Congratulations! You are growing and need help getting to that next level. When you discover an IT skills gap in your organization, the first question you may have is whether you can afford to hire a new employee. It’s a good question. The costs of a new hire are significant. Even if you handle the hire internally, you will likely pay around $4,000 in recruiting costs for a midrange person. If you hire a headhunter to do it for you, you’re looking at approximately $22,000 in fees. Keep in mind, these figures don’t include the salary and benefits you’ll be paying.
Given the cost to hire, not to mention the time investment, it’s no wonder so many companies have a tough time deciding between a contract-to-hire and a direct hire. We want to break down the direct hire meaning first since that’s generally the first place business leaders go.
Defining Direct Hire
The meaning of direct hire is best summed up as a “permanent” hire. These employees are hired with the assumption that they will become part of the fabric of your staff for the long term. Of course, “long term” is a relative statement. In the Bureau of Labor Statistic’s most recent summary of employee turnover in the U.S., the median number of years that wage and salary workers had been with their current employer was 4.2 years in January 2018, unchanged from the last evaluation in 2016.
The direct hire will receive any benefits of a full-time employee at your company. As a W2 employee, you will pay them a salary and any bonuses or incentives associated with their job position. As a full-time employee, you may also offer them healthcare, 401(k) matching, and paid vacation days. You will also invest in the technology they will need to perform their job duties, such as their computer and related software. Finally, there may be training costs that involve basic ramp-up to become familiar with your product/services, technology, business processes, culture, etc., as well as more detailed training for the job responsibilities they have been assigned.
Direct hires are hired to fill a certain role and are most often expected to perform their job duties in a specific way outlined by the company. For example, the direct hire might be required to follow certain processes, use provided technology and adhere to a standardized work methodology to deliver an expected output.
A contract-to-hire position, on the other hand, begins as a contract gig that can lead to a permanent hire. A contract employee is typically hired to perform a specific task for a specific period of time – with the caveat that at some designated point in time, the contract employee may have the opportunity to join the company as a full-time, W2 employee. There are approximately 17 million American workers who operate as temps, contractors, consultants, freelancers, seasonal workers or interns.
Hiring a contractor to fulfill an IT need can save your company money. You aren’t paying them an annual salary or benefits, nor are you paying for perks – at least not until they become a permanent employee. They may use their own technology and may work from a home office. Training costs are also less, as the contract-to-hire person does not necessarily need to be trained on anything other than their specific job responsibility. For this reason, contract-to-hire employees are ideal if you are looking for faster onboarding.
Contract-to-hire people are typically found via a staffing agency. IT staffing agencies have relationships with contractors and can help your organization identify an ideal skill match much faster than if done internally. They will also understand if the contractor is interested in a contract-to-hire opportunity or if they are more interested in bouncing from one company to another as a career contractor.
Keep in mind, a contract-to-hire arrangement benefits both the employer and the contractor. Because the relationship begins on a contract basis, both parties have the ability to test the waters, so to speak, before a lengthier commitment is made. On the other hand, contractors may not be loyal to your company. If a better gig comes along, they may jump ship without warning, making them less dependable as a direct hire.
Now that you understand some of the key differences between a direct hire and a contract-to-hire employee, let’s get to the checklist you can reference when determining which type of hire is best for your company.
Checklist for Deciding between a Contract-to-Hire and a Direct Hire
There are benefits for both a direct hire and a contract-to-hire arrangement, making it challenging for companies to decide which makes the most sense for them. There are key questions you can ask yourself and your requesting managers that can help you in your assessment.
Will I need this specific skillset for another project in the future?
If you have identified a gap in skills required to execute a particular aspect of a given project and that project is a one-time thing, a contractor may be your best bet. You can leverage an IT staffing agency to find you the exact skill to come in to do the job, then they are done and move on to their next job elsewhere.
If, however, you recognize a need for a specific skill that is required to round out your team, a direct hire is likely a better choice. You will tap into that skill over and over again to execute current and future projects. Having this person on your team on a permanent basis will ensure your projects can be done with expertise and consistency without delay.
Does this hire need to hit the ground running with minimal ramp up?
Contract employees are typically highly experienced in one or more skills. They don’t require much training and can begin executing work rapidly with minimal hand-holding. If you have a project that you need to speed to market, a contractor is a good idea.
If you are looking more to extend your team’s capabilities over the longer term, a permanent hire is a better option. You may not need their skills immediately, therefore you have time to get them onboarded and trained. They will be able to deliver value continually, given the proper training, and grow with your business.
Do I have a resource on my team that can mentor and train the new hire?
As an extension of the question above, you need to consider how much training is required to get the new person adequately trained to do their job. Training doesn’t happen in a vacuum. You will have to pull someone off of another job in order to train the new person, particularly if they are a direct hire. If you are short on resources, a contractor will need less training than a direct hire.
How long can I wait to hire this resource?
Both direct hires and contract-to-hire people have a lead time. They may be serving another employer and can’t come to your team immediately. Typically, direct hires are looking for a new job and are ready to transition quickly. Contractors set up their next gig in advance of the end of their contract period, often a month or more before they can leave their current job.
Related: 4 Tips for Reducing Time to Hire
Determine if you are in a position to wait for the contractor to be available. A staffing agency will be able to provide multiple contractors who you can select based on their availability. If you need talent faster, consider a direct hire who can join your team within days or a couple of weeks. Keep in mind, the direct hire may require more training than a contractor.
Would my team benefit from an expedited interview and onboarding process?
Finally, if your team is all about speed of delivery, hiring a contractor is ideal. They will require a significantly shorter interview and onboarding process, particularly if you utilize the vetting an IT staffing agency will complete in advance of your interviews. This ensures you are only interviewing talent that has already been deemed as a good fit.
If, however, your team is hoping for a more permanent hire who can add value on an ongoing, indefinite basis, look for a direct hire. Again, you can speed recruiting by partnering with a reputable staffing agency. The onboarding process may take longer for a direct hire, but once complete, the new hire is likely to stay longer and be more loyal to your company for the long haul, saving you time later from having to continually hire new contractors to fill that same position.