Field-ready wisdom (Part 2 of 3): A conversation with Jeff Novotny and Shawn Fields

Jeff Novotny (Field Nation’s Director of Network Development) and Shawn Fields (Field Nation’s Senior Field Services Strategist) are veterans of the field service industry and have worked with some of the largest, most well-recognized service organizations in the country. In this conversation, they address the myth that on-demand labor is more expensive than a W2 workforce and offer advice to service leaders looking to protect their margins.

Shawn:

Jeff, more and more service leaders are coming around to the idea that the blended workforce will be the future––not just the far-out future, but the near-term future. As they think about what that means for their company, there are a lot of myths and misconceptions that we often hear about, and cost is a big misconception. We often hear this myth that 1099 labor is more expensive than W2 labor. Jeff, when you hear prospective clients say that, what’s your reaction? And what’s your response?

Jeff:

Depending on their perspective and what they’re looking at at the micro level, they’re not wrong. But that’s because they’re looking at it at a micro level and they’re not taking a macro approach. A look at the big picture is going to reveal a very different answer. Again, where there’s volume and it’s consistent, the W2 model does hold true because there are fewer idle costs. But in the leaner markets, those idle costs that lie outside of an individual work order do add up, and they will impact your overall cost in the long run. When you factor that in, the 1099 model is actually less expensive than the W2.

Shawn:

I’m going to take a little bit of a different approach and stance on the answer to the question. I often say that people who think W2s are less expensive than 1099s just can’t do math. There’s a $92 billion outsourcing market out there that was built on the concept of labor arbitrage. Labor arbitrage means that alternative labor, depending on factors like geography, is less expensive. I’ve been in this business for about 40 years and I can’t tell you how many different organization-wide cost analyses I’ve done. When you take into account all the costs associated with a W2, it’s very difficult for a W2 to be less expensive than a contingent worker.

Jeff:

Agreed. I’ve witnessed similar total cost analyses. It’s important for companies to be honest with themselves about their total costs when discussing the W2 model.

Shawn:

And when you think about it, there’s a very narrow case where it could happen, to your earlier point Jeff. If you’ve got W2s who are 1) sufficiently utilized and 2) utilized doing the right type of work that generates enough revenue to cover (and hopefully exceed) their cost––in those narrow instances there’s absolutely a case for W2s being able to recover their cost and generate profits. But it’s such a narrow case.

We often find that companies are looking at utilization to judge whether W2s are being used efficiently. W2s can have great utilization numbers, but when you look at how much revenue they generate (when you look at revenue per tech per day, in other words) it tells a different story. For example, a high utilization figure may be because they’re in a car for two hours for a 30-minute call to do preventive maintenance on a commodity piece of equipment. That won’t generate the revenue needed to cover the labor cost of that drive time. It’s very difficult for W2s to be less expensive than contingent labor due to those types of factors.

Jeff:

To your point, I think there’s a lot of magic math that happens when companies try to justify that expense. Companies have to be truthful with themselves. They have to ask, “What is the true cost of everything we do? Where is the revenue coming from that supports that cost?” There are a lot of companies that will only look at the costs associated with a single project versus looking at the total costs for the entire company. The magic math prevents them from considering all the costs that are supporting the tech that completes the work order.

Shawn:

I’ll give you a good example of that, actually. We’re doing a project for an enterprise organization right now where the actual average cost of their technical labor at 100% utilization is somewhere in the $25/hr range, which is not terribly bad. But when that resource can only be used 80% of the time at best, which is a pretty decent utilization number, that cost jumps up to almost $30 an hour. And then when you take a look at all those cost of goods––categories like telecom and travel and depreciation and freight and service vehicle expense, all those things that have to be counted––and then looking at the corporate allocations, the SG&A allocations that apply to that same labor, that takes that labor up to $40/hr just to break even. Again, this is at 80% utilization. And that’s before you add any profit in. So I think the math you’re referring to Jeff just boils down to being honest with yourself. It’s not an unburdened labor rate you’ve got to look at, it’s the fully burdened labor rate that contains all those cogs and SG&A categories.

Jeff:

Yeah. All of that is what needs to be added into the equation to get the true side-by-side view of full-time versus on-demand labor. Then you need to look at it over time. Don’t just look at it at the level of an individual work order. You’ve got to look at it over time because you need to consider variability and seasonality. You may have a tech that’s 80% utilized in one month, then 60% the next month because seasons change or demand changes.

Shawn:

Making sure that you’re coming up with a fully burdened comparison to platform labor is job number one. You need to make sure that it’s an apples-to-apples comparison. And then, as you bring up, you need to factor in variability. You’ve got to reckon with the fact that, when it comes to W2 resources, you’re going to be paying for an entire year. You’ve got 2,080 possible hours in which you can recover that cost––but, as I mentioned before, you really don’t have that because they can’t work all those hours. So for 80% utilization, you have got to recover that cost in 1,664 hours. So that’s how that cost number starts ticking up.

With platform labor, you’re only paying for the cost of the labor while they’re turning the wrench. Typically, you’re not paying the travel cost, unless it’s pretty extensive. And admittedly, here in the current economic climate with gas prices going up, we are seeing higher travel costs on the platform as well. Enterprise organizations are saying the same thing. But if you’ve got a three-hour call, if it’s an hour travel there, an hour on-site and an hour trip back, worst case, you’re paying travel expense there, travel expense back and the hour you’re turning the wrench if you’re paying for the platform. For W2 labor, you’re paying travel expense and you’re also paying the tech’s labor rate for those two hours of travel time there and back in addition to the hour they’re on site doing the work. So from a work perspective, it’s typically much less expensive.

Jeff:

The market is shifting into more of a 24-hour concept for service, which reminds me: We haven’t even talked about overtime. In those cases, you’re now paying a higher rate for your W2 than you probably would for a 1099, who would not incur that overtime rate. On top of that, you may not be getting any additional revenue for it. With a W2, you’re incurring additional cost for the overtime. With a 1099, you’re just paying the cost of the labor.

Shawn:

And it’s tempting to think, “Well, can I just go back to my end customer and charge them more? Renegotiate the contract to still make up my margin?”

Of course, you can always negotiate with customers in an effort to make up margin. But is that cost going to be competitive at that point? The client is looking at the market competitive rate. What are the prices for a specific transaction in a specific location? What’s the competitive rate for that? Buyers aren’t worried about what your costs are and how you mark that up. So if you pass that markup onto the buyer, that may take you out of contention for that specific project. You don’t always have that flexibility.