Evolving from cost savings to true partnership.
By Matt Rivera
The use of contingent or temporary labor has varied during the past 15 years. In 2000, we saw an uptick in the use of contingent labor, driven by changes in technology. Today, we’re experiencing an unprecedented shift in the composition of the workforce. An annual Workforce Trends Study by Yoh found that 80 percent of respondents expect their levels of temporary and contingent employees to stay the same or increase in the coming year. We are seeing the use of temporaries become the new norm.
As a result, the necessity is greater than ever to control this non-employee talent (temporary, independent contractors, or other workers not directly paid by the company). Companies need to ensure this activity is not only managed effectively, but also done in compliance with employment laws and standards, and without undue risk for the company.
A managed service provider (MSP) is an organization engaged by a company to manage all of its contingent labor processes, as well as the associated vendor supply chain. MSPs manage the talent acquisition process, contribute to non-employee onboarding and offboarding, and oversee vendor compliance and performance.
The Staffing Industry Analysts’ 2010 Contingent Buyers Survey, published last November, found that 66 percent of respondents (companies with more than 1,000 employees) use an MSP today. Another 15 percent indicated that they were likely to seriously explore this option within the next two years.
Three factors typically contribute to an organization’s decision to engage an MSP:
- The cost of contingent labor;
- The number of contingent workers throughout the organization; and
- The quantity of vendors in the talent supply chain.
These factors mirror the typical lifecycle of an MSP program—from looking at reducing costs, to identifying and capturing overall spend, to finally focusing on service.
With a heightened awareness of the increased use of temporary employees, working with an MSP is no longer simply about cost; it’s about managing the non-employee hiring process with a partner who understands the company culture and its processes, as well as one who can respond appropriately to changing talent needs.
Realizing Cost Savings
When examining the process for bringing temporary talent into a company, many businesses might find their process is decentralized, with different areas of the company having different procedures in place. Invariably, when asked about the cost of their contingent labor, many organizations will give approximations that are much lower than their actual spend. Others simply admit that they don’t know.
This is usually the result of temporary costs that are misclassified or hidden in project costs or unclear accounting items. Thus, the first reason a company might choose an MSP program is to reduce or better manage costs.
Indeed, by working with an MSP, many companies experience major cost savings. In fact, a late 2009 report from Aberdeen Group found that organizations that outsourced to an MSP realized savings 40 percent greater than those that managed the process internally.
Initially, one of the most common ways MSPs save companies money is by standardizing rates. As opposed to negotiating individually with multiple temporary staffing vendors that might charge varying rates, an MSP assumes the management of those vendors and creates a consistent rate structure. This means that for job positions, the pay rates remain consistent across the board. If the structure is based on bill rates, those bill rates are set within a defined minimum and maximum. If the company is using a markup model (defined as a percentage over the pay rate paid to the temporary agency), then a consistent markup among all vendors is established.
Furthermore, if a company identifies contract employees for hire, the MSP can administratively manage and pay them under the agency’s payroll. This is known as “payrolling,” and can include former employees, interns, retirees, or other candidates the company knows or recruits on its own, but at a cost that is much less than paying them as direct employees.
Another way to achieve significant cost savings is to leverage the amount of spend. For example, volume discounts can be put in place for the amount of spend going through the program. When certain thresholds are hit, there can be savings over either the markup or in the form of an annual rebate. This also provides some incentive to capture as much spend as possible through an MSP program.
It’s also important to note how the MSP will be paid. Typically, between 3 to 5 percent is taken from the vendor’s bill rate or mark-up for participating in the program. This fee is paid to the MSP and is known as a “vendor-funded” model. In most cases, the result is that the company doesn’t directly pay for the MSP program. Some companies do choose to pay a monthly MSP management fee directly, but for the most part, vendor-funded models seem to be the standard.
Consolidating Vendor Management
If a company relies on a large quantity of staffing vendors (20 to 30 or more)—or worse, if it cannot identify how many vendors it has engaged—an MSP will evaluate the number of vendors, negotiate rates, and begin managing the relationships on the company’s behalf.
Aside from streamlining the vendor process, MSPs also help ensure that vendors are in compliance with employment laws and company policies. The MSP will make sure that proper screening procedures are in place (background checks, drug screens, etc.) and that the vendors adhere to all the required processes. The costs and risks associated with co-employment (the case of Vizcaino v. Microsoft is a well-known example) and discrimination lawsuits are often forgotten “soft” costs savings—gained through avoidance, rather than realization of an outcome—that can result from implementing an effective MSP program.
An MSP can also supervise vendor performance. It will monitor success rates, response time, qualified candidates submitted, and other metrics to determine the vendor’s effectiveness. By ensuring that all vendors are performing as they should, the MSP helps the organization extracts maximum value and quality from the program.
The Turning Point
The early stages of the relationship with an MSP are typically focused on transactional successes—cost reduction, processes and procedures, or evaluating vendors. Over time, however, the focus should shift to more strategic aspects of how non-employees move into the company and how the management and engagement of these employees occur. It’s at this point that a company begins to build a true partnership with the MSP because it involves altering behaviors and facilitating change management. It’s also the point at which many programs stagnate.
For example, as the MSP evaluates vendor relationships, some managers might be forced to abandon their relationships with favored vendors or suppliers. To create an efficient and streamlined program, companies must not allow exceptions to it. If the customer and the MSP allow these exceptions, cost savings are reduced, risk avoidance is compromised, and the door is opened for managers to ignore non-employee policies and guidelines. This type of change management is difficult—and prevents many MSPs from reaching a more strategic level.
In order for a more strategic partnership to develop, the MSP and the company must evaluate how the non-employee talent acquisition process supports the larger goals of the company (rapid growth, acquisition of specific skill sets, or to provide more highly qualified talent). In addition, executive buy-in for the program must exist at the highest levels and must support these goals and related policies.
As the relationship progresses, the two partners can begin to look at how the MSP can be leveraged for other areas of the business, including overall talent acquisition and management of other non-employees. It is at this level that the true value of an MSP can be realized.
For example, the MSP might begin to help evaluate non-employees working on projects, or those coming in through vague statement of work (SOW) engagements. For direct hires, an MSP might be able to expand its responsibilities to recruiting for company employees or establishing a recruitment process outsourcing (RPO) program for large hiring events or to augment internal recruiting teams. Independent contractor (1099) qualification and management is also an area where the MSP can provide an opportunity for cost savings and increased risk management.
In addition, as the MSP becomes a trusted partner, the provider can impart intelligence and advice on the marketplace, rates, skill set trends, compliance issues, contingent employee trends, and more.
By engaging an MSP that understands the company and the culture, an organization can secure a strategic partner who can respond quickly and appropriately to changing talent needs. Although an MSP can immediately yield cost savings and assume vendor management responsibilities, these initial savings can decline over time. The real success of a program is obtained only if the MSP is able to reach a more strategic level of partnership.
The MSP must become a seamless extension of the company—a strategic talent acquisition partner that can filter high-quality talent throughout all areas of the organization, not just a big stick to drive cost savings.
Matt Rivera is director of customer solutions for Yoh. For more information, visit http://blog.yoh.com or www.yoh.com.