When Smart Balance (SMBL) decided to treat its workers to a cruise around New York Harbor, it made some of them a little sad. "They wanted to know why contractors weren't invited since 'they work so hard,' " recalls Bob Gluck, chief operating officer of Smart Balance, maker of a buttery spread by the same name, as well as all-natural peanut butter and nutrient-enhanced milk.
The Paramus (N.J.) company extended invitations to the event to permanent employees only, and according to Gluck, the requests to include the contractors were a testament to the close relationship between its two sets of workers: a permanent staff of 67 people based in its Paramus and Boulder (Colo.) offices and a virtual workforce of some 300 contractors, based in other locations throughout the U.S. The company says it has achieved something like the best of both worlds, using contractors to save money and boost productivity while instilling in them the same vision and enthusiasm—and to a great degree the same sense of camaraderie—as permanent employees.
A Contractor-Intensive Business Model
Robert Labick, senior managing director of research for CJS Securities, says Smart Balance's large virtual, mobile workforce of contractors is the reason his firm got interested in the company in the first place. "They're avoiding overcapacity of workers," says Labick, who's based in White Plains, N.Y. "The company is expected to grow quickly. It turned a profit in the fourth quarter, and its margins are expected to grow this year." He also says that "functional foods," those formulated as healthful alternatives to staples, are on the rise within the food industry.
With its potential for growth, Smart Balance makes for a particularly interesting case study of the contractor-intensive business model. Jessica Lipnack, chief executive of Net Age, a consultancy specializing in networked organizations, says the high ratio of Smart Balance's contractors to permanent employees is "surprising" even in the food industry, which tends to hire large numbers of contract workers.
So how does a business that grossed $222 million in 2008 make this equation work? "We're a marketing-driven company so we have all the marketing people in-house," says Gluck. Senior executives and administrative and clerical workers are permanent employees, too. But all manufacturing, distribution, sales, and IT workers are outsourced via flat-rate, "per job" contracts as well as some hourly agreements. For the most part, these workers receive no standard benefits.
Gluck, a 35-year veteran of the food industry, says he and Smart Balance CEO Stephen Hughes choose mostly contractors they have had working relationships with at other jobs.
Unifying Staff and Contractors
To keep everyone immersed in the corporate culture, Smart Balance twice a year holds all-company meetings that include permanent staff and contractors. At one of the meetings, senior executives from each area of the company make formal presentations, which the company uses to update its business plan. Gluck believes divulging this type of information to contractors is necessary to give a sense of unity to its contractors and permanent employees.
They celebrate successes with the virtual workforce via simple "atta-boy" e-mails, and during presentations at the biannual meetings, the company's executives make a point of recognizing and praising contractors' various accomplishments. But Smart Balance spreads around other kinds of rewards, too: It cuts certain contractors in on stock options and bonuses.
On a day-to-day basis, communication is all about e-mail. Flurries of messages go back and forth every morning from 7 a.m. to 10 a.m. as the virtual contracted employees and permanent employees update each other on what took place the day before, and what needs doing today.
"We remind everyone that it's about thinking about how you can communicate to others," Gluck says. "We tell the permanent employees to put themselves in the contractors' place as far as what you would need to do that person's job."
Patti Rooney, a permanent employee who serves as office manager for Smart Balance in Paramus, considers the virtual workforce of equal status to the permanent staff. "Aside from the fact that you can't walk into someone's office, it's not so different," Rooney says, "There are a lot of e-mails and phone calls, which is what we do here anyway for the most part." The twice-yearly meetings have time built in to them so the on-site permanent employees and the virtual ones can socialize in person.
So if contractors get paid some fringe benefits—in addition to the higher rate of pay contractors traditionally receive to compensate them for lack of health insurance, pensions, etc.—how do they help Smart Balance save cash? "If we hire a regular employee, we are paying him whether he's sitting around doing nothing or not," says Gluck. "A lot of our contractors are paid by the job. We won't add a contractor to our permanent staff unless we've determined we need that contractor 40 hours a week, so we don't have to pre-invest in personnel."
Contracted employees also mean savings on office space, supplies, health insurance, accident insurance, and life insurance.
Although Gluck says the arrangement is a harmonious one, it is not without a few challenges. "People look at how much contractors make and get jealous," explains Gluck, who acknowledges that contractors' basic pay tends to be higher than that of its permanent workers. "We have to explain to [permanent employees] that contractors don't get health insurance and pension plans."
Other companies considering this type of business model, however, should know that just because it works for Smart Balance doesn't necessarily mean it'll work for them. Lipnack of Net Age advises companies to watch out for corporate guidelines that might be contradictory—and to make adjustments as necessary. "If the policy for sick days and expense reimbursement is different for each set of employees and they get together and start talking, it can cause resentment and make it hard to do good work," Lipnack says.
Other perils exist, too. "If you make a business plan that takes a year and a half to implement and the contract with marketing is only for a year, you diminish the incentive for sustained success," says Brad Jensen, an associate professor of economics and international business at Georgetown University's McDonough School of Business. "The subprime mortgage crisis happened because bankers were compensated on achieving a deal—not on the long-term quality of the deal."
Nonetheless, Gluck feels confident Smart Balance contractors' sense of long-term purpose will prevent problems. First of all, its manufacturing contracts are multiyear. Second, the one-year contracts it uses with some contractors are usually either renewed or "evergreened" (continued on a month-to-month basis indefinitely once the initial contract has expired). "We want contractors to have a feeling of ownership, not of a sword hanging over their heads," Gluck says. "We emphasize winning the war, not just the battles."
Ken Rice, the northwest vice-president for Acosta, the company Smart Balance hired to run sales, says that despite the one-year contracts between the two businesses, his sales team thinks of their relationship as long-term. "Most of our contracts from other clients are short-term, too, but they tend to become evergreen over time," says Rice, whose other clients include Ocean Spray and Heinz (HNZ). "We're part of the success of Smart Balance's brand, and that looks good on our record."
And that success includes Smart Balance's goal of reaching $500 million in sales by 2012. Given its prospects for growth and profitability, Gluck contends that the company will continue looking for ways, large and small, to deepen its relationship with its virtual workforce. "Next year," Gluck says, "we'll probably invite the contractors on the cruise."