Chapter Listing | Return to 1997 Topical Index

Entrepreneurial Firm Motives

Entrepreneurial firms are motivated to use contingent resources in technical areas primarily out of necessity, not luxury.  Necessity is driven by two primary concerns of the entrepreneurial software firm:  speed and flexibility.  Speed is an overriding concern because these firms are subject to intense time–to–market pressures.  Venture capital funding common to these firms has specific time demand that are built into the contract.  Also, in this industry, being first to market with a particular product often determines the long–term viability of the company.  The perception within these firms is that missing the window of opportunity to first bring their particular product to the market jeopardizes the very viability of the firm.  The importance of flexibility revolves around having the ability to effectively complete even cyclical components of the development process (i.e. testing, customer support immediately following product release, computer animation unique to one particular product) efficiently.

The importance of speed to entrepreneurial software firms motivates the use of technical contingent resources because entrepreneurial firms have difficulty in procuring necessary  knowledge within their time constraints.  More specially, these firms have difficult in obtaining external knowledge manifest in the skills and know–how of individuals.  These firms may have highly specialized demands for knowledge because entrepreneurial firms may be exploiting a unique but narrow niche market.  In addition to difficult demand characteristics, these firms are also limited in their access to the supply of this knowledge in the labor pool.  First, these firms do not have well developed administrative structures that are experiences in recruiting, screening, and maintaining individual skills and knowledge.  Second, these firms may face difficulty in procuring the knowledge held in individuals even if they can locate these human resources because entrepreneurial firms can offer neither the high market wages for unique, valuable and rare skills nor the name recognition and reputation that can build up an individual's long–term marketability.

The unique demand characteristics coupled with the constrained access to the supply of knowledge manifest in individuals' technical skills and know–how create the motives for contingent resource use.  Using contingent resources is a means of outsourcing the human resource function associated with recruiting, screening, and hiring and also is a means instantly accessing a pool of individual knowledge that has, in theory, already gone through the recruiting and screening process.  Thus, contingent resources are used to keep entrepreneurial firms on top of their time–to–market demands.  They do not need to spend the time building an administrative function to search and access the knowledge pool, or spend valuable development time interviewing and screening prospective employees.  In addition, they save the time they would have to spend in wooing prospective fill–time employees, which can be substantial in some cases.

...we have to go contract because of time–to–market...We can’t afford two years to bring someone up to speed—we can’t even afford six months.  We need someone who can build tight code right off the bat...  we look at cost and time to market, but time to market is more important.  Its better to go over budget than over time.
VP at start–up software firm (PSD)  
...(we) have to use them (meaning contractors) for everything.  We want to hire them full–time, but they all want to be contractors...they’re very experienced and you just can’t get them full–time.
VP of Operations at start–up software firm (AG)

Flexibility concerns also motivates contingent resource use in entrepreneurial firms.  Contingent resources are used in cyclical or idiosyncratic parts of the development process, saving both the time to attract resources to the area and giving firms an added measure of flexibility because once these components of the process have ended, the firm is not saddled with resources not needed on an on–going basis.  While larger firms may use contingent resources for flexibility in case a project is experimental or may not be a successful one, this is not the case with entrepreneurial firms:  the projects in progress are all instrumental in the firm's viability and success.  If the project fails, the perception is that the entire firm will fail.  Accordingly, contingent resources preserve flexibility from overstaffing because of short lived needs in the development cycle, not as a hedge against uncertainty with regard to project success.  Another form of flexibility that contingent resources provide is the flexibility to get rid of an individual immediately if that individual is perceived to produce low quality work.  Because these firms cannot afford to spend the time bringing someone up to speed, contingent resource use gives them the flexibility to immediately terminate the use of a resource if it is not making the anticipated contribution.

If they’re contract, we can 86 them right away if they’re making spaghetti....we look at their stuff after six weeks, and if its spaghetti, they’re gone.
VP at start–up software firm (PSD)

We want to hire contract people when we have a project that’s typically 10 or 12 months long.  We bring in a lot of animators and jobs like that on contract for these kinds of projects...
Operations Manager at start–up software firm (HI)

A short discussion on the role of costs in motivating contingent resource use in entrepreneurial firms in warranted because of the volume of popular attention given to the idea that contingent resource use can be a method of cost savings for firms.  This was not a motive with any of the firms I interviewed.  In fact, several individuals made an unsolicited point of reporting that cost was not a factor at all.  The wage premium paid offset any benefit costs saved.  Additionally, the time–to–market pressures are so extreme, that firms would much rather go over budget than sacrifice on speed, as noted above.
 

Top of page | Chapter Listing | Return to 1997 Topical Index

1997 Babson College All Rights Reserved
Last Updated 03/21/98