Enterprises using staffing agency-supplied contract workers face the challenge of minimizing supplier rates while ensuring that the agencies are engaged and motivated enough to continue being their suppliers. This is a tight rope walk that needs to be continuously managed. Not everyone manages to handle it successfully – and some even end up having strained relations with suppliers, further complicating matters.
Let’s break down the issue. When hiring a contract worker through a staffing agency, you will be charged a rate that consists of the pay rate (actual hourly rate to be paid to the worker), statutory costs (taxes, fees for background and drug tests, etc.), other costs (e.g., costs of benefits provided to workers) and a profit margin paid to the supplier. Together, this is referred to as the “bill rate”. In an effort to control costs, most businesses ask for complete transparency into all bill rate components.
Many companies conduct auctions to find the lowest possible pay and bill rates. They may also impose conditions such as dropping the bill rate after a specified period of time (the idea is that the supplier will have recouped its recruitment cost and should offer better hourly rates after that point in time) or allowing the company to convert the temporary worker to a permanent employee without paying fees for the conversion (note that most agencies support temp-to-perm conversion. The sticking point is the length of assignment prior to ‘no fee’ conversion).
The challenge is where is the breaking point? When does a supplier determine that the rate is so low that attempting to fill the position is not profitable? As Procurement officers relentlessly pare down bill rates when dealing with staffing suppliers, they may not find much support even internally as hiring managers feel the effects of requirements that remain open for long periods of time. Dissatisfied staffing suppliers may have an ally in the hiring manager, who would want to keep them happy, in return for the quality talent they bring in.
Procurement organizations are caught on the horns of this dilemma. Their mandate is to deliver the best possible service to their employer, at the lowest possible cost, with the least amount of risk. Of course, it’s easier said than done. What is the best possible service? How do they know what is the most appropriate cost? How do they balance the risk of program and project delays that result from the inability to find qualified workers, or the risk of high attrition rates as workers leave to accept higher paying positions? What about the risk to the corporate brand as a reputation for treating suppliers unfairly spreads?
What do the best Procurement officers do? To ensure effective management of the program, while driving cost savings, they adopt this 80-20 mantra – give a few high performing suppliers 80% of the enterprise’s business, so that the volumes offset lower margins – while 20% of the requirements, comprising of hard-to-get and niche skills, are outsourced to suppliers who demand higher rates but deliver such quality resources.
I was curious to know what criteria are used to decide which suppliers get the lion’s share of the business. Here is a list of the parameters to be tracked. Of course, only the enterprise can say the actual weightage each of them is to be given.
Additional parameters to track could be their corporate social responsibility and diversity certification and practices.
To build a strong supply base, the Procurement team should start by getting the facts. Do an exhaustive assessment of market-based rates by position and location. Repeat this assessment at least twice annually. If using a managed contingent workforce program, the Managed Services Provider (MSP) will conduct the assessment for you. Alternatively, you can hire consulting firms to do this assessment. Many companies issue a Request for Quote (RFQ) to gather this data. Keep in mind that this approach can backfire on you. Responding to an RFQ takes considerable effort. If suppliers determine that it is just a research exercise you don’t really intend to award contracts to new agencies, they may make a half-hearted attempt or decline to participate. The result could be faulty and you could damage your relationship with potential suppliers.
Using this data, your negotiations will be fact-based, and suppliers will be more willing to accept aggressive rates. Once the relationship is established, the suppliers can be motivated to continued efforts and commitment through the fair administration of a ‘rewards and recognition program’ and maintaining a responsive and supportive relationship.
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