Spend Matters welcomes a guest post by Anshu Vazirani of GEP.
The temporary labor market trend follows the economy’s growth and recession cycle very faithfully. In fact, the temporary labor industry is one of the first industries to recover after a recession. Businesses need workers in response to increased demand for their goods and services but are unsure of whether the recession is actually over, e.g., whether this new demand level is here to stay. In such a scenario, most organizations turn towards temporary workers instead of hiring permanent staff until there is a clear indication that the economy has recovered from the recession. At the same time, the accelerated demand for temporary labor is resulting in an increase in billing rates. According to industry reports, bill rates have increased by over 5% since March 2012 and are projected to continue to increase throughout 2013.
Smart organizations are reacting to this trend by reaching out to the market with RFPs for their temporary labor requirements to avoid being hit by such rate increases. In some cases, they are even leveraging the increased labor requirements to negotiate reduced rates. Conducting an RFP, however, is only one way to optimize temporary labor spend. While conducting an RFP can help achieve savings of 7-8% on the overall spend, the measures outlined below have shown to result in over 15% savings:
- Reduction in hourly wage rates: The hourly wage rate depends on the level of skills and experience required for the position as well as the demand and supply dynamics for that position in the local market. While market price benchmarking and bidding will help ensure that the agency is not overcharging, it is equally important to define job specifications accurately as over-specification of skills may lead to higher rates. Standardized job titles ought to be created across the organization. In a managed staffing program, the Managed Service Provider (MSP) should be encouraged to bid jobs to ensure that the MSP is not selecting temps based on preferred relationships with certain agencies but based on alignment with the company’s business needs.
- Reduction in markups: Markups are comprised of three components: statutory expenses (8-11% of wage rates), benefits (3-7% of wage rates) and agency SG&A and profits (15-35%). Agency SG&A and profits is the most negotiable component. Obtaining visibility into the sub-components, benchmarking and bidding provide the levers for negotiation. Markups related to benefits are not highly negotiable but it is important to make sure the benefit package offered to the temps is market-competitive, neither too rich nor too lean. Statutory expenses are comprised of unemployment insurance, federal and state unemployment taxes and workers’ compensation. This component is non-negotiable, but it is important to note that it varies from state to state.
- Rebates and discounts: More often than not, agencies are willing to offer tiered volume-based or tenure-based discounts due to supply side economies of scale. It is also typical for agencies to waive background screening, drug test, reporting and invoicing. Further discounts can be negotiated by improving payment terms.
- Demand management: A make versus buy assessment should be done to achieve the right balance of temporary and permanent employees. Policies should be established to mandate conversion of temps to permanent employees upon exceeding a set number of service hours. The conversion fee should be negotiated upfront with agencies. Implementing a formal approval process and restricting the number of overtime hours are other methods organizations use to manage the demand for temporary labor.
- Process efficiencies: In complex organizations with multiple sites and multiple hiring managers, managed staffing arrangements are extremely effective and efficient as these arrangements reduce the administrative burden of the hiring managers and established standard processes across the organization. It is common for MSPs to offer a Vendor Management Solution (VMS) as part of this arrangement. The VMS solution, which can also be purchased from third parties, directly simplify the end-to-end process of requisition, candidate selection, approval and billing.
In addition to the above price negotiations, well-defined SLAs should be put in place through contractual agreements to achieve guaranteed service quality. In this post-recession environment, a holistic assessment of the organization’s temporary labor spend is necessary in order to keep rising costs under control while fueling the growth in the company’s top-line.
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