The Perils of Rogue Spend in Contingent Workforce Management

contingent workforce

The contingent workforce makes up a sizeable and growing portion of enterprise spend. Worldwide, companies spend an estimated $300 billion per year on contingent labor, according to a 2015 analysis by Accenture. Add to this the ongoing transition of the freelance economy from mainstream consumer staple (e.g., Uber and Lyft for ridesharing) to enterprise workforce strategy (e.g., sourcing a graphic designer through a dedicated online platform like 99designs), and businesses of all sizes are beginning to realize the benefits of using freelancers and independent contractors (ICs) to augment various business functions and tap sorely needed skill sets.

But alongside this growth comes another issue: Much contingent workforce spend is poorly managed or not managed at all, often slipping into the category of rogue spend, or maverick spend. This is troubling for businesses, as contingent labor and related projects hiding in off-contract purchases and indirect spend categories present numerous challenges in terms of costs and risks.

Fortunately, the rogue contracting of freelance resources can, with the right supporting technologies, be turned from an operational risk to an attractive business opportunity — to drive savings, reduce compliance risks and provide improved visibility into and intelligent insights about this segment of the workforce to senior leadership.

In this article, we examine the drivers and resulting issues of the increasing presence of rogue spend within contingent workforce management programs, and then explore the opportunities and solutions that businesses can use to address this challenge.

Rogue Spend and Contingent Workforce: Background

To seize the opportunities available in better managing contingent workforce spend, it helps to first understand the nature and drivers of rogue purchasing.

Rogue spend, conceptually, is a subset of what procurement organizations refer to as tail spend, the portion of total spend that is not actively managed. Tail spend typically consists of the 85% to 90% of suppliers that constitute only 5% to 10% of spend. But while the portion of total spend is small, the tail spend segment, due to poor visibility and the large number of often small suppliers contained within it, consumes a significant amount of enterprise resources to manage.

In terms of management strategies, tail spend can be broken down into five subsegments:

  • One-off, one-time “spot” buys
  • Off-contract maverick or rogue spend
  • Commercial cards
  • Expense reimbursement
  • No-PO invoices and “after-the-fact” POs

Of these subsegments, rogue spend is where a considerable portion of freelance/contingent workforce spend hides.

Rogue spend consists of scenarios where requisitioners contract with suppliers outside of pre-negotiated agreements or preapproved buying channels (e.g., an e-procurement system or marketplace like Amazon Business). In one Spend Matters study, procurement professionals estimated their rogue spend to be as much as 23% of their negotiated spending.

Within the contingent workforce category, rogue supplier selection often occurs when non-procurement or HR stakeholders hire a freelancer or IC on their own. This can be as simple as a marketing manager hiring a designer to create a logo for a new product without following standardized enterprise procurement procedures or using dedicated talent sourcing tools.

The challenge for businesses is that the combination of rising demand for specialized freelancers and contractors and the proliferation of new ways to access work outputs (e.g., online services providers or work intermediation platforms) are causing an increasing number of stakeholders to go rogue. By one estimate from Ardent Partners consulting, nearly 60% of all contingent/contract labor is unaccounted for in financial planning, forecasting and budgeting within the average company.

As Spend Matters’ Research Director for Services and Labor Procurement Andrew Karpie put it in a 2016 article on the topic:

“Across many companies, we are seeing rising adoption and use of online platforms to source individual workers (freelancers, consultants, etc.) and a growing range of service/SOW outputs (software development, user testing, creative content writing, graphic art, video, voice-overs, etc.). And the growing use of such platforms is mainly initiated in functional/departmental levels of the organization outside of the vendor/supplier management processes of contingent workforce management/services procurement programs (in effect, rogue spend).”

What’s more, the rising demand for freelance labor will only exacerbate businesses’ inability to manage this rogue spend effectively. Professionals tasked with managing contingent workforce and services will find three main challenges they must address:

  • Poor rate visibility and benchmarking. When stakeholders select ICs outside of normal talent sourcing processes, they do so without benchmarks for what the service should cost. The requisitioner likely has no market-based rate for comparison to offer, nor much historical data to inform how the business has negotiated pricing for similar engagements. Plus, because the labor or service provider in such scenarios is often selected on the basis of a pre-existing relationship, managers in procurement or HR that could help influence a better decision rarely have visibility into such agreements until after the fact.
  • Exposure to hidden risks. Limited visibility into labor and services sourcing processes creates opportunities for numerous risks to enter the enterprise. Worker misclassification is one prominent example, as the growth of the freelance economy has made the capability to properly classify workers as ICs or W-2 equivalents an essential component of any contingent workforce program worth its salt. Forgoing a thorough vetting process also exposes businesses to more complex risks, such as allowing a malicious actor into enterprise IT systems, compromising cybersecurity.
  • Unreliable service quality. Ad hoc selection of labor and services also precludes the possibility of using analytics to inform decisions, which can result in unpredictable quality results. Data about a contractor’s past performance, for example, can be vital in deciding whether someone should be awarded additional business. A recommendation about whom to contract with can be helpful, but it provides no guarantee that the project will be completed on time, correctly and to the best benefit of the business.

Satisfying Rogue Requisitioners: How Technology Provides a Solution

With its multiple drivers and persistent challenges, rogue spend within the contingent labor category can seem daunting to address. But the answer to these issues is more straightforward than at first glance.

As Spend Matters determined in its 2017 study on tackling rogue spend, the main problem is that organizations have taken a “piecemeal” approach to addressing the issue — using suboptimal methods (e.g., commercial cards or corporate purchasing systems that lack the B2C-like features that users desire/need to influence adoption) that are individually spotty and don’t integrate well with each other.

Progressive organizations that are effectively tackling this issue, however, are following a different path. Instead of relying heavily on one method, they are converging these piecemeal solutions into an integrated approach. Key to this strategy is adopting dedicated tools that target the exact pain points that stakeholders have identified.

For addressing rogue contingent workforce spend, these tools take the form of independent contract worker (ICW) solutions.

ICW technology supports the enterprise need to organize, manage and pay independent contract workers/freelancers. When offered as standalone/point solutions, they may also be known by the name “freelance management systems,” or FMS.

ICW solutions can support "direct sourcing" of workers but can also be used with online marketplaces. They also provide capabilities that include:

  • Direct sourcing and project bidding
  • ICW selection, compliance and engagement management from on-boarding to off-boarding
  • Online private labor cloud creation, curation and self-sourcing
  • Project management
  • Invoicing and payment

And perhaps most valuable, ICW solutions accumulate significant amounts of data that can be used for analytical and management purposes.

With respect to rogue spend, ICW/FMS offerings allow businesses to address the three main challenges discussed above:

  • Understand and manage costs. Routing all freelance and contractor spend through a dedicated software system allows businesses to better benchmark rates and monitor program performance, ultimately leading to significant savings. According to research by Aberdeen, best-in-class freelancer management programs supported by an FMS see an average of 16% savings in labor costs.
  • Identify and address risks. Increasing total workforce visibility and monitoring requires a strong set of procedures to ensure various compliance standards are being met. ICW solutions come with pre-configured business rules that help managers determine and prevent classification risks. Reporting capabilities also allow you to instantly track and report on worker engagements, as well as quickly perform internal audits of diverse labor practices.
  • Analyze and improve worker performance. Consolidating IC management into a single source of truth provides better insights into not only how much labor costs but also how well it performs. According to the same Aberdeen study, organizations whose freelancer strategy were supported by an FMS were 32% more likely to report very high or high visibility into the performance of their non-employee workers. They also reported increased productivity, with an average of five days to full productivity rather than 15 for laggard organizations.

Rogue Spend is an Opportunity, Not a Pest

With a clearer understanding of rogue spend, what drives its growth and what role technology can play in addressing the challenges it creates for businesses, contingent labor program managers and executives have the foundation they need to modernize their workforce strategies. But before they attack their rogue spend problem head on, businesses should consider reframing the way they think about it.

Ultimately, rogue spend should be looked at more as an unmet need, instead of being an issue of non-compliance from stakeholders. When requisitioners go off the ranch to find freelancers or services, it’s because they have a requirement they need to meet quickly. So when internal stakeholders contract for work through online intermediaries, they’re trying to solve a problem that they feel the available options can’t.

This is not a behavior to criticized; instead, it’s an opportunity for management to put the right tools in front of their employees. And with ICW/FMS solutions now readily available to address these challenges, there’s no reason why procurement and HR organizations can’t start bringing rogue spend under management today.

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