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mslogoMicrosoft employed about 100,000 people directly prior to its acquisition of Nokia’s smartphone business. That’s the employment number the company reports publicly — the “blue badges” who make up the core of its workforce.

But in addition to those employees, more than 71,000 worked with Microsoft as “orange badges” — contractors, vendors and other contingent staff who do a ton of work in the trenches. This is the “shadow workforce,” a number that Microsoft does not include in its public employment figures.

That estimate, from a person with access to the data, gives a sense for how large Microsoft’s contingent workforce has become — more than two-thirds the size of its direct employee base. And it helps to explain why the company’s new restrictions on many of those contingent workers represent such a significant change.

As reported by GeekWire last week, the company quietly sent a memo to contracting firms on Friday outlining a new policy in which all contingent workers will be prevented from accessing its buildings and network for a period of six months after every 18-month period in which they perform work for the company. Theoretically someone might be able to continue working even without that access, but in many cases it won’t be possible.

It’s the latest in a series of major internal changes at the company over the past 18 months. The move follows Microsoft CEO Satya Nadella’s announcement last week that the company will cut 18,000 direct employees, or 14% of its reported workforce, in its largest layoff ever — taking a big chunk out of the Nokia business and streamlining Microsoft’s engineering teams.

I’ve been talking about the contractor policy change with a variety of people — including current and former employees and vendors — and the consensus is that the new policy is a fundamental shift in how Microsoft approaches its workforce.

Microsoft COO Kevin Turner
Microsoft COO Kevin Turner

The company says the intent of the policy change is simply to “better protect our Microsoft IP and confidential information” by limiting access. But if the contingent staff is Microsoft’s shadow workforce, these changes feel to many people like a shadow layoff — a way to quietly cut costs by going beyond the publicly announced layoffs of direct Microsoft employees.

One example: Kevin Turner, Microsoft’s chief operating officer, said in a memo to the company’s sales and marketing groups last week that the plan is to “reduce our reliance on contingent staff augmentation by over 20 percent year-over-year” in that part of the company, according to Mary Jo Foley of ZDNet.

How contracting at Microsoft works

Microsoft has two primary forms of contingent workers, supplied by third-party companies: “a-dash” temporary staff who have traditionally taken a 100-day break after every year on the job; and “v-dash” vendors who can work indefinitely on longer-term assignments.

Some teams are known to hire large number of vendors, rather than direct employees, as a way of getting around internal headcount restrictions. Another common approach is to figure out ways to hire people as v-dash rather than a-dash, avoiding the time constraints.

It’s not uncommon to hear about vendors working in the same position inside the company for many years, in some cases outlasting the blue badges in their groups. Squadrons of v-dash workers can be found at Microsoft in positions such as project manager, principal consultant, marketing consultant, and so on.

contractorpullIn making the policy change, one risk is that Microsoft will see years of institutional knowledge walk out the door after 18 months, perhaps not to return.

“I had some individuals that stayed in one group for almost 4 years but they were really staff augmentation,” one former executive for a vendor firm told me.

The executive explained, “They did this because budgets were getting squeezed and GPG (Microsoft’s Global Procurement Group) wanted them to use a-dash.  But Microsoft project sponsors knew the knowledge was with the v-dash resources. So they would manage the individuals directly instead of doing it project-based through the Vendor. Everyone was finding loopholes.”

V-dash workers are employed by a variety of third-party vendors, including large consulting companies like KPMG, CapGemini and Accenture. For those companies and the contract workers on indefinite assignments at the company, the world just changed.

The new limits promise to make Microsoft groups think twice about using vendors for these types of long-term roles. Some current and former employees I spoke with welcomed the change, calling it a much-needed move to combat “bloat” on Microsoft teams.

The move also puts Microsoft’s a-dash temporary workers on more equal footing with the v-dash vendors. The new policy applies the 18-months-on, 6-months-off rule to a-dash workers, which could be viewed as better than their past one-year-on, 100-days-off rule of the past.

One former Microsoft employee who has tracked the issue closely welcomed this move as a blow to Microsoft’s three-tiered workplace hierarchy of blue badges, v-dash and a-dash workers — a structure frequently criticized for creating management inefficiencies, dead weight and cultural challenges.

But the company might be being more pragmatic than that.

Legal and financial implications

Pradeep Chauhan, a former Microsoft business development manager and the founder of the OnContracting jobs marketplace for tech contractors, explains in this blog post that Microsoft may be addressing the legal liability that comes from employing vendors on contract for long periods of time. (This “co-employment risk,” as it’s called, can cost companies lots of money if contractors are deemed eligible for benefits received by direct employees.)

Workers in the cafeteria at the Microsoft Commons
Workers in the cafeteria at the Microsoft Commons

The move also benefits the company by “empowering” the a-dash program, Chauhan writes. He explains, “For Microsoft, a-dash assignments are much easier to control rate-wise as they are filled through open competition among preferred vendors through their Managed Service Provider program.”

Explaining how this impacts the job market, Chauhan writes, “A number of local consultants and independent contractors that relied on v-dash consulting gigs at Microsoft will be affected by eligibility now. The more experienced ones can’t afford artificial breaks of 6 months causing them to find work elsewhere or raising their rates to cover the downtime.”

The policy is just for workers in the U.S., and doesn’t apply to overseas contracting, but Chauhan notes that the change is especially bad for v-dash workers in the U.S. who are here on H-1B visas, who would need to find alternative assignments.

Wall Street analysts are also watching the situation closely. Rick Sherlund of Nomura Research wrote this morning that the cost savings announced by Microsoft through its layoffs at Nokia and its main workforce may not be as large as investors would have hoped. That could increase the pressure on the company to cut costs elsewhere.

Microsoft reports earnings Tuesday afternoon, and Sherlund predicts that the company may have more to say on the topic of its “shadow workforce” of contractors during its conference call with analysts.

Click here to read the full Microsoft memo to vendor companies, outlining the new policy for network and building access.

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