Employee, Contractor, or Vendor?
In Vendor Management it is critically important to understand the difference between employees, contractors, and vendors. I have seen far too many people over the years show, by their management style, they have never answered this question.
To be honest, while writing this blog post, I struggled to define these terms. Here are my definitions – let me know your thoughts and definitions in the comments below.
Employee: several dictionaries I referred to said that an employee is “an individual hired by a company for wages or salary”.
That is really generic and can actually apply equally to a contractor as well as an employee. If you change “wages and salary” to “fee” you could be describing a one-person vendor as well.
We need to find a better definition for employee.
Here are my thoughts:
An employee is hired into your company as an individual – not as a company. If you were to hire me as MentoredByMarkT, you would be taking me on as a consultant contractor. If you hired me as “Mark” (separate from my consulting business), you would be hiring me as an employee.
Your company has more responsibilities and rights over employees than over contractors or vendors.
Your employee’s performance is reviewed on a regular basis. Continued employment with your company depends on the employee meeting certain hurdles. In my experience, very few contractor and vendor contracts have these performance hurdles defined or monitored.
Your employee’s corporate loyalty is to one company – one boss – one manager.
I guess the key word I am looking for here is “undistracted”. Of the three – employee, contractor, and vendor – your employees are the most focused on what you, their employer, want.
What about contractors?
OK, I am a contractor. However, I want my comments here to be honest, maybe even blunt, but not cutting.
Contractors are a company you employ as though they were an employee.
You will typically hire a contractor for a specific project at your company.
Contractors are typically hired for a shorter duration than employees.
This last point has been warped recently as some companies have tried to avoid their responsibilities to their employees by making all their employees contractors. Maybe these employers don’t realize that. . .
Contractors go from one gig to the next. While contractors are working a gig, they are also looking for an additional gig or “the next gig”.
I will bring back my word, “distracted”. Contractors, by the nature of their business model, are distracted.
I have seen contractors bail on the last weeks of their contracts. They seem to know that they don’t have future employment with this company. There are no penalty clauses in their contract for leaving before the project completes – as long as they give 30 days’ notice.
As a contractor, let me comment on that last point.
It takes a lot of personal discipline and integrity to finish a contract well.
Many contracts are written to allow the hiring company flexibility to stretch the engagement to other needs and projects. This is good for both parties (the contractor and the company) as they don’t have to renegotiate the contract repeatedly. However, it does create ambiguity on when or how to best end the contract. Finishing well requires the following from the contractor and the hiring company: trust, clear communication, and a shared commitment to completing the project and contract well.
As you can see, a contractor is different than an employee.
Personally, I would consider a contractor a one-person vendor.
Why?
A vendor is a company you retain to provide one or more services or products for your company.
Vendors are a company as well, so they have their own rules, goals, and metrics.
Most vendors actively pursue additional business. They are distracted.
It is VERY rare for a vendor to assign a specific person to a specific account as part of the service agreement. This means there will be a steady churn of vendor employees working with you as time goes on.
In my experience, being a vendor, especially a service provider, is a very slim margin business. Profits come from scale and limiting customizations.
There are some vendors who also chronically underperform. The cost savings they gain from this underperformance adds to their slim profit margins. I will talk more about that in a future blog post.
As you can see, there are marked differences between employees on one side, and contractors and vendors on the other side. Each need to be managed effectively. Each need to be managed differently because their relationship with you is unique.