fees

  • Computer hardware and software

  • Conference and trade show participation

  • Corporate taxes

  • Data communications (email and data servers, phones)

  • Office supplies

  • Support services (legal. HR, IT)

 

Examples of insurance costs:

  • Liability insurance including general liability as well as professional liability

  • Workers compensation

 

Examples of future liability costs:

  • Relocation expense

  • Severance

  • Sick leave

  • Unemployment compensation

 

One additional indirect cost usually not considered is “the employment mistake”.  What if the person hired was a mistake because they don’t have the capabilities or they just don’t fit the corporate culture?  A mistake in hiring is a very real and substantial cost and a potential added liability.  This can be quite high as many have experienced.  A solution to minimize this risk is the “contract to hire” arrangement.

 

Work through a trusted company which will provide contractors who may be considered for future employment.

 

Jim Honefenger is one of the founders of Consulting Assets, a clearing house for the energy industry, providing technical and management professionals available for contract to hire.

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