KNOWLEDGE SHARE

Buying contingent labour in a changing market-place

Matthew Hardaker

The Oculus team have spent a large portion of their individual working careers within industries that utilise contingent or flexible labour models in the delivery of their service.

Introduction

Many organisations (particularly within the traditionally ‘blue collar’ industries of construction, warehousing/logistics, agriculture and manufacturing) that experience huge swings in their labour-requirements are highly dependent on ability to deploy high volumes of labour to satisfy peak demand, however, the weak pound; increasing levels of inflation over the last two years; and reducing unemployment figures showing the UK is at its lowest annual rate of unemployment (4.4%) since 1972 (4.3%) are making things even tougher in an industry that is saturated with suppliers. By digging a little deeper, we can see how everything from geo-political matters to technology is putting a squeeze on the availability of candidates; increasing competition; and thus, creating a more challenging frontier for the UK recruiter:

  • Net migration is reducing. Net migration to Britain over the past 12 months has fallen by the largest amount since records began, with EU nationals accounting for three-quarters of those who chose to return to their native country, official figures show. The Office for National Statistics showed that net migration has reduced to 106,000, down from its peak of 336,000 in June 2016. Of this, three-quarters was accounted for by European Union nationals.The ONS also reported that of the quantity of migrants whom were actively looking for work has dramatically reduced, down from 43% to 28% according to November 17 statistics.In short, there are less people available or willing to fulfil certain roles, or as some tabloids have coined it, The Brexodus!
  • Pay inflation is increasing, incentivising businesses to consider upskilling or reskilling existing employees, in favour of recruiting. The Adecco Group UK report in their Spring 2018 update that the average basic pay increase expectation for the next twelve months has grown to 2.1% from 1.8%.
  • Employment confidence is increasing. The Chartered Institute of Personnel & Development’s  (CIPD) metric of employer confidence – measuring the difference between the proportion of employers who expect to increase staff levels and those who expect to decrease staff levels – shows a sharp increase and it being at its highest level since Winter 2012/13. It shows an increase of +26 from +16 of the previous quarter.
  • The ‘gig economy’. Whilst this very topical concept is dominating headlines for seemingly preventing workers from benefiting from the full gambit of employee rights and protections, and despite all the criticisms, the reality is that this type of engagement is hugely popular. In fact, there are now five million people currently working in the gig economy in the UK, representing 15.6% of the total full and part-time workforce, according to the McKinsey Global Institute (MGI). . For organisations who favour a more traditional approach to employment or are simply not able to offer a role in such a way as would be attractive to the ‘gig-economy’ worker, means there is a skilled workforce that simply cannot be accessed or attracted.
  • Buyers have historically been conditioned to buy solely on price and mark-up reduction alone, often ignoring service, regulatory and quality considerations in favour of a short-term ‘win’.

Clearly, procuring contingent labour strategically should be a high-priority for organisations whom are reliant upon it. As an area of spend, it has grown in importance for the procurement function over the years, historically having been left to operational teams or HR functions. As with many categories however, the unit price is not necessarily the cost, and the cost is not the total opportunity in which a strong procurement exercise can impact upon.

How should we approach this area of expenditure? Let’s look at the most recent supply-chain trends first…

In most instances, businesses will use an agency for contingent labour, with the HR function taking a more ‘in-source’ approach to conventional non-volume recruitment.

An agency typically acts as the intermediary between the hirer and the candidate in question, but more particularly, as an extension of your own HR team. Invariably, agencies will work on a per-hour fee basis that comprises of the pay, statutory components and their own supplier margin. In some instances, you may be able to negotiate productivity related pay and/or tenure related discounts; and gain/share arrangements relating to operational efficiency improvements.

Now, in a largely unregulated market place, with zero barriers to entry, we will speak from a position of what a good and credible agency SHOULD do. A strategic review of this area of spend would ensure your agency(s) actually DO these tasks;

  • Directly or indirectly advertising for a role or requirement;
  • Administer the payment of the worker(s), including instances of holiday or sickness;
  • Ensuring the workers are fully compliant with all right-to-work legislation, and, validating any pre-requisite skill checks and qualifications;
  • Working with their client to anticipate and plan for peak demand requirements.

As a supply chain, companies can opt for a variety of supply-chain models and can consider the introduction of technology to assist in the management of their supply-chain.

The factors influencing the viability of any one of these supply-chain models include but aren’t limited to the volume of workers required; geography; how involved a customer wishes to be; and of course, the commercial opportunities associated with consolidation vs the risk of consolidation. Some typical models within the marketplace are;

  • ‘PSL’ – A preferred supplier list. The conventional approach to procuring contingent labour, whereby multiple suppliers will be used by a business and there may be a degree of rate consolidation. Demand will be managed amongst the PSL and (arguably) requirements are placed according to who can fill a vacancy first.
  • Vendor Management System (VMS) firms provide software to assist in administering the process of vacancy creation; allocation; timesheet consolidation and payment. They also help in the consistent application of commercially negotiated fee and performance arrangements.
  • Managed Service Providers (MSPs) / Master Vendors – At the complete opposite end of the spectrum to a ‘PSL’, the MSP acts as your outsourced provider and manager of your contingent labour requirements and MSP’s will usually provide their own technology platform. Often the reserve of large volume businesses that may not have the skill or knowledge to manage their recruitment needs internally, organisations such as Adecco, Randstad, Hays, Manpower and Allegis dominate this market, however, they will often partner with local agencies.

Undertaking a procurement exercise in this area

As if often the case, ensuring you have a clear understanding of your current recruitment challenges is the natural starting point.

From a service delivery perspective, you will need to have a clear understanding of (quite literally) what you need contingent labour for; what skills are they required to have; how appealing is your business within the market place; do you know how and where your existing service partners are succeeding and failing?

From a cost and data perspective, do you have a detailed depth of understanding of your current recruitment costs? The pay and cost of your current contingent labour workforce? The financial and contractual risks associated with your current supply chain in terms of temp-to-temp/perm transfers?

Understanding the above is a vital ingredient for a successful procurement exercise in this area and should form part of a structured and cross-functional ‘Request for Information’ (RFI) stage. Without this level of understanding, businesses risk making decisions on anecdote or sentiment – We are not advocates of either!

We often find pre-tender workshops with both prospective and existing suppliers as invaluable; often part of the ‘RFI’ stage, it can allow a buyer to glean some valuable insight into the area so help them validate the final tender strategy.

So why would a supplier invest time, money and resource into doing work pre-tender?

Suppliers view this stage as an opportunity to gain a greater understanding of your business, outside of receiving a ‘cold’ tender. In this respect, it is valuable pre-sale work for them and may offer them a level of advantage over the other. In short, it is in their interest to help you as much as possible, as it may help them in a future tender!

And the tender?

At this point we would possess an intricate understanding of your contingent labour estate and a detailed level of knowledge of your recruitment challenges, enabling bidders to make detailed and unambiguous service, delivery and commercial proposal for you.

In drafting a tender document, we are advocates of being explicit with our aims and objectives, whilst giving latitude to respondents so they are encouraged to demonstrate their skills, experience and draw relevant comparisons with similar organisations to our client. We would encourage you to do the same; do not be overly prescriptive and where strategic change is being considered, this category is not one where you are looking to ‘tick the tender box’.

Things to consider when assessing are supplier would include but not be limited to the following points, however it is essential to ensure your tender project team comprises of the right stakeholders such as HR and Operations;

  • What is the supply chain being proposed and how would this be structured, managed and costed? MSP? MSP with a PSL? Or something different?
  • Reflecting on the challenges of the UK labour market, how would a bidder convey and convince their ability to source quality candidates, whereby others have failed to do so?
  • What experience could they deploy to improve a businesses ability to recruit, in terms of brand; reputation; speed to market and similar?
  • How would security vetting procedures be managed and how can they give comfort to a client in this regard?
  • How would they bring visibility and transparency to the pay and charge rate components?

Deriving value…

As I touched on earlier, buyers have been conditioned to be over focused on the actual agency fee. Whilst it can’t be denied that the majority of cost relates to pay and statutory components (85%+), it does not mean that the spend cannot be managed and influenced. In this regard, it is important to understand where opportunities to reduce cost and improve quality reside;

  • Agency fee – The easy one; this is the fee applied by the agency for their recruitment services. Sometimes called mark-up, sometimes called margin. It is vital to understand the difference!
  • Speed/cost to hire – There is no point in negotiating your fee down for a worker whom never starts! One of the biggest cost in any business is downtime, and this may be compounded because of not having enough resource. Secondly, the cost of the recruitment process itself – interviews, assessments, open days etc. All of these kill time and cost money. Focus on making hiring decisions quicker and consider incentivising the agency to work quicker.
  • Challenging demand – By its very nature, contingent labour is inherently expensive when compared to an equivalent FTE. And, as 85% of cost directly relates to the pay, the largest opportunity to reduce cost is to reduce or remove the requirement. Undertaking an analysis of your own demand planning and root-cause analysis can help you look to reduce your aggregate requirements, however,…
  • Planning demand –Whilst underutilisation is expensive, it is not as expensive as your business being unable to operate due to lack of resource! Ensuring a transparent, honest and collaborative approach to demand planning will help ensure that labour demands are fulfilled.
  • Compliance – Often forgotten, but arguable the most important. Any saving that may be derived from the above will be forgotten about should your organisation receive a fine from a government body. Ensuring robust measures are in place to manage security vetting; right to work vetting; licensing and GDPR considerations is essential.

Lastly, make sure you take a mature approach to supplier management. The phrase ‘supplier management’ is often a pseudonym for ‘kick a supplier’.

Whilst we all look forward to a future of artificial intelligence, Skynet and the local Costa being staffed by Sophia, Google’s AI robot, for now we are to contend with humans, and in such a people-driven industry, accept that there will always be challenges and speed-bumps!

However, taking a holistic and mature approach to supplier management, one which allows mistakes to be corrected whilst incentivising success, against the framework of a relevant will allow you to get more value from your supplier-partner.

Our Top Tips When Reviewing Contingent Labour

  1. Always be clear on the terms of reference and objectives of the review and bring together a project team of relevant stakeholders to ensure buy-in.
  2. Engage market leading providers and existing who can help you build up your knowledge of the market and your own supply-chain.
  3. Be willing to listen and open to change. Pre-tender workshops are your opportunity to learn and be educated by experienced providers and will often give rise to quick-win opportunities or tactical changes that can improve your recruitment practices immediately.
  4. Be clear on your expectations and standards and ensure your HR function.
  5. Ensure you understand your existing contractual commitments and any fees associated with exiting your current providers. Be it temp-to-temp/perm transfers or early termination fees.
  6. Following a very robust due diligence and appointment approach by ensuring any statement or case study is verified and fact-checked. Naturally, ensure a contract is in place which clearly articulates the services provided, the service levels and key performance indicators before you start.

Summary

Hopefully our article has helped you understand the area in more detail and will also help you undertake a review of your contingent labour expenditure.

If you would like to speak to Oculus Procurement about your contingent labour spend or wider procurement support, please do not hesitate to make contact for a no obligation discussion on how we can help you. Also, be sure to visit OculusProcurement.co.uk to view our range of knowledge-shares and articles.

ABOUT THE Author:

Matthew Hardaker

Matthew Hardaker

Matthew is a seasoned procurement manager who has spent the last two years with Oculus leading a range of procurement transformation and maturity-assessment programmes.

Most recently, Matthew has led a procurement transformation programme for one of the UK’s largest insurance intermediary, insurance broking and underwriting groups.

Before forming Oculus, Matthew has held senior procurement positions within high-performing procurement teams across a range of sector-leading organisations across Transport, Logistics, and Financial Services sectors, including FCA regulated environments.