Strategic use of Temporary Employment Contracts as Real Options

Abstract

Managers operate in an environment characterised by volatility, uncertainty, complexity and ambiguity. This paper focuses on uncertainty and demonstrates how managers are mitigating supply-side uncertainty through the use of temporary employment contracts. These temporary employment contracts are being used as real options where uncertainty is reduced by reducing irreversibility and by increasing flexibility. The empirical work comprised in-depth interviews with employees and employers in the academic sector, a sector that has a tradition of employing people on temporary contracts. The key findings are: temporary employment contracts provide the organisation with a low-risk mechanism for reducing uncertainty in supply; temporary employment contracts increase flexibility and reduce irreversibility for the organisation and shift risk from the institution to the employee. However, there is a cost to the organisation in the form of demotivation, holding back and early exit of desirable employees. It can also lead to an organisational division between staff employed on temporary contracts and those on permanent contracts. The paper has relevance to managers and decision makers who operate in sectors or levels where human resource abilities are initially opaque but are revealed over time.