Is the IC Compliance Business Model Due for a Change?

ICs

Spend Matters welcomes this guest post from Michael Matherly, CEO of Sourcing for Services.

Independent and contingent workers are all the rage these days. What used to be 10%–15% of the total workforce just 15 years ago is pushing 25%–30% today, and the tide is still rising. This flood of contingent talent has begun to alter the moorings of many vessels in our industry, none more so than the independent contractor (IC) compliance solution. The rise of the contingent workforce, and particularly the proliferation of independent or freelance workers, has put misclassification risk, and the providers that help companies manage that risk, on the HR and procurement radar in a big way, across all sectors.

Which brings us to our question about the IC compliance business model. Are we approaching a point where the bundled services business model that delivers all things IC compliance will be subject to change, innovation or disruption? There is recent precedent in our industry that suggests the answer is, “Yes.”

The Precedent: Lessons from Procurement’s Change in Preference

There is growing consensus in the contingent labor market today that the optimal contingent workforce management (CWM) program is supported by (a) an independent managed service provider (MSP) for the services layer and (b) an independent vendor management system (VMS) for the technology layer. We have been seeing this preference clearly stated by program stakeholders in the MSP and VMS RFPs over the last five years. What used to be a preference for a bundled synergies model to achieve cost savings has matured into a demand for a model that delivers those same cost savings and independence and severability.

Ample evidence of this demand-driven restructuring of CWM services and solutions can be found in the marketplace, including the unbundling of IQNavigator and Geometric Results and Beeline and Pontoon. MSPs and their parent companies or affiliated staffing organizations also underwent unwindings of their own: no longer are staffing vendor on premises (VoP) and master vendor lead programs the norm for larger companies either. And as noted above, these changes have been market/demand-driven.

These structural changes didn’t happen overnight. Demand owners, decision makers, category leaders and program stakeholders all effectively jumped on the bandwagon and sent a message to industry participants: We’re not kidding — independence and severability are important to us.

The IC Compliance Business Model

Many IC compliance providers blend three separate and distinct services into one solution:

  • IC compliance screening;
  • Employer of record (EOR) services to employ workers who don’t meet the legal criteria; and
  • Agency of record (AOR) services to engage ICs to do work on behalf of clients.

All of these services are indeed necessary and prudent for clients to comprehensively manage their risk, including safely engaging the talent they need to get work done.

So what is wrong with a single provider providing all of these benefits? Maybe nothing for some clients whose risk levels are inherently low. But if history is any indication and if procurement thinking hasn’t radically changed since the push for MSP and VMS independence and severability (it hasn’t), then it is reasonable to at least consider the possibility that some structural changes in the IC compliance business model may be forthcoming as the growth in the independent workforce continues.

Procurement Risk

The reason program stakeholders broke up MSPs and VMSs is because of procurement risk associated with sourcing, pricing and service delivery accountability. The blended MSP and VMS solution created specific challenges from a procurement perspective:

  • Opacity of blended pricing
  • Misaligned pricing structures between VMS and MSP
  • Perverse pricing incentives that introduce potential for conflict at key decision points
  • Multiple sets of performance indicators and service-level agreements (SLAs) for each service with no holistic remedy for bad performance that does not involve dissolution.

Making the Connection

IC compliance providers are, of course, different from contingent labor program providers; their business similarities are not the point. What is important about the comparison is that each of the underlying services currently being provided by “full service” IC compliance providers are severable, just like VMS, MSP and staffing services were and still are severable. That means each service can be delivered as a standalone service; each service can be priced separately; each service responds to separate and distinct price/cost drivers; each service has its own unique risks (not procurement risks, but service delivery risks like classification risk, payment risk, etc.); and each service drives unique and usually different contractual terms (e.g., indemnification, insurance, liabilities, paid-before-pay, etc.).

Conclusion

Most markets are reasonably efficient and evolve with changes in supply and demand. The changes we have seen with VMS and MSP providers have proven that the contingent labor market is no exception to that rule. To date, the spend on IC compliance providers has been small enough to escape interest or scrutiny. As they scale with base industry growth, though, the importance of their structural economics, which is based largely on absorbed testing fees and distinct downstream services with different margins, will certainly become more visible. Many of the same contingent labor stakeholders also oversee or influence their company’s IC compliance strategy and access to independent workers. So it is not a surprise that we have seen a few RFP’s recently inquiring about the IC compliance provider’s willingness to provide a more targeted solution versus the traditional bundle. And it is not a big stretch to predict that we will see a continued push for independence and neutrality within the IC compliance space. The real question is timing and how our current providers and new entrants will innovate to meet the emerging demand. Now that is a panel discussion I would like to see at future industry conferences!

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