Temporary Employment Contracts and the Application of Real Options in the Irish Third Level Academic Sector

1. Temporary Employment Contracts and the Application of Real Options in the Irish Third Level Academic Sector Paper accepted for presentation atStrategy Track atBAM2013: 27th Annual Conference of the British Academy of ManagementLiverpool10th -12th September 2013 Anthony Briody Malcolm Brady Dublin City University Business School Dublin, Ireland

2. Real Options • The ‘right but not the obligation’ to do something under certain conditions at some future date • Originated as a financial instrument • e.g. The right but not the obligation to buy $10,000 at 0.65 £/$ in one year’s time • Characteristics • Flexibility (you have more choices available to you) • Uncertainty (you do not have full knowledge of the future) • Irreversibility (you may find it difficult to back out of a decision) • ‘the ability to delay an irreversible investment expenditure can profoundly affect the decision to invest’ (Pindyck, 1991) • Taking out a financial option comes at a price • Black and Scholes (1973) • Used in the strategy field for investment appraisal • Adner and Levinthal (2004); Amram and Kulatilaka (1999); Janney and Dess (2004)

3. Real Options and Hiring • Where uncertainty and irreversibility of hiring is high, options for alternative employment arrangements are valuable • Bhattacharya and Wright, 2004 • Temporary employment • option to defer hiring a worker permanently • option to abandon a temporary worker • Foote and Folta (2002) • Taxonomy of real options : • immediate entry • immediate exit • delayed entry • delayed exit • Janney and Dess, 2004 • The immediate exit option provides the benefit of making full commitments reversible.

4. University Context in Ireland • Few institutions and little mobility • Specific assets • Difficult to remove academics from positions • Risk averse approach to recruitment • Temporary contracts are commonly used in academic recruitment in Ireland • And in other countries • Netherlands: van Emmerick and Sanders (2004) • France: Robin and Cahuzac (2003)

5. Temporary Employment Contracts in Irish Universities • One year contracts • For example to cover lecturer absence due to sabbatical or other leave • Three year contacts • for new position resulting for example from new programme offering • Allows lecturer time to demonstrate research capability • The implied real options are • that the university may but is not obliged to offer a full-time position at the end of the three year contract • The university delays an irreversible decision • More information is available at the end of the contract than at the beginning • The contract period is effectively an extended probation • That the university may abandon the temporary employee at the end of the contract period • Does the option come at a price? • May not attract the most qualified or committed applicants • May incur second round of recruitment when option expires • May lose future value of a good employee who leaves at contract end • The cost of a temporary contract for employee who doesn’t work out

6. The study • Semi-structured Interviews (18#) • Employees • Permanent, but were on contract • Temporary, and still on contract • Permanent, but never on contract • Employers (Deans) • Human Resource Managers • Public Universities • Institutes of Technology

7. Findings • Employers are deliberately using temporary contracts as an option strategy • They are buying time "to see how a programme flies“ • if the temporary employee is not working out: "they are gone" • Temporary employment contracts are "easy to reverse out of“ • Employees sense that an option is being taken out on them by employers • "there is no commitment" from the institution to the temporary employee • HR Managers • See temporary contracts as a method of increasing ‘churn’ or turnover • Differing views on the nature of uncertainty • "revenue stream dries up" • “the future funding model" • "My view is there is no real uncertainty“

8. Findings (contd.) • Uncertainty • Reduces for the university as the decision horizon is reduced from perpetuity to three years • Increases for the employee as unsure if he/she will be employed in three year’s time (of course, this may not matter greatly if the employee does not intend to remain with the organisation) • Risk is being shifted from the university to the individual • Irreversibility • Reduces for the university as it now has a ‘get out’ clause at end of three years • Increases for employee as ironically there is a perception by employees of increased obligation to remain with the university until the end of the contract • Flexibility • Increases for university as it has two options in three year’s time: to keep or not keep the employee; this can allow better matching of resources to demand • Decreases for the employee as does not have the choice to remain on at end of contract

9. Limitations and future research • One national context examined • Employees and employers drawn from one major university ----------------------------------------- • Extend to other universities and other countries • Consider the price to the university of taking out these real options. Are they cost-less to the university? • Develop a formal real option model • Consider larger implications: • Is a permanent core and a temporary periphery the best way forward for academia? • Does an emphasis on temporary contracts devalue lecturer positions? • Will academia become unattractive to new entrants (especially those from industry)?