Last week, The Wall Street Journal published an interesting op/ed piece by Paul Christiansen that explored some of the implications of the Affordable Care Act (ACA) on corporate structure. Borrowing the concept of the “protean corporation” from journalist Michael Malone, Christiansen suggested that the wave of the future will be a shift from the almost exclusive use of full-time employees to a structure where a smaller “core” of full-timers basically act as general contractors, buying and managing the services and expertise that companies need from a large network of individuals who set themselves up as LLCs, or as Christiansen puts it:
“Like a protozoan single-cell organism, the protean corporation has the ability to “shape shift,” rapidly adapting to internal and external forces in the market and the company. At the heart of a true protean corporation is a tiny number of core employees surrounded by a large cloud of resources, generally contracted or outsourced talent that does most of the work.”
To a great extent, this model has been in operation for a long time and is not necessarily new. I have seen this model at work in my own experience, particularly in jobs and skills that have undergone a great deal of change over the past decade, like graphic design, public relations, video production, and the like. The novel part of Christiansen’s concept lies in its scope. Larger and larger enterprises are now experimenting with it as a means of cutting their fixed costs. Also, the skill sets being targeted are higher up the chain of value-added tasks, such as certain kinds of financial and legal work. Some companies are going so far as to contract whole departments, particularly in the start-up phase when cash flow is limited.
According to Christiansen, this trend will likely accelerate thanks to the Affordable Care Act, or Obamacare. ACA mandates that companies with more than 50 workers must provide health insurance or pay an annual fine of $2,000 per each worker. While some folks claim this will have a minimal impact on job creation, at the very least I think we can agree it certainly doesn’t help small companies, many of which do well to scrape by on small margins. Many small companies face constant top-line pressure. Competition is intense, and the pace of so-called “creative destruction” has quickened, dislocating whole industries. Few people have the luxury of a constant, predictable stream of business; therefore, it makes sense that ACA’s 50-employee mandate will force many companies to consider novel ways to control costs. The protean structure that Christiansen posits is one such solution.
The Challenges of Protean Workplaces
The benefits that so-called protean structures hold out for corporations are obvious. The fixed costs associated with full-time employees (FTEs) are cut significantly, thereby juicing the bottom line. But there are challenges for companies looking to implement a protean workforce.
Firm culture is probably the biggest area of concern. It is difficult enough to promote a sound work ethic and a shared sense of mission in employees in the traditional corporate structure; this ability to develop and promote a common culture is that much more difficult when full-time employees become contractors who are scattered about with little direct day-to-day interaction with company personnel. Companies will have to pay close attention to the resulting culture, especially in those parts of an organization that are client-facing. The shift from FTEs to contractors will also place new strains on the “core” employees who are in effect turned into general contractors. Managing colleagues and projects does not come easily for many people; when those colleagues become third-party contractors, the challenge can overwhelm otherwise capable people. Lines of responsibility and accountability can blur, and the resulting work product usually suffers when such confusion prevails.
Another problem area comes in the form of government intervention. State and federal regulators have become sensitive to companies’ use of contractors when such use is an obvious attempt to end-run the requirements of full-time employment. When companies use the same contractors over and over again and these contractors operate as sole proprietors with no other sources of income, this becomes a red flag for regulators when they audit a company’s labor practices, exposing companies to litigation and fines. These government interventions are well-intentioned, but I can’t say they do much one way or the other. One clear result is that companies are simply being more diligent in documenting the relationships they have with contractors, sometimes imposing costs and tax liability on contractors retroactively in an attempt to ward off government enforcement actions.
No LLC Is an Island
While there are a few serious challenges for companies in implementing protean structures, there are far greater dangers for workers.
Periodically over the past decade, I have worked as an independent marketing consultant and have experienced many of these dangers first-hand. Working independently is a two-edged sword. On the one hand, the value of my time is greatly enhanced as an independent. I make far more money per “billable” hour than I did as a full-time salaried employee. On the other hand, however, I bear all the overhead and hidden costs of doing business. For instance, without being a part of a large organization, I lose the benefits of collective bargaining when it comes to healthcare insurance. One expects this to matter less under the impending ACA, but it’s hard to tell at this point what the effects of the legislation will be. Also, there is a great deal of non-billable time that must be logged in the areas of administration and business development, not to mention that revenue can be “lumpy,” meaning that projects come when they come – one month, you might bill $30,000; the next month, nothing.
Everyone who owns their own business has to deal with these things, and I’m not complaining. I mention them because they impact what is probably the most difficult and contentious challenge of being an independent contractor – pricing. Particularly in a field like business services, where the costs of doing business are more apt to be in the form of time spent prospecting and administering accounts, you have to always be mindful of the overhead and hidden costs of your operation, and those costs need to be reflected in the pricing models you use.
Inevitably, there will be disagreements on price between contractors and so-called protean corporations. Of course, there are many ways to accommodate client concerns – success fees, fixed-fee arrangements, and so on – but if there is significant disagreement over the value of your contribution, then no degree of risk-sharing will likely resolve a pricing dispute. So it becomes paramount for independent contractors and consultants to constantly stress the value proposition when selling and executing projects.
But this, too, can be a difficult endeavor in the protean corporate structure. Often, those who realize the value of your contribution won’t necessarily control the budgets on which you rely, or it happens sometimes that those who purchase services are not particularly skilled at articulating your value to key decision makers within the corporate structure.
Some Conclusions to Ponder
All of this is to say that the incipient protean corporate model now being propounded as a means to greater corporate profitability carries with it a host of risks for those who seek to provide services on a contract basis. Unlike being a salaried full-time employee, the independent contractor will need a far more entrepreneurial approach to his or her career, and frankly, let’s face it, business savvy and aptitude doesn’t come naturally to most folks. Without being too cynical about it, I rather think many corporations are relying on that fact. When it comes to price discovery, corporations will generally have a more nuanced picture of the prevailing market than the contractor. They might gain tremendous insight simply by soliciting competing bids (after all, I used to do this all the time when working on the inside). As protean corporations gain in transactional experience, there is the very real possibility that many contractors in the protean model will misprice their services due to market asymmetry.
And then there is the larger question: is the so-called protean corporation merely a business-school attempt to put lipstick on the pig of our souring national economy? With unemployment stubbornly high and demand falling across multiple sectors, it is a fair question to ask whether the protean corporation is not geared more to the benefit of corporations versus that of workers. The proposition needn’t be a zero-sum calculation, but it often is, unfortunately. And because so many people could be thrust into the role of contractor without any real business experience, I worry that too many of them will discover that they are ill-equipped to deal with life outside the traditional corporation.
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