Why IC-SOW May Be the First Step Toward SOW Lite: An Interview with Michael Matherly

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In our previous article, we posted a question to services procurement practitioners: Is it time for “SOW Lite”?

Simply put, businesses do not currently have the tools they need to take advantage of the badly needed talent available that the gig economy, freelancers, independent professionals and small, specialized service providers offer. The concept of SOW Lite proposes a lifecycle process that “runs from sourcing, through contracting, on-boarding, project management, and all the way to invoicing and payment.”

To help take this concept from question to practice, I reached out to Michael Matherly, CEO of Sourcing for Services LLC, to continue the discussion on the next stage for SOW and how technology providers could support the area.

Andrew Karpie: Michael, you're no stranger to the SOW world, and I think you've even been referred to as the "SOW Geek." When did you start your immersion in SOW? And where has that taken you?   

Michael Matherly: My involvement in SOW began before we as an industry even referred to it as “SOW.” As a category manager at a Fortune 100 financial services firm, we needed a technology solution to support and scale the sourcing, contracting and vendor management service layer we had designed. So, long story short, we co-developed a first-generation SOW workflow within our existing VMS, which until then was only being used for temp staffing. While the functionality was not comparable to today’s SOW technology standards, it was absolutely what we needed at that time to change organizational behaviors, scale category operations and enable our strategy for managing the consulting spend across the enterprise.

Eventually, I jumped over to the consulting track and ended up co-founding Sourcing For Services LLC. The timing of that transition was near perfect, as the term SOW was emerging as a separate category of contingent labor spend. And the adoption of SOW sourcing and category management practices within the operational context of the contingent labor and services procurement program was something our industry was and is ready to pursue today.

AK: And the “geek” part?

MM: OK, OK. As far as the “geek” part of it goes, it originated when I wrote an essay about and gave a presentation on how to properly pronounce the term SOW: say S-O-W, not a single syllable word rhyming with cow. Duh.

AK: Recently I contacted you for your opinion about a new concept I'd been thinking about.  I've started to write about "SOW Lite" — a type of SOW agreement and management process that would be tailored to engaging independent contractors. It turned out you and your firm were already into something like this — something you've termed IC-SOW. Is that right?

MM: Yes, your term “SOW Lite” aligns quite well with what we have started calling IC-SOW. Earlier this year we made a conscious decision to distinguish IC-SOW from C2C (corp-to-corp) SOWs, because the service levels to support them are materially different, much like you laid out as the SOW Lite lifecycle in your last article. I think you said something like we need to have seamless support for ensuring efficient classification of a contract provider right at the beginning of the lifecycle. And that’s where we have focused at this point.

AK: What led you to see the need for something like this? 

MM: It is best practice to insert independent contractor language in all SOWs and to do at least a cursory check of the service provider to ensure there is not heightened risk for misclassification. More times than not for the projects and services engagements we were supporting there wasn’t an issue. Last year, though. we started to see an increase in the frequency of SOW engagements with freelance contractors or small businesses with fewer than 10 employees being routed to our team for processing. This meant the pre-screening process upstream was either inadequate or non-existent. So, rather than continue to send those misclassified SOWs back to the beginning of the process, we developed the capability to do the full IC screening ourselves, and we began distinguishing between IC-SOWs and C2C SOWs.

AK: Could you speak more specifically about your approach to what I would consider one of the first stages of the SOW-Lite lifecycle process — that is, the screening of these engagements involving independent and small group SOW providers and assigning them to IC-SOW and C2C SOW categories?

MM: The key thing, as you point out, is to screen the SOW engagement to identify and isolate the IC-SOW cases to ensure compliance with independent contractor classification criteria and apply the appropriate contracting templates and management practices.

There are two important aspects to focus on relative to management within the contingent labor program framework.

The identification of IC misclassification risk is the first one. In order to engage the right IC-SOW service level, the program intake process for non-agency contractors (i.e., W2 contractors and ICs) and for all SOWs must properly identify which engagements are at heightened risk for IC misclassification and route them accordingly. With so many programs being supported by multiple channel service providers (i.e., temp labor managed by the lead MSP, non-agency contractors — W2 and IC — managed by IC compliance/EOR/AOR firms, and C2C SOW being managed internally or by a specialty MSP firm), coordination and clear scope definition on the program’s front-end routing is critical.

The management of IC misclassification risk is the second one. Defining and applying the proper service level for IC-SOW, at a high level, simply requires the insertion of a full IC compliance screening and documentation step into the normal SOW service delivery model. Combined with identification of the heightened risk and proper routing to the IC-SOW channel, the risk can be managed.

AK: So once this classification activity is completed to isolate IC-SOWs from C2C-SOW and further distinguish between valid 1099 contractors and those that must be payrolled, what else is involved in effectively handling IC-SOWs? I’m thinking contracting and the role internal hirers.

MM: Most IC-SOWs fall within the self-sourcing realm because they tend to fall below the competitive bid or formal sourcing policy thresholds in a lot of organizations. From a spend management perspective, we believe this is appropriate and we support your recommendation that self-sourcing activities be supported by best practice buying guidance. And we add with emphasis that good contracting practices are as applicable to IC-SOWs as they are to C2C SOWs.

However, we make the following important caveat: you cannot “contract away” IC misclassification risk. In other words, you can have a perfectly written contract and still be at risk if the service provider or the conduct of the engagement does not meet independent contractor criteria (business insurance, control of work delivery, multiple clients, etc.). Our experience tells us that vendors and managers sometimes say one thing to get the contract written and executed, but then interact on the engagement a little differently from the contract terms — shocking, I know.

On a C2C SOW, that risk can be absorbed or written off as business risk limited to just that engagement and just those commercial terms. With an IC-SOW the risk is greater: IC misclassification fines and payment of back taxes and benefits can be as much as 80% of the engagement cost, but more critically it exposes the organization — that is, all other 1099 engagements — to further regulatory scrutiny.

Given this reality, we have built IC and client manager education and coaching into the IC-SOW development process to make sure that each party understands the classification criteria and actually intends to manage/conduct the engagement accordingly.

We recommend using different SOW templates to accommodate different types of vendors (usually differentiated first and foremost at the master legal terms and conditions level) or for different types of engagements (i.e., project versus managed service). Whether an organization does or does not segment out IC engagements along those lines really depends on the legal position the company takes — we see no meaningful trend one way or the other. And we have no issue with that as long as the IC misclassification risk is properly identified and subsequently the engagement is properly classified. However, from a practical perspective, since IC-SOWs are more reasonably expected to be self-sourced by the business unit manager, then we do suggest an emphasis on writing strong deliverables-based, fixed fee SOWs that actually hold the vendor/IC accountable for delivery. The IC-SOW template therefore should contain some of the IC risk education and coaching mentioned above.

Independent contractors, properly classified, are technically third-party vendors, the same as larger, more recognized consultancies and other businesses the company engages (think Deloitte). But we believe there is a bit of a battle on the horizon between HR and procurement regarding the question of special, differentiated treatment of independent contractors coming into the organization as a part of the extended, total talent workforce. Should Joe Smith, independent consultant, be required to maintain the same level of general and professional liability insurance as Deloitte Consulting? What about limits of liability, indemnification, termination, invoice and payment terms? Does the risk of engaging Joe outweigh the business need of the organization to attract more independent workers like Joe?

AK: I guess you could say there is a road ahead. Do you think the technology solution providers are doing anything that will support progress in this whole area?

MM: From a technology perspective, we are pleased to see several VMS providers adding or enhancing self-sourcing functionality to support engagement of non-agency contractors, whether through talent clouds, alumni pools or direct referral from company managers. Related to my comments about identifying the risk in order to properly manage the risk, our feedback to the VMS community has been to focus on the intake and routing of non-agency contractors “pre-IC screening” and to enable dynamic channel routing.

AK: I guess using the term dynamic channel routing does highlight that the handling of IC-SOW will be occurring in an increasingly digital, on-demand world.

Yes, I think organizations that will establish an SOW Lite set of processes — starting with cornerstone of IC-SOW policies, procedures and processes — are going to see significant benefits.

They will get appropriate access to the fastest growing portion of the contingent workforce population; they will lower their misclassification risks across all channels, and they will improve their spend management capabilities for a significant and growing portion of the overall contingent labor spend. And an added benefit: Because addressing intake and classification occurs at the outset, it gets a lot of complexity sorted out sooner rather than later and puts the project on the right path from the start — this can translate into faster cycle times and better project outcomes in what is becoming an on-demand world.

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