What Is the Best Way to Purchase Contingent Workforce Services?
Contingent workforce services, also known as extended workforce, refers to the use of third-party labor to supplement the firm’s base of employees.
Typically, hiring managers will obtain these services from one of several channels: staffing companies who supply labor on a time-and-materials basis; large IT services firms who offer consultants based upon a Statement of Work specification or on a Managed Services basis; or gig workers offering freelance labor.
Estimates of the market for Statement of Work/Managed Services (“SOW”) contracts suggest an annual rate of $250 billion, roughly equivalent to the size of the staffing market. On the buyside, local managers (not centralized HR or procurement) typically manage these engagements from selection through final delivery.
The trend is ever higher. Mercer writes “… 79% of executives expect that contingent and freelance workers will substantially replace full-time employees in the coming years.”
Imagine a manager working in the IT department of a large company. She is responsible for supporting the operations of an individual division, including maintenance of existing systems as well as the extension of new capabilities, subject to established budgets and project descriptions. She can either use her own team to deliver results, or she can bring in outside help, on a temporary basis. For example, part of her broader mandate may be to make system A talk to system B. She brings in extended workforce talent to handle this discrete project.
One key risk here is compliance. She needs to take adequate steps to ensure that the government will not re-characterize the extended workforce as employees. Co-employment is difficult. A key risk is the risk of misclassification in which the individual worker or the government argues that the individual was, effectively, an employee. This could lead to back payment of benefits, higher wages, and higher taxes. Governments have been getting more aggressive about prosecuting this. Tech companies such as Uber are juicy targets, for example.
Many consulting firms have argued that mitigation of misclassification risk requires either a Statement of Work or Managed Services approach, both of which they (conveniently) use as a contracting methodology. This may not be as true as the consultants would have managers believe because “… the burden of proof (and most of the risk) is on the buyer of the services. Absent any proof to the contrary, the beneficiary of the work product is generally considered to be the employer.”
A bigger risk with more personal import for CIOs and their staff is the risk of getting fired.
As Smart Ledger writes:
“We all know that the unit costs of technology is falling year-on-year, the problem is that the demand is increasing even faster. This means left unchecked, the costs of IT would explode year-on-year — and if this happens every CIO knows that they will be out the door before the kickoff budget planning round has even finished.”
McKinsey writes that “Using a global network of experts and proprietary benchmarking tools, we found that companies were paying 30–50 percent more than they should for their contracted services.” This may be due, in part, to the weakness of management. Over 90% of respondents to a Deloitte survey acknowledged room for improvement, with more than half citing inconsistent or non-existent processes for managing extended workforces.
Another key vulnerability is scope creep: “continually adding requirements as a project progresses. If the scope grows too large, it can even cause the project to fail.”
One way to address the possibility of scope creep is to discover and specify the requirements of the project in great detail upfront. Once the project manager has done this, they can write a contract for the project laying out key dimensions:
1. What will the project deliver?
2. Who is responsible for each of the deliverables?
3. What are the milestones and checkpoints that the team needs to meet along the way?
4. How will the team determine how to change the project?
5. How will the team allocate the costs and responsibilities of changes to the project?
The contract can be either with internal stakeholders as in a guarantee from the internal project manager to execute a particular plan. Or it can be a contract with third parties, either staffing firms or consulting firms.
In any project, there are multiple stakeholders.
Business users want to get the maximum functionality possible from the new solution and they may be indifferent to questions of expense if the cost center does not affect them directly. They will push for change in the form of additions even after the finalization of the internal contract.
The hiring manager aims to get the project executed on time and on or under budget while meeting all of the performance targets and minimizing management distraction.
The consulting firm is looking to execute the project with the maximum profitability possible. If it is a fixed cost project, they hope to allocate the smallest set of feasible resources. In either the case of fixed cost or time-and-materials billing, there is an incentive for them from increased scope. Often, the unit costs of additional requirements can be higher than those in the initial contract, ostensibly to compensate the consultant for the additional flexibility they must provide. It can also mean extending the timeline for the project, keeping the consultant’s resources fully occupied for longer, improving utilization rates.
Here is a good summary of the consultant’s perspective from the Liquid Planner site:
“Scope creep can actually have an upside for projects with external clients. With a properly written contract, added features can produce new revenue. When the request is made, you calculate the additional hours of work and allow the client to sign off on the requested work. Your scope creep then becomes the customer’s cost creep.” (emphasis added)
Having laid out the context, what is the key challenge for procurement of extended workforce services?
Recall, however, that local managers usually act without the involvement of HR or procurement when it comes to sourcing extended workforce services.
Ideally, the hiring manager will collect the requirements for the project and write a Statement of Work describing what needs to be done, independently, using this document to solicit bids in competition from a number of potential service providers.
In practice, hiring managers may not behave independently. They collaborate with one supplier, picked from a short-list of approved vendors, to develop the Statement of Work. In some cases, the consultant is the one who writes this project contract. The manager then awards the work to the collaborating supplier on an effectively sole-source basis.
Not only does having the supplier influence or write the Statement of Work in the absence of competition increase the risk of misclassification, the conflicts of interest between the buyer and the supplier here can lead to scope creep and intellectual property leakage, by design.
If the Statement of Work purposely (or sloppily) excludes anticipated requirements, then scope creep is more likely, along with the attendant cost inflation.
Often, there is intellectual property associated with the work that the third-party contracts to execute. This may be in the form of written code or other engineering solutions. A well-written contract should ensure that the buyer has perpetual, unrestricted access to this intellectual property. Otherwise, the consultant can hold the buyer up for expensive subsequent work that relies on this IP.
Existing tools such as the VMS/MSP approach don’t do enough to encourage competition and manage this process. Indeed, hiring managers in the IT department or other line departments may find the Statement of Work solicitation intimidating to the point that they welcome the intervention of a favored consultant.
Of course, one could also argue that this lack of competition and the undue influence of the supplier over the assembly of the Statement of Work is an example of procurement fraud.
The more this behavior takes place, the more likely it is that tension between the IT department and procurement increases. IT wants to control the technology aspect of the project to get better outcomes. Procurement wants to control risk and price.
It’s possible to make them both happy.
Accessible sourcing platforms like EdgeworthBox make it easy for IT hiring managers to execute a simple RFP, soliciting competition from multiple consultants and staffing firms, even as they first use the structured database and social network to collect the information they need to develop independent Statements of Work. For the most common contracts, it would even be possible to have templates that multiple buyers used, massively lowering the intimidation factor that leads to such distorted outcomes currently. Give us a shout. We’d love to talk to you.