The Way We Hire Is All Wrong

In a frictionless, efficient market it is always cheaper to contract out work. But the world isn't frictionless. There are transaction costs. Search, information, bargaining, maintaining confidentiality and enforcing agreements all cost time and money. Meanwhile, overhead costs and the management error grow as in-house functions increase. Balancing labour transaction costs and management scaling inefficiencies results in an optimal firm size. This firm will outcompete less agile and well-integrated small firms and distended behemoths.

http://www3.nccu.edu.tw/~jsfeng/CPEC11.pdf

Many of the replies thus far have quite rightly pointed out that the predominate contract/freeland/short term model actually puts even more power in the employer's hands, and is often used in an abusive, diminishing way. It is full-time employment made worse -- all of the problems and detriments, with fewer of the benefits.

There is an alternative model, but it is extremely hard to make a success. I build systems for financial services, and have a long, proven track record (one of the products I built half a decade ago, barely changed since, was just acquired by another company for big money). I decided to go solo, set up a corporation, and pitch my independent services for short term engagements. The premise is that it amplifies my own motivations, focuses my work, and intrinsically improves my rewards.

A surgeon ready to swoop in and remove the cancer -- focusing on my specialty and utilizing my somewhat unique set of talents -- leaving a well-documented, working, tested, proven solution for your organization to pick up and run with. This can be for load sharing, for capacity extensions, or because certain talents don't exist on the team. It allows me to specialize in a way that I couldn't do in one engagement, and I don't end up whiling my days away reading Reddit (which is the case for a significant percentage of full-time workers pretty much everywhere).

It is extremely difficult to get businesses to buy into this model. The first problem is the illusion of a "learning curve" -- if you have a learning curve in what you do (the classic "employees can't be productive for the first n months), you probably don't actually know what you're doing. I saw this in one firm where everyone was sure it couldn't work because their mystical financial calculations were so complex it would take months to understand them. Only they weren't actually complex whatsoever -- everyone was just blissfully in the dark about how to calculate simple things like IRR, so it seemed like some sort of unique, in house mystery meat.

A bit of a rant -- I could go on for pages -- but honestly most firms can't utilize the contract style employee because their own processes are so broken, their projects so tightly coupled and intertwined and undocumented, that they can't imagine how to separate something out.

The solution to overhead of hiring isn't "let's do more hiring". It's figuring out how companies can de risk the hiring process. Certainly moving everyone to contracts would do some de risking (definitely around 'parting ways'), but more revolutionary would be to figure out a way to de risk the 'finding talent' part of hiring.