In search of a labor derivatives market.
By Michael Beygelman
What if the labor market learned something from the financial services industry that can become a game-changer in how companies think about procurement and retention of labor? The creation of a new tradable instrument called a labor derivative could bring massive innovation that would enable a company to take delivery of a talent pool at a pre-agreed price point. This mini insurance policy, akin to an airline locking in fuel costs for some future point, could become a powerful corporate weapon to insure that companies have access to the labor they need, when they need it, and at pre-fixed price points.
Here are the brief mechanics of how this would work, so get out your pencil and paper. First, a reputable source, probably a global supplier of labor that is beyond question financially sound, will develop a security whereby they will guarantee delivery of a set number of workers, contingent or permanent, at a given price point or bill rate. Like other commodities, this kind of contract will have an expiration date. The further out the expiration date or the more speculative the skills mix the more expensive the contract, as issuers would have to take on more risk because they might have to actually deliver the talent. I say “might” because, as in any other commodities options trading, often the options expire without ever being called.
The buyer of the option pays a small premium to purchase such a contract, for argument sake let’s say 1 percent of the total labor pool costs projected for some future date, and now has the assurance of a guaranteed labor force at a guaranteed rate. Think about the scores of companies that would buy such an instrument at pennies on a dollar, which they can then use to lock in their talent supply chain, or its costs, to drive more comprehensive business continuity planning or annual budget cycles.
Multinational suppliers of labor or recruitment services would have tremendous appetite to manufacture and sell such instruments because if the options are called, the seller has guaranteed revenue at some future point in time. But if the options expire, the seller creates additional revenue for taking on some potential risk that never came into being. Frankly, suppliers of labor and recruitment services are desperate for innovation, and are eagerly looking for additional products and services that can leverage their massive infrastructure.
If a marketplace existed for these kinds of instruments, buyers and sellers would line up at the door. But a labor derivative market doesn’t exist, and therefore a third constituency can be invented—technology companies that can develop systems to operate this kind of marketplace and create revenue for themselves by clearing transactions. Maybe even existing financial services markets, such as ICE or NCDEX, might take an interest and move to develop automation for this type of an instrument?
As outlandish as this innovation might seem, the briefest of analysis will reveal the powerful value proposition of such an instrument and the already-existing demand that, unfortunately, has yet to realize just how much it needs or wants this kind of a product. In marketing this phenomenon is called an unarticulated need, and companies such as Apple have made fortunes from this concept. After all, we didn’t walk around saying, “I wish someone would invent an iPhone or an iPad,” and frankly we didn’t even know that we wanted or needed one until these kinds of products were introduced; then instantly we said as a society, “we want one!”
Part of the challenge for stagnating innovation in the labor markets is that a number of companies are simply too focused on reductive activities such as cutting costs, cutting heads, and maximizing profit instead of looking for creative ideas to grow business and capture additional market share. An overused but highly relevant quote is from Henry Ford when he said, “If I asked my customers what they want, they simply would have said a faster horse,” and in essence suppliers of labor or recruitment services have settled this kind of a response from their customers, who in turn have opted to simply settle for a faster horse—for now!
I am convinced that the kind of innovation discussed here will not fall by the wayside and will one day see the light of day. One idea births another, and so on, until the ultimate idea takes hold and becomes reality. The notion of labor derivatives is not just a philosophical conversation but rather an important tool that companies will learn to use just as soon as suppliers of labor pools learn how to manufacture them—and as soon as a safe commercial environment is created to trade them.
Michael Beygelman is the global practice leader and president, North America RPO, at Adecco Group. He can be reached at email@example.com.