New Rules of Commerce
Throughout the economic boom of the 1990's, when strong profits and seemingly unlimited funding were the norm, the costs of new projects and related staffing requirements went relatively unquestioned.
In line with today's cost conscience business climate, however, companies are being forced to a new set of “Rules of Commerce.” They have analyzed their supplier contracts and attempted to obtain more favorable terms for leases, banking services, travel, telecommunications, advertising, office products, and even raw materials used for manufacturing.
Squeezing lower costs from vendors is not a new concept. Over the past 20 years, accounting, finance, and procurement departments have continually explored and implemented process improvements and technology-based tools to capture and evaluate the cost of materials used in the creation and delivery of the end product or service to their customers. They have also learned to capture the cost of direct hire labor in their equations.
Nevertheless, one important piece of data was often omitted — the cost of contingent (temporary) labor. Since 1980, the use of contingent workers has expanded to the degree that today it has become the norm for most companies, especially in certain departments. Project teams in IT, for example, often are now made up of a larger percentage of temporary workers than permanent employees. Despite this widespread use of contingent workforces, however, the costs often went unnoticed.
Many companies are, for example, not aware that a contract Java programmer in one department is costing them twice as much as a contract Java programmer in another. This happens for a variety of reasons:
- Managers are driven to complete projects on time and if they are unaware of market rates, they can unknowingly pay too much for a consultant.
- An internal recruiter may have negotiated the rate without having access to the rates of the manager's other contractors.
- The manager may be hiring consultants directly and not using a preferred vendor and not realizing the preferred vendor's pre-negotiated rate schedule.
- By hiring outside the preferred supplier list the manager is unable to take advantage of the pre-negotiated volume discount or other discounts.
Bringing Order to Contingent Staffing
Human Capital Management (HCM) is a set of strategies designed to gain efficiencies in the use of people to help produce, sell, and support products and/or services. A portion of the HCM discipline focuses on the cost/benefit and procurement analysis of contingent labor. Today we are seeing the implementation of a new set of HCM processes and tools to help companies gain efficiencies, process improvement, and cost controls in their acquisition of contingent labor. These new methods are generically referred to as Managed Services. Via Managed Services, the procurement of contingent workers has become more structured and sophisticated.
Managed Services is the concept that one agency is chosen as a 'partner' to work with the employer to manage procurement and administration of contract labor. In most cases, the partner is paid a management fee or given increased opportunities to generate revenue. Usually the agency assigns one or more staff (depending on the volume of contract usage) on-site with the customer to work with purchasing, human resources, and the departmental managers involved, and so provide a 'one point of contact' solution. Any other agencies that support the customer also work through the partner.
Three Distinct Structures
Managed Services can be best explained by breaking down the three types of staffing structures that typify the reorganization of the staffing process and the potential use of automation.
Structure One:
(Tier 1 Staffing Firm; No Automation Tool)
All staffing procurement is coordinated via a staffing agency known as the "Prime" or exclusive Tier 1 supplier. The selected staffing firm becomes the conduit to receive and distribute job requisitions to as many approved Tier 2 suppliers as needed to ensure that the positions are filled with the right candidate in a timely manner. The Tier 1 staffing firm is responsible for gathering the submitted resumes for further screening and makes recommendations on candidates. In addition, the Tier 1 firm coordinates all accounting and administrative issues.
Advantages:
1. One contract.
2. Single point of contact for all problem resolution.
3. One consolidated invoice.
4. Tier 1 staffing firm becomes a true partner that understands the company culture, leading to more timely hires.
5. Tier 1 staffing firm has ability to produce informative Tier 2 vendor performance and analysis reports.
6. Potential for volume discount via consolidated billing.
Disadvantages:
1. Client becomes somewhat dependent on a single staffing firm.
2. Some managers may be disappointed that their staffing firm of choice is not the Tier 1 firm.
3. Some vendors may be unwilling to participate unless given direct access to hiring managers.
Structure Two:
(Tier 1 Staffing Firm; Automation Tool)
Because of the complexity involved, companies with more than $10 million in annual contingent labor spending, may need a tool to automate their programs, unless the Tier 1 staffing firm has a proprietary tool or processes that feature similar functionality. In addition to the general features of Structure One, the Structure Two staffing scenario includes the selection and implementation of a Web-based Vendor Management System (VMS).
Advantages:
1. Completely automated solution from job order requisition to invoicing.
2. Tier 1 staffing firm partner absorbs some of the duties and costs for implementation, training, and help desk support of the Vendor Management System.
3. Tier 1 staffing firm may have experience with the selected Vendor Management System.
Disadvantages:
1. Implementing an e-procurement tool can be challenging.
2. Third party software contracts are typically for a three-to five-year initial term.
3. Some third party software firms have gone bankrupt or have been acquired.
Structure Three:
(Multiple Tier 1 Staffing Firms; Automation Tool)
Typically requires independent evaluation and acquisition of a third-party VMS. The client selects and negotiates with all of the staffing firms and creates as many tiers as needed.
Advantages:
1. Fully automated end-to-end talent procurement process.
2. Costs are typically passed along to staffing firms.
3. Cutting edge e-procurement technology.
4. Spending data is available via on demand and customized performance analysis.
Disadvantages: (in addition to those disadvantages mentioned under Structure Two)
1. No staffing firm to absorb any installation, training, or help desk costs.
2. Possible higher consultant turnover as staffing firms may need to pass along the increased fees to future and currently engaged consultants in the form of pay rate reductions.
3. No Tier 1 staffing partner to provide an additional layer of candidate screening.
Trend Toward VMS Adoption
A VMS typically requires contingent spending greater than $10 million per year to offset its installation cost and its typical customer is a Fortune 500 enterprise buyer.
Research indicates that 20 percent of the Fortune 500 companies have evaluated and selected a VMS. While the features of these tools vary slightly, they perform most of the tracking, job order distribution/fulfillment, and reporting functions.
The current popular pricing for these tools is uniquely positioned so that no installation costs are incurred by the user. While fee structures vary, the typical range is one to three percent of the billing cost. The payment is shown as a reduction on the supplier's invoice. In many cases suppliers pass on the majority, if not all of the cost to the consultant via a reduction in the consultant's pay rate. Depending on the depth and breadth of the installation, the user may find that it makes more sense to purchase a license for the software and pay the VMS provider for installation assistance and support.
Criteria used in VMS selection includes pricing structures, references from other customers, understanding of the ease of implementation, the ability to interface with existing back office systems, data security, financial strength of the VMS supplier, and how the VMS supplier will support both the installation and ongoing use of the tool. Some VMS tools are in their third and fourth releases and have impressive functionality. As with any new software niche, there have been several suppliers in this new space that have not survived due to lack of funding and lack of revenue. Although the ongoing financial viability of VMS suppliers is becoming more encouraging, some "shakeout" will continue as the industry moves from infancy and consolidation to growth and maturity.
Benefits of Managed Services Alternative
A growing alternative is the use of a traditional staffing firm as the Managed Services Provider as described in the "Structure One and Structure Two" examples. There are numerous advantages to selecting a Managed Services Provider that has pre-established contractual partnerships with one or more VMS vendors. However, because a non-VMS solution may be a better solution in some situations, organizations should consider aligning with a staffing partner that can implement with or without a VMS tool.
| Managed Services Features | Managed Services Benefits |
| Standard, company-wide rates for skills | Eliminates widely varying rates for identical skill sets. |
| A defined list of supplier(s). | Guarantees set price, reduces "maverick" spending, and ensures volume discounts |
| Single supplier for permanent and contingent talent. | Reduced costs, volume discounts, single staffing agreement |
| Simple job requisition process | MSP assumes all responsibility to produce the right candidate. |
| Cost and efficiency reports. | MSP consolidates data and produces standard and customized performance reports. |
| MSP becomes extension of the internal staffing team. | Screening process tailored to the individual business' corporate culture |
| Uniform accounting for contingent labor | Consolidated worker invoices and streamlined Accounts Payable process. |
Standard Firm-Wide Rates
A key benefit of Managed Services is the establishment of standard, firm-wide rates. In typical organizations that have not implemented a Managed Services program, many hiring managers directly negotiate rates with a staffing firm for each temporary worker hired. But in many cases, hiring managers do not have sufficient knowledge of prevailing rates. Often times separate business units within a company pay widely varying rates for identical skill sets and experience levels.
Reduced Costs and Volume Discounts
With a single supplier as overseer, there is greater likelihood for reduced costs and/or volume discounts as well as the consolidation of many staffing agreements to a single contract. There are also accounting and reporting benefits. Since all individual contingent worker invoices are consolidated, the accounts payable department saves time in processing and remitting invoices. The Managed Services Provider consolidates data and produces standard performance reports with the potential for customized reporting to fit specific needs. Standardized time sheets lessen the possibility of managers being confused by a myriad of time sheet formats and disparate time sheet deadlines.
A Managed Services program also defines a list of supplier(s), helping organizations control "maverick" spending with non-approved vendors at rates that are higher than the company's standards.
Simplified Job Requisition Process
Managed Services provides a simple process for informing the staffing partner of a job requisition. The MSP assumes all responsibility for enlisting any necessary Tier 2 staffing firms or subcontractors to produce the right candidate in a timely manner while ensuring compliance with the standardized rate structure. As the MSP becomes a true extension of the company's staffing team, it develops an in-depth knowledge of the work environment and is better qualified to screen for candidates that will excel in the company's corporate culture. As a result, internal managers spend more time interviewing and selecting the best-fit candidate, and spend less time screening.
Customization is Key
Research reveals that each Managed Services contract is very unique with the terms, costs, duties, and processes varying widely. To successfully transition to a Managed Services staffing model, an MSP must be able to custom fit a solution specifically for their client's specific size and needs. "Cookie cutter" implementations may provide some savings; however, a customized and forwardly flexible solution will provide more significant long-term savings.
Conclusion
Supplier relationships are often key to helping a company develop, support, and take to market the company's product or service. The importance of contingent worker supplier relationships as a key supplier relationship is finally getting much-needed traction in the Human Capital Management arena. Companies are now implementing similar supplier processes to ones they have successfully utilized with other materials and services providers. The strategic value of successful supplier partnerships cannot be taken lightly. With today's heightened emphasis on cost cutting, it is tempting to simply demand that all suppliers slash their charges. However, that often creates negative consequences both short and long term. As a result, over the next few years, Managed Services is going to be heavily analyzed and implemented as a potential cost saving tool.
Thomas Stalkamp, vice president of purchasing at Chrysler, described the difference between his partnering approach and others: "In general the cooperative approach is the quickest route to better and lower costs. When you start to see suppliers as the experts, then they become a valuable partner instead of a switchable commodity. You have to have some other technique other than just bludgeoning to get some efficiency out of them."
Business Network's article, titled Managing Contract Staff Services, says "Most of the companies that have made the move to Managed Services are showing significant improvements to their current processes. Managers are not only spending less time in this area, but they are finding that they are filling their contractor requirements more quickly and easily than before. Direct and indirect cost savings are varying from five to 20 percent even before savings associated with increased manager productivity are taken into account."
About the Author
Barry Mills, Director of Sales Programs for MATRIX Resources, Inc., is one of the most highly regarded experts in the staffing industry. He began working in IT staffing in 1981 and joined MATRIX in 1994. Barry has earned Certified Personnel Consultant (CPC) and Certified Employment Specialist (CES) distinctions and is often sought by the media as a source on staffing and recruiting trends. In addition, Barry serves as a leader and speaker for several staffing associations. |