Nearly one-third of the world’s workforce is comprised of “external” or “independent” talent defined as workers that do not have traditional “employee” roles with an organization. As organizations shift from “hiring” employees to “buying” external talent, they must get smarter on how to work more strategically with staffing agencies and employees.
The concept of “buying” or “borrowing” talent has grown exponentially since Kelly Services (1946) and Manpower (1948) first began providing staff augmentation to companies for lower-skilled workers. But today’s landscape of buying external talent is much different from the days when “temp” labor meant hiring a Kelly girl to help out in the typing pool or having Manpower provide extra folks to fill in at the warehouse during volume spikes.
Today’s staffing agencies are propelling the world into a free agent nation filled with skilled knowledge workers of all disciplines and specialties. According to Staffing Industry Analysts, the percentage of “knowledge workers” comprised 73% of all non-traditional workers in 2016 – up from 56% in 2008. Organization such as 99Designs and Athena help organizations flex their marketing and account departments by providing expert graphic design and reliable accountants to fill gaps in talent. Even physicians and college professors are making the shift to an independent workforce with the aid of companies like Heal and Vitea.
As companies have increased their spending on labor services, so has the degree of management complexity required to facilitate that spend. The result? More and more organizations are choosing to outsource this complexity, and procurement organizations have emerged as a principal gatekeeper. Progressive procurement functions see this as a fantastic opportunity to help their stakeholders achieve better business outcomes. These better business outcomes encompass management around the broad aspects of procurement, talent onboarding, Statement of Work (SOW) and service delivery, knowledge transfer, and risk management of external labor. One aspect that continues to be scrutinized is the “rate card.”
External Labor: The Rise of the “Rate Card” Mentality
Traditionally, purchasing labor services fell under the purview of either human resources or the operational function where the labor support services were consumed. For example, a marketing department would identify and hire the best staffing agency to provide support for marketing projects.
With the Great Recession of 2008, as procurement organizations began to accelerate their influence in the labor equation, they turned to the tried and true strategies of increased competition and volume aggregation. Additionally, by looking at labor services through a more “commoditized” lens, procurement professionals were able to help their organizations use scale and purchasing power to reduce input costs.
A key purchasing tactic was to create a “rate card” that enabled them to commoditize various labor services into standardized buckets, using either absolute numbers or by setting a particular range. Theoretically, this allowed procurement category managers to compare various staffing agencies on an apples-to-apples comparison for various job classifications. For example, prior to procurement getting involved, one organization found that the variation in spending by different functional departments for project managers ranged from $50 an hour to $210 an hour.
Other organizations didn’t even have a known rate, because they were paying a “fixed fee” for project management support, which made it hard or impossible to identify the cost per hour. Using a category management focus and bundling their volume across the various functions, procurement organizations have been tremendously successful at reducing the cost per hour they are spending on staffing support. For example, an organization buying project management support was able to create three levels of project management classifications – one for buying “general project management support,” one for buying IT project management and one for “PMP Certified” project management to manage more complex projects. Competitive bids then resulted in more consistent pricing and also ensured that the company did not “overbuy” skills they did not need.
Rate card logic can be applied to a multitude of labor classifications from janitors and maintenance personnel to graphic designers and IT application developers. Some organizations such as Microsoft even have rate cards for buying professional consulting services. The concept of the rate card has also become a staple tool in developing large scale outsourcing deals as well.
There is no doubt that a rate card approach has paid off handsomely in terms of reducing labor rates across the board.But the key question is: has that level of sophistication now reached the point where this approach is beginning to reduce the quality of the work itself?
The Perverse Incentive of Labor Commoditization
Many argue that labor commoditization and a rate card mentality has had a negative impact on an organization’s most strategic assets: its people.
Teresa Carroll, President, Global Talent Solutions for Kelly Services, explains the rise of the rate card has unintended consequences. “To realize true value for money you have to focus on the work outputs required and how best to achieve them. By being disproportionately measured on lowering input costs staffing partners and outsourced suppliers are often deterred from offering the best available talent. For example, a pure cost focus can easily lead an organization to hire talent at the ‘right’ price, but receive the wrong value. What if the best talent may cost 20% more, but be 50% more efficient? The staffing agency or outsourced service provider is forced to offer a knowingly sub-optimal resource just to meet the client’s rate card.” The outcome may end up being penny-wise and pound foolish for the client when the “right” rate card approach racks up other costs in the end.
Tom Mehl, VP of Operations for the Populus Group explains the dilemma of using a rate-card model. “The whole staffing industry is caught in a Catch-22. We also need to realize a rate-card model creates the dynamic of a never-ending cycle of simply getting butts in seats to get work done at the lowest cost per billable hour. Today’s forward-thinking organizations are partnering closer with their staffing and human capital partners by finding ways to not only procure the talent they need, but creating solutions that retain top notch talent through efforts like Redeployment Programs, Alumni Programs, Silver Medalist Programs, Talent Clouds, and Direct Sourcing Efforts.”
Carroll also points out a negative consequence associated with highly competitive bid rate cards. “Today’s workplace is rapidly evolving; talent has a choice and we are finding that the best talent is often choosing to leave organizations behind that choose to manage on labor cost alone. The most talented workers would much rather work with the companies that are in tune with their broader values, for example by offering a flexible project structure that better supports work-life balance needs. Decisions are increasingly based on the holistic benefit of an assignment rather than the size of the paycheck.”
Many organizations are now deploying more fixed price “Deliverables” using a “Statement of Work” (SOW) to define the workscope, but not the hours or level or of effort needed when procuring labor services. On the surface, this is smart because it forces a supplier to cap the number of billable hours it can charge. But Philip Ideson – a popular procurement blogger on the Art of Procurement — warns organizations that deliverables-based sourcing of labor services is not a panacea. “While many have made the shift to deliverables-based approaches to creating SOWs, the vast majority of suppliers determine the cost of the deliverables using a rate card to calculate their costs. And if they are uncertain about the level of effort, they guess high, ultimately increasing the price that is paid. For strategic work, a deliverables-based approach still provides a strategic value proposition, but it is not a one-size fits all solution”
Robotic Process Automation: The Rate Card Killer
If being penny wise and pound foolish is not a reason for organizations to reevaluate rate cards, robotic process automation (RPA) will be the rate card killer of the future. RPA is the application of technology that allows employees in a company to configure computer software or a “robot” to capture and interpret existing applications for processing a transaction, manipulating data, triggering responses and communicating with other digital systems. The focus is now shifting to segmenting jobs into tasks and automating those tasks that are predictable and repeatable. The shift is in more complex thinking that adds mutual value to the vendor/partner relationship. It’s not a simple rate card or SLA, it’s about getting to positive business outcomes.
Advocates of RPA predict some job functions will be impacted by as much as a 90% reduction. Carroll says Kelly Services is an advocate of RPA – something many think is counter-intuitive. “While the headlines often focus on jobs being lost to robots, in many ways the human element of the talent supply chain matters more than ever. There are many stages between human and robotic work, and talent leaders need to be thinking about the implications for how work gets done, who (or what) does the work, and how the work is paid for.”
Carroll adds, “Organizations can automate processes across most aspects of their value chain — but you still can’t make people work for you if they don’t see your organization as relevant and inspiring or a place they want to engage with. As the in-demand human skill-sets become more specialized and harder to find, you’ll also need to be ready to acquire and engage talent in more disruptive ways.”
Michèle Coquis, an expert specializing in labor and services procurement for The Forefront Group, also points out the responsibilities of corporations and individuals when thinking about evolving labor services. “While RPA and automation should be a key strategy for organizations to drive down costs, it is essential that they plan for the support and cross training of workers whose roles are likely to be replaced or changed due to automation. Likewise, it is unreasonable for workers – white or blue collar – to presume their jobs will always be there. No one is exempt from change.”
Coquis says one way that organizations can adapt more smoothly to RPA and other changing technologies is through Vested relationship models with staffing agencies and workers. “The Vested sourcing business model creates a win-win business model for suppliers and workers to find ways to eliminate non-value activities and drive efficiencies in their work. Identify a way to eliminate or automate 75% of your job through RPA? The supplier/worker model will be incentivized to replace billable hours with more productive approaches such as RPA.”
A good example of the power of the a Vested approach is the Department of Energy – which created a win-win-win approach with Kaiser-Hill and it’s 8,000 workers to drive radical efficiencies in how they approached the cleanup and closure of the Rocky Flats Nuclear site. The supplier and workers were paid on a traditional rate card approach. Shifting to a Vested approach highly motivated Kaiser Hill and its employees to create over 200 innovations that led to the cleanup and closure of the Rocky Flats ahead of schedule and $30 billion under original estimates. In essence, Kaiser-Hill and its employees were highly compensated through incentives to work themselves out of a job.
Coquis acknowledges that the staffing industry is slow to adopt a Vested business model because their business is linked to billable hours. “Fill and bill is the standard external staffing mantra and the easy thing to do. But if they can get beyond that and into a creative Vested model, they can really become valuable partners to clients that are reinventing the way they work and the upside for both companies will far exceed their current commercial deal.”
Kelly Services and Populus Group are two staffing agencies that are keen to adopt a Vested model with clients. Mehl believes using traditional rate cards does not motivate suppliers or the people performing the work to eliminate the work. “Our job as a key strategic business partner for talent management is to create value and help our clients define and acquire the most appropriate blend of talent. The Vested model motivates service providers such as ourselves to view work not in terms of billable hours, but in terms of the value of the work that is being performed. Creating Vested agreements with our strategic clients is a way to shift from the rate-card battle to a value-based approach that creates a winning solution for everyone involved.”
Carroll agrees. “We are first and foremost talent advisors, focus on improving the quality of business outcomes. Killing the rate card mentality using a Vested business model creates a triple win; a win for our clients, a win for us, and a win for the worker.
Collaboration the Key to Success
The next decade will demand organizations to re-examine current pipelines and consider how technology and automation will impact decisions to build, buy, or borrow talent.
Carroll is adamant that organizations must collaborate to be successful. “Procurement, HR, and operations functions must work together to pinpoint which workers have the right competencies, where they’re located, how they want to work, and why they would choose one organization over another.”
Ideson is also a staunch advocate for collaboration. “Procurement must make a shift from focusing on ‘buying’ labor services to becoming active partners in helping HR and operations determine how to solve the scope of procuring talent. The talent value proposition and the importance of a strong corporate brand have become critical in attracting and retaining the modern, multi-generational workforce. Organizations are not the only ones with priorities, and talent is choosing to work in various ways that align with their own goals. Choices are constantly evolving. Individuals choose how they develop their skills and make the best use of their expertise. Which is one of the reasons why companies must now rely on a mix of full-time employees, temporary/contract employees, consultants, freelancers, etc.”
Winning the War on Talent
Coquis, Carrol, Ideson and Mehl all agree. Winning the war on talent will require a fresh set of eyes that demands a holistic and collaborative approach. Technology can drive efficiency and innovation in a workforce strategy, but only if organizations buying talent and their strategic suppliers are co-creating solutions that are designed to adapt to tomorrow’s demands.
Mehl sums it up nicely. “Making the paradigm shift will mean killing the rate card and other mentalities that drive ‘business as usual.’ It will also mean creating true long-term alignment with strategic suppliers that are willing to invest in transformation efforts that will meet the needs of their client’s ten years from now.”
The good news is that there are talent suppliers is out there that are not afraid to accept a paradigm shift. Seventy-year-old Kelly Services and newer organizations such as the Populus Group are leading the charge towards a more value-centric approach to talent acquisition. The question is whether organizations stuck in the rate card Catch 22 are willing to make the leap.
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