In Pursuit of Growth in a Gig Economy

January 30, 2017

Case categories include: Human Resources   Leadership   Operations   Strategy & Planning   Trends   

By Warren Lutz

Once again, the Bay Area finds itself at the center of a cultural revolution. Only this time it’s not “flower power,” the PC or social media, but a revolution in the way we work.

Welcome to today’s gig economy, the term ascribed to the 54 million Americans working as freelancers, temp workers or independent contractors. Thousands more are joining them every day, turning down job security to be masters of their own work routine.

Meanwhile, Bay Area businesses – no doubt inspired by the success of Uber and Lyft – are outsourcing larger and larger shares of their workforce to remote workers to lower costs, strengthen teams and secure new growth. In fact, between 2012 and 2014, San Jose, San Francisco and Oakland led all U.S. metro areas with the highest growth in non-employer firms – code for companies that hire “gig” labor.

Andy Berkenfield, CEO of advertising agency Duncan Channon, says his industry has depended heavily on independent contractors for years. Today, the dynamic carries a different vibe. “Being a freelancer used to be code for ‘I’m in between jobs,’ but that’s no longer the case,” he said. “It’s become more acceptable as a legitimate career path.”

Many of his competitors have transformed themselves into virtual agencies, hiring independent contractors almost exclusively. Yet Berkenfield believes a strong full-time staff is best for bonding with clients, which tends to produce better work. “I am very jealous of the low overhead model agency,” Berkenfield says, “but I think the absence of deep relationships is a challenge to these kinds of businesses.”

While startups crave the cost efficiencies that gig labor provides—at least on paper—Silicon Valley stalwarts seem lukewarm to the trend. Glo Gordon, Vice President of IOT Cloud for Cisco-Jasper, says her company doesn’t really use gig labor, but its clients do. “Some of the disrupter companies are our customers, so I see the trend from a ‘how do we enable that?’ perspective,” she said. “Our own workforce tends to be a little more mature and sage. For the younger workforce, flexibility and doing something that’s fun and interesting, is huge.”

However, Gordon sees the trend growing among older workers who have expertise, but don’t want full-time work. For example, she says, there are people who worked on General Motors' OnStar technology in the 1990s who are now being hired as contractors to work on connected vehicle startups. "While some of these people have retired, they have a set of expertise they can leverage at a high price," Gordon said.

Kathy Zwickert, Chief People Officer at NetSuite, said that NetSuite has roughly 200 contractors today compared to more than 5,600 full-time employees, a number that could grow as more Millennials enter the job market. “We're seeing traditional employment tenures getting shorter and shorter, but that is okay,” she said. “This generation has a thirst for new experiences and building their portfolios, and joining the gig economy allows them to dabble in a lot of different things in a short period of time.”

There are downsides to this trend. Zwickert says there are legal issues to be concerned about when someone is hired as an independent contractor, but is treated the same as a full-time employee—only without the benefits. “You have to be careful,” she said. “If the employee has a cubicle, a company email, but they are submitting invoices for payment over a long period of time, they could be considered as a statutory employee for purposes of payroll taxes, workman’s compensation and other employment related benefits.”

“Gig” employees aren't necessarily cheaper, either. For example, NetSuite typically pays contractors an hourly rate, which could be as much as 30 percent higher than the same full-time employee would get. Additionally, NetSuite also works with payroll service companies who charge up to an additional 18 percent mark-up on the contractor rate. Zwickert says it’s “definitely” money well spent—you get the right person for the right role, and the person can hit the ground running with very little training.”

Laura Bergheim, Founder and CEO of Wordsmithie, which hires and manages freelance writers for advertising and marketing projects, believes there is a distinction between “gig” workers and freelancers. “Giggers are those who take on fast, spot assignments for a flat fee, and they often rely on a platform such as TaskRabbit or Fiverr to help them get gigs—while freelancers are likely to have a lasting relationship with a small number of employers working on ongoing projects,” she said. “We're talking about two different but interrelated work styles. All giggers are freelancers, but not all freelancers are giggers.”

Bergheim suggests the “gig economy” should be called the "freelance economy" to include everybody who does not fit under the umbrella of full-time or part-time employment. She agrees these trends will transform American labor. “I think this is going to be an evolution, not a revolution,” she said. “Everyone is not going to wake up one day and find out their jobs are gone. But in the next five or ten years, that evolution is going to move faster and faster. We have the technology and the resources to make this happen in a powerful way to give people more freedom while also empowering them to do meaningful work.”

Nathan Collins, Executive Director of the Discovery Sciences section at SRI International, which takes academic inventions and translates them for commercial potential, said SRI frequently uses independent contractors in different capacities depending on need. “Most of our work is with the government through grants and contracts, which are based on a certain number of labor hours, so it makes sense to have a flexible workforce,” Collins said. “We have a lot of contractors who are willing to work with us on a particular project and then take a hiatus.”

“It’s always been a component of what we’ve done, but it’s certainly grown in popularity over the past five or so years,” he added. “It gives us the ability to have access to the newer skill sets that are outside of our current areas without making a huge investment. We can put our toe in the water and see how it works and if it’s sustainable or not. It’s also a great way to assess whether to bring these people on at the end of the day.”

Ross Fernandes, Founder & CEO of Q Analysts, a technology consulting firm, frequently hires contractors for quality assurance and testing of software and hardware products. He notes the labor environment is much different in Europe, where gig workers are much more acceptable. But many of his contractors are doing well. “We have people who have made a career out of getting one contract after another,” he said. “In our model, we don’t hire people permanently—we hire them for the duration of a contract, which may be long term for a year or two, but when they are done they move on. It’s definitely increasing.”

Alliance Director Marion McGovern was an early innovator in the gig economy; in 1988 she founded M Squared Consulting, a firm that provided consulting solutions through its network of independent contractors. She grew it into a nationwide enterprise before selling the business in 2005. M Squared’s business took off during the 1990s when companies were downsizing, and many workers began hanging out their shingles. She’s now writing a book about the gig economy, Thriving in the Gig Economy. One challenge, she says, is that it is difficult to measure its size. There are many studies and surveys that each define the term “gig” differently. Meanwhile, the Department of Labor stopped tracking labor numbers for “contingent labor” – the category most gig employment would have fallen under – back in the mid-2000s. They will be reinstating that study in May of this year.

“Whether the gig economy is a bad thing or not depends on how many people are doing it because they are forced to, or because they have no other options,” McGovern said. She noted that a recent MBO Partners study reported that 91% of independent workers are doing so by choice. “It has yet to be seen how it plays out. But if you agree that the future is going toward a blended workforce, where your core employees are supplemented by independent contractors and free agents, how does a leader create a cohesive unit? How do they ensure knowledge resides in the organization when people aren’t going to be there long term?”

Whether they are immersed in the gig economy or not, these Alliance leaders understand America’s labor force is experiencing fundamental, permanent change. To be sure, this transformation will create critical questions for today’s leaders and their solutions will be customized for each unique situation. Given the track record of Bay Area innovation, we think it’s not a matter of if the answers will come, but when.