Why does contracting increase in a tough economy?

In a previous article talking about how a recruitment business can thrive in a tough economy one of the suggestions I made was to focus on contracting. We tend to see contracting spike during a tough economy, but why is this?

It probably seems obvious but when the world is a more difficult place to do business, companies become more cautious. Those who rely on funding, be it VC/Private Equity or more traditional means such as banks, find it harder to come by. And those who reinvest profits to fund growth might start to think about saving some of that cash for a rainy day.

It all comes down to runway, the number of months you can continue for based on the funding you already have in place. It doesn’t mean the people leading these companies stop investing in their businesses altogether, but they tend to turn to a more project focused approach. So instead of hiring a bunch of permanent employees and the legal obligations & long-term commitment that come with it, they turn to the contingent workforce.

Contractors, on the face of it, tend to be a more expensive option so why do businesses go for this seemingly counter-intuitive option when money is tighter?

Firstly, it allows them to have workers who are purely focused on the project they’re working on. They don’t need to consider training (other than necessary for the role) or wider business needs. This means they’re in and working and productive much more quickly as they bring skills that, generally, the organisation doesn’t usually already have. They also tend to be available much quicker so no waiting for notice periods and that dreaded call that the candidate used the offer to get a pay increase.

Secondly, it provides a flexibility that permanent workers just can never offer. It allows businesses to bail out of a project in very short order. The implementation of Off Payroll (otherwise known as IR35) reform where end clients take responsibility for IR35 status has been controversial and disruptive in the contracting world.

However, one of the things it has done is force businesses to look at how they engage contractors compliantly and this has had a big effect on things like notice periods. The upshot is that contractors are generally being treated a lot more like the B2B providers they are and so end clients can avail from that much increased flexibility.