Comment by marcus_holmes
17 hours ago
I've seen this happen because of accounting/corporate finance policy.
Payroll is an ongoing commitment. Consultancy is a temporary service. Moving people from payroll to consultancy means they can reduce overhead in financial projections. Even though consultancy costs more, and employs the same people, it makes sense to do if it means you can convince shareholders and analysts that Opex will shrink in the future, and therefore profitability increase, and therefore the share price increases.
The problem arises when moving someone from payroll to consulting creates the illusion they are not necessary.
That's not Accounting's problem.
This is one of the many situations where counting beans creates idiocies, because GAAP has no concept of context, and management can play games to make the numbers look good while destroying real value.
That's Level 1 of the problem.
Level 2 is conscious fraud, either of investors or by investors. There are always startups that look suspiciously like their only purpose is to extract money from investors based on future promises that are... unlikely.
You can spot them because the promises keep being delayed, and/or they pivot to some other activity, but keep pretending to be a serious viable business with Exciting Plans™.
Level 3 is the one described by OP, where startups are cynically used by an incubator to extract fees and other income. This can overlap with genuine investment. It can be a triple win. No IPO? A nice cut of investor money. Unicorn IPO? A nice cut of a different kind of investor money. Successful business? A nice cut of the income stream.
Level 4 is straightforward investment fraud by banks and brokers. There are many, many variations on this, from "questionable relationship practices" to risk washing, to outright pump 'n dump, and even the occasional classic Ponzi.
The bottom line is that capitalism is inherently corrupt. There is no free market of rational actors inventing wealth and value for a glorious shared future.
There's an infestation of opportunists, fraudsters, and hucksters at all levels, and governments regularly have to step in to hide the mess and glue the pieces back together - sometimes because the people involved own parts of the government too, and it's better to make millions of working people poor than to go to jail.
> capitalism is inherently corrupt
People are inherently corrupt. That's just life. The Soviet Union was corrupt as hell.
If you want to put down capitalism, feel free, but don't blame it for something that isn't unique to it.
At a glance, maybe. But we also see this in government. The US has outsourced 10s of thousands of “permanent” jobs over the decades. The entire DC metro economy is based on this.
Also because of corporate policy. I know of a company where the VPs are heavily targeted on headcount reductions. Contractors are not headcount.
> if it means you can convince shareholders and analysts that Opex will shrink in the future
Isn't that just fraud?
No. Fraud is a much higher bar than making a prediction about your plan for the future that may or may not pan out. There’s no deception here, management fully intend to end the contractor relationship in future, whether they’re able to or not.
A vague promise which you pretend to beleave and can make believable to other is just business advice unfortunately.
It doesn't actually make sense tho. It just "makes sense" within the rules of a fundamentally nonsensical system.
That system however is no law of nature. It's just broken nonsense no one bothers to fix because we haven't yet run out of money.