Analyze the Costs When Structuring a Contingent Workforce Management Program | DCR Workforce Blog

Analyze the Costs When Structuring a Contingent Workforce Management Program

Total cost of ownershipThe spend on contingent labor today is estimated at $270 B worldwide, making it a major cost item for businesses which sometimes gets overlooked. Large organizations which have decentralized operations may have multiple contracts with many staffing agencies at the local, regional and global levels – with most spending over $20 million on the program. For them, establishing a contingent workforce management program supported by a vendor management system (VMS) becomes an imperative. But, is total spend on non-employees the critical determinant of when to turn to a formal program to help them manage their contingent work program?

A few years ago, businesses experienced the “total cost of ownership” (TCO) craze. Simply put, companies figured out that the true cost of anything goes beyond the initial price tag to include any “hidden” costs, or any additional expenditures associated with its ongoing use. Of course, this “common knowledge” opened up a whole new business opportunity for consultants who were more than anxious to help companies build a TCO modelling tool. While we are not proposing that you retain the services of an expert to build a TCO model for you (which – by the way – should then be factored into the cost of your intended purchase), we do encourage you to consider all costs associated with a Managed Services Program (MSP) or Vendor Management System (VMS).

There is no specific cut-off point at which all companies feel the administrative and financial need to stop managing the program in-house. The point at which the savings gained through an MSP program or MSP tool (resource savings, reduction of redundancies, standardization, risk mitigation, improved compliance, shortened process time and quality improvements) offsets the cost differs.

At this point, you’re thinking, “There is no cost. These services and products are provided via a supplier-funded model. The staffing agencies pay the bill.” It’s not always quite that simple! When developing your cost of ownership model always start by identifying all cost elements, and determining who pays for each. Some things to consider:

  • MSP programs – determine if there are incremental costs associated with the use of onsite personnel, market research, client briefings on industry trends, supplier onboarding, independent contractor compliance, report generation, or Quarterly Business Reviews.
  • VMS programs – will the vendor change separately for software implementation, integration with existing applications, customization, training, documentation, technical support, usage support, updates or upgrades? If so, who is expected to incur these costs?
  • If you decide to expand your program to include workers sourced internally and payrolled through your MSP, how does the rate structure differ?
  • Similarly, what pricing structure would be applied to the management of third parties delivering projects under a Statement of Work (SOW)? Does a supplier-funded model apply? If so, what are the rates?
  • If you choose a client-funded model, will the vendor offer a variety of options including spend under management, fixed rate, and monthly retainer?
  • What about discounts? If the MSP offers a rebate when contractors reach SUTA levels, or when the volume of business exceeds a specified threshold, how is that handled? Who benefits from those savings – you or the suppliers?
  • Will the vendor offer a gain share program in which you establish a cost baseline, then divide up any savings against that baseline?
  • Will the vendor pay penalties if certain metrics are not achieved? Will you pay bonuses if the vendor exceeds your expectations in specified areas?

You may want to dig deeper by conducting an audit of all spend against market rates. This must be done by skill type, level and location. Don’t forget to consider spend on non-employees that is done through “non-approved vendors” (typically referred to as ‘rogue spend’).

These are the cost elements that can be straightforwardly tracked and measured. What about the “soft costs”? Realistically, will the program result in a reduction of your internal headcount? Will you be able to shift resources to higher priority areas as a result of the reductions in administrative tasks? How will you measure the cost savings associated with filling positions faster, or reducing your attrition rate? What potential costs will be saved by avoiding government penalties for non-compliance with employment regulations? What savings will be realized through elimination of invoicing errors and rework?

In evaluating the effect on soft costs, consider the workload. The volume of transactions is a stronger indicator of potential process savings than the number of temporary workers on assignment, as it speaks directly to the work effort involved. Spend under management can also be misleading; given the variance in wages paid to entry level light industrial workers and high end IT professionals, two companies could have the same spend but very different temporary worker populations requiring different levels of oversight and administration.

Also, you must decide on the most appropriate period of time for measurement of return on investment. The fill ratio and other process time metrics may take time to show improvement.

Using all of this information, begin to build your own total cost of ownership model. If it appears that the model is becoming too complex, prioritize each factor, eliminating those that are of lesser importance to your organization.

The content on this blog is for informational purposes only and cannot be construed as specific legal advice or as a substitute for competent legal advice. They reflect the opinions of DCR Workforce and may not reflect the opinions of any individual attorney. Do contact an attorney for advice specific to your issue or problem.
Lalita is a people/project manager with extensive experience in operations, HCM and training and development across industries like banking, education, business consulting, BPO and information technology. She believes in a dynamic approach to life and learning as change is the only constant.