How Firms Can Prevent Overhiring

By Tim Sanders, Quartz (TNS)

Although layoffs have been common in the business world for decades, there’s been a vicious cycle in recent years. Companies that have seen unprecedented growth and success during COVID have led a culture of overhiring and overspending, rapidly expanding their workforce and taking on increasingly ambitious projects. As these companies face economic uncertainties and changing market conditions, they resort to layoffs as part of a cost-cutting exercise. And in many cases, they cut past the fat, beyond the muscle, and into the bone of their capabilities.

Beyond the recession, however, these companies will inevitably have to regain talent to compete. This raises an important question for business leaders: when growth is back on and your “add back” season starts, how can you create a more sustainable and cost-effective workforce?

The costly mistake of overhiring

Companies from small startups to Fortune 100 companies like Amazon and Alphabet have resorted to mass layoffs in the last year, and there are no signs of it slowing down. In just the first three months of 2023 alone, tech layoffs hit a running total of over 121,000, according to Layoffs.fyi. Frustrated employees have blamed overhiring as a key reason for letting go of thousands of workers. And it’s not just employees saying this. Executives at companies like Zoom have also confessed that layoffs resulted from overhiring. Nonetheless, although that may not always be the case, others reflect the evolution of a company’s business model in an era of rising automation.

Companies that overhire or are working to optimize their workforce frequently have a bloated organizational structure that creates unsustainable expenses, inefficiencies, and a lack of focus on core business priorities. Overhiring inevitably increases labor and operating costs, ultimately decreasing shareholder value.

A report by the National Bureau of Economic Research finds that overstaffing can also lead to lower profits, as excess labor leads to decreased efficiency and lower output per worker. When a company overhires, there is a range of negative impacts. Now more than ever, firms looking to rebuild and hire again need to carefully consider their hiring needs and ruthlessly challenge their old ways of hiring.

The science behind hiring

“The fundamental economic problem in hiring is one of matching with costly search and bilateral asymmetric information,” Paul Oyer and Scott Schaefer underline in Personnel Economics: Hiring and Incentives. Hiring and many of its practices are time-consuming, expensive, and inherently uncertain.

When a headcount is typically approved, there are few metrics required for a hiring manager to “open a requisition.” Once the recruitment process is initiated, it can take months to fill the role. And according to LinkedIn hiring statistics, talent acquisition professionals spend nearly one-third of their workweek (about 13 hours) sourcing candidates for a single role. This speaks to the artisanal nature of talent acquisition. However, companies need to be more scientific when adding talent.

Scientific hiring requires throwing away predictability and chance. Companies need to shift to a more calculated and methodical approach to hiring. They need to require managers to build a case that 30 hours or more of the new hire’s time would be “on task,” leaving the balance of the workweek for attending meetings and conducting operational tasks. If they can’t demonstrate this need, they should bring on talent on a fractional basis, letting the billings tell the story over time (three to six months) about whether they should convert to full-time employment.

This involves developing a comprehensive hiring plan that includes contractors or fractional workers seeking first to bring on talent on a fractional basis while using a data-driven approach when determining when and if full-time hires should be made. Since January 2023, Upwork has seen over 40,000 contract-to-hire jobs posted on the marketplace, with over 2 million professionals open to contract-to-hire opportunities.

By leveraging fractional workers, companies can accurately forecast their hiring needs as these workers offer greater flexibility to adjust to changing workloads. Independent professionals also have more freedom to work on their own terms with flexible work arrangements. A mix of full-time and fractional workers helps companies quickly and easily scale up or down, which can help to reduce the risks and costs associated with over- or even understaffing. This helps them achieve a more variable cost structure, much like cloud computing and software as a service (SaaS) has for technology expenses. Additionally, companies can identify trends and forecast future needs more accurately by analyzing past fractional worker usage patterns.

Employing a fractional to full-time hiring model

For more than a century, companies have adopted a mindset of prioritizing full-time employment. This full-time-first mentality comes with limited flexibility, difficulty finding qualified candidates, and higher costs. Seeking first to bring on talent on a fractional basis provides companies control in three key ways:

1. Scalability: Hiring fractional workers allows companies to scale their workforce without the fixed cost of maintaining a large, full-time staff. Companies can add or subtract fractional workers as demand fluctuates, giving them greater control over financial and operational flexibility. In a recent Upwork report, among hiring managers who use on-demand independent talent, 84% say they are confident in their company’s ability to respond to disruption, compared to just 69%. In the same study, over three-quarters (79%) of businesses agree that working with on-demand talent enables their business to be more innovative, as they have more freedom to scale up and down.

2. Specialized skills: Fractional workers are among the most educated and often have specialized skills that companies can tap into for specific projects or tasks. This gives companies greater flexibility to respond to changing market conditions or pursue new opportunities requiring specialized expertise. A Deloitte study on the future of work indicates independent professionals are also upskilling and reskilling 50% more than traditional full-time workers.

3. Reduced risk: Hiring fractional workers can be less risky than hiring full-time employees because companies can limit their exposure to financial risk. Fractional workers are typically employed for specific projects or tasks, reducing the risk of long-term financial obligations from hiring a full-time employee. This gives companies greater control over their labor costs and reduces the risk of over-committing.

Breaking cycles of overhiring

Research shows companies that emerged the strongest from an economic downswing relied more on operational improvements than layoffs to cut costs. Layoffs aren’t always the solution to prepare for a downturn. As industries begin to look for new talent and fast after mass cutbacks, careful and strategic hiring practices will help them maintain a focused, efficient, and engaged workforce. Those considering alternative staffing models like fractional workers will break the vicious cycle of overhiring and layoffs and settle into a predictable rhythm of talent access for real-time needs. This ultimately will enable them to be more competitive for years to come.

ABOUT THE AUTHOR

Tim Sanders leads client strategy at Upwork, helping businesses implement better ways of working.

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