Economists Do It With Models

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Dilbert (And Wally) On Outsourcing And Leverage…

May 13th, 2010 · 6 Comments

Consider the following:

Wally’s plan seems like a decent one on the surface, but there are a number of potential issues with it. First, I would hope that he is setting up a company to do this, since otherwise he will be paying the stand-ins out of his after-tax earnings, and the stand-ins will also get taxed on the amounts that they receive. This is just inefficient, and Wally could do better if he could make a business out of this. (I say this because I can’t imagine that Wally’s payments to the stand-ins would be deductible from his personal income taxes.)

Second, if the people that Wally is hiring could reasonably act as stand-ins, why wouldn’t they just go and get the jobs themselves? I could argue that Wally’s value-add is that he is better at getting hired than the stand-ins…but that would require making the case to some degree that Wally makes a good first impression. In fairness, Wally does seem less creepy than the random dude above, so maybe he’s onto something…

Actually, what’s important to remember here is that job searches are costly in terms of time and effort, and, in a weird way, Wally is acting as a headhunter. He’s performing the job search tasks for the stand-ins and taking a cut off the top in return. In this way, he’s getting a smaller payout from more jobs as opposed to a larger payout from one job. (This is, in fact, a form of leverage.) Whether this will make him more money than his current job depends on how many stand-ins he has and what his cut is. In any case, Wally is somewhat misguided, but only because he seems to imply that his plan is going to result in an income stream without him having to do anything, when in reality he is making an up-front investment (finding jobs for the stand-ins) in return for an ongoing payout (having income while he sits on the couch and eats cheetos).

In case you’ve forgotten, there’s no such thing as a free lunch.

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6 responses so far ↓

  • 1 Viktor // May 13, 2010 at 5:50 pm

    In old times, kings would favour their favourites with sinecures, jobs where the pay is good but the responsibilities few.

    Actually, having been in IT for a decade, if Wally had been in middle management, I think he would have been on to something.

  • 2 Howard // May 13, 2010 at 10:12 pm

    Bu breakfast and dinner _are_ free?

  • 3 J S // May 31, 2010 at 7:52 am

    This is how consulting companies and contract employee companies work. Scott Adams just has a funny way to describe it.

    Business hires consultants to get skills they cannot easily get on the open market, or at different cost structure. Do you want to employ a CPA at $300/hour all year long to do three hours of your taxes a year? Or you need some engineering talent that the provider only wants to give you on a part-time basis (stay-at-home Dad/Mom with a particular mix of valuable technical and network skills – a resource that is not available any other way?

    The businesses that hire contract employees do it more for workforce flexibility than wage savings. Not the temporary fill-in like traditional Kelly Service; but the longer term arrangements. I’ve known people in industry that work for years this way. Which is an interesting model. The business must pay less for the employee (somewhere, in wages or healthcare), as the ongoing fee to the contract house plus the employee wages should be less than a regular full-time employee. Because the risk is the contract employees may be inferior workers or they otherwise would get higher pay for a regular job. But mostly it’s for flexibility.

    Flexibility for some industries is valuable. I’ve seen where contract engineers are paid about market prices, plus the money to the contract employee service on top. Often the reasons are varied but done for local department’s benefit, not the whole company’s benefit.

    Contract hires often get paid from another department’s cash so local budgets appear to stretch further, these workers do not show up as ‘headcount’ on the typical tracking charts (local productivity zooms), ability to call up the contract service provider and tell them ‘don’t send so-and-so in on Monday’ is easier than the red-tape of firing a regular employee, unions create costly friction by putting too many restrictions on hiring and firing (which is the opposite of what they try to accomplish), and sometimes phantom healthcare costs are lower (another topic for you .. can a huge corporation negotiate healthcare cheaper than a small contract company).

    Wally is getting into a complex business mix; motivated by what he thinks will be brilliance if he can work it out.

    Agree, no free lunch.

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