Why contractuals contribute to poor productivity



MANY managers don’t realize this basic premise. They hire an army of minimum wage earners who are systematically kicked out of their jobs as soon as they reach five months of continuous employment. They are called with so many names like “555,” endo, contractuals, agency staff and temporary workers, among other job insecurity tags.

The abuse becomes apparent if an organization hires as many as 50 percent of its workforce. At one time, an acquaintance HR manager boasts of maintaining contractuals as many as 90 percent of its total manpower complement, even as they perform regular, desirable, and necessary functions of their business. The idea is to make it easy for the principal organization do accordion hiring and firing. Or is it?

Never mind if the manpower agency is sloppy in the hiring process or the qualifications of job applicants is much to be desired. These temps, because of their employment status, can be easily removed, the moment they commit an absurd infraction, such as not brushing one’s teeth after a meal.

Because of the ease in hiring and firing temps, many organizations are trigger-happy in contracting or sub-contracting jobs to manpower agencies, resulting in overstaffing that causes poor labor productivity.

Raise your hand if you dislike poor productivity. I’m sure, 99.9 percent of you will agree with me that poor labor productivity is a silent organizational killer. It is a form of waste, no matter how temporary it has become at any given time. The trouble is that, people managers perpetuate such form of poor labor productivity for some malevolent reasons, like they’re on the payroll of manpower agencies that are charging a minimum of 10 percent for administration fee.

The internet is an ocean of information for computing the labor productivity formula. The basic definition is the value of output per unit of labor input or the measurement of the worker’s produce. You can check it for yourself. The most common model is: Number of units produced/man-hours of work.

For example, if you have 120 employees, 100 of whom are contractuals and 20 are regular employees. Assuming that the 100 temps are receiving an average monthly salary of P10,000, (not yet included here is the 10 percent administrative fee charged by manpower agencies), then that means at least P1 million for the monthly salary of contractuals.

Compare that with say, the average P20,000 monthly pay of 20 regular workers, that means an additional P400,000 or at least a total of P1.4 million monthly payroll for all 120 workers. That’s a lot of money for any organization.

But what if an organization starts using its common sense by exploring all possible options to minimize, if not eliminate or reduce their temps to their barest minimum, who because of the nature of their jobs are not inclined to be loyal and are always on the lookout for greener pasture elsewhere?

That’s the point. How do you retain the best and the brightest workers for your organization? More often than not, the top three employee retention strategies are: One, be kind to the workers even if you can’t pay them good money, at least temporarily. Two, give them challenging and enjoyable work assignments. And three, be considerate by paying them pay and perks that are above industry rates.

More than anything, the best approach is to ask employees the $6-million question—what would make you stay in your organization? The answers may revolve around those three retention strategies that I stated earlier.

While you’re at it, consider two approaches in improving labor productivity. Let me give you a hypothetical case—suppose, a car manufacturer produces 100 cars a month with the help of 10 workers. What are the possible approaches, if and when its top management decides to increase labor productivity by 20 percent?

One is the Western approach—reduce the manpower size from 10 to eight workers, while at the same time, maintaining its monthly 100 cars production quota. The other approach is called the Japanese solution—maintain ten workers, but require them to produce 120 cars a month. Easy does it!

Now, here’s my favorite formula—the ½ x 2 x 3 rule of Charles Handy. In his two books, “The Age of Paradox” (1994) and “The Age of Unreason” (2002), professor Handy (born 1932) says the best approach in improving labor productivity is to dismiss 50 percent of the workforce, resulting in the cutting of the payroll to one-half of its original size.

Then pay double the salary of the survivors, make them work smart for it so that your organization can achieve three times more of its production level. With this in mind, you can reduce the number of your contractuals to 50 percent of their original size. Convert them to regular workers and pay them good money and benefits. That is, if you want to achieve three times the level of your current productivity.

But of course, don’t forget to install an objective performance appraisal system.

Rey Elbo is a business consultant specializing in human resources and total quality management as a fused interest. Send feedback to elbonomics@gmail.com or follow him on Facebook, LinkedIn, or Twitter for his random management thoughts.


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  1. Dear Sir/Madam…if you will read again, you will understand that the article is Philippine-context. However, please understand that I can’t give enough examples due to space limitations. Thanks for reading, anyway.

  2. What is this? Doesn’t Elbo have examples for Pilipinas setting?

    Like what has he seen work with a Pilipinas call center? Or with a Pilipinas tuna factory? Or even with a highways department? Any real-world examples?

    • It’s all but a textbook approach to drive home the message. More often than not, local experiences may be too complicated to illustrate the principle, or corporate confidentiality might be a handicap.

      The Charles Handy formula is just a guide which would surely take various modifications and numerous trial-and-error implementations before it becomes a company success story. However, the formula speaks of a strategy to start a productivity campaign.

      There are many ways to do away with 555. Some might take profits away from companies which unduly benefited from this scheme.
      Mr. Elbo is espousing productivity as a way out of contractualization without sacrificing the bottom line.