By: John Hutchins, Quantix Vice President, Client Services
During the last four years, we’ve noticed a dramatic shift in the types of positions our client companies are asking us to fill – contract vs. direct hire positions. Based on conversations with friendly competitors, it appears that this shift has occurred throughout the IT employment sector. For example:
- In 2010, 80% of the positions we were asked to fill by client companies were contract (temporary) positions and only 20% were direct hire – meaning the client intended to pay us a fee and hire the candidate immediately.
- In 2012, the number of contract positions fell to 55% and the number of direct hire positions increased to 45%.
- Thus far in 2014, 39% are contract positions and 61% are direct hire positions.
What caused the shift from contract to direct hire? We’ve seen this type of shift multiple times over the years. The typical cycle coincides with the strength of the economy. When the economy is struggling, companies tend to utilize contract labor. Our theory is twofold: (1) money used to pay for contract services comes from a different funding pool than money used for the salaries of direct hire employees and contract labor is perceived differently by shareholders; and (2) direct hire is viewed as more of a long-term commitment with more strings attached.
The economy has taken a long time to recover from the ‘Great Recession’ that started in 2008. Although the IT sector was not hit nearly as hard as other sectors, it still experienced a staffing downturn from 2008 until 2010. The first signs of life were client companies wanting to hire contract labor. This trend continued until companies began to feel more secure about the future – approximately 2012. At that point, we noticed the trend away from contract and toward direct hire. This trend builds quickly upon itself – almost a self-fulfilling prophecy. As more companies are willing to hire candidates directly, candidates become more particular and are only willing to consider direct hire opportunities. This, in turn, causes even more companies to begin hiring directly because they can’t find candidates for their contract positions.
As a side note, here’s an interesting twist that eventually occurs at some point in this cycle. When direct hire becomes the norm, some highly skilled IT professionals figure out they can make a whole lot more money working contract and, with the strong economy, they don’t worry about the temporary nature of contract positions. Near the peak of the direct hire frenzy, companies begin to lose their top talent to contract and consulting gigs.
How does the shift from contract to direct hire impact candidates and the hiring process? Candidates are impacted in multiple ways. The biggest positive impact is the perceived stability of direct hire. Although there are numerous examples of contract opportunities lasting longer and paying better than direct hire opportunities, candidates feel more comfortable when a company commits to them by hiring them directly. Negatives include a longer hiring process and hiring managers becoming increasingly picky with regard to whom they hire. The hiring process lengthens because direct hire brings with it a greater sense of commitment which requires more company representatives to be involved in decision making. With contract positions, it’s usually just the manager who interviews and decides on the best candidate. With direct hire positions, multiple managers, team members and human resources weigh in on the decision making process. This increases the number of interviews which lengthens the process.
Based on previous experience, this most recent shift to the direct hire preference will change back to a contract preference when the economy stumbles, as it eventually always does. There is nothing inherently bad about the current shift or the overall cycle, but it is an interesting phenomenon that explains some of the behaviors IT staffing companies and our candidates are experiencing in the hiring processes of our client companies.