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Services Procurement History: Staffing Firm Dominance Faces a Challenge

05/04/2018 By


The history and growth of the U.S. staffing market in the last century, which we covered briefly in the first installment in this series, reflects many of the overall economic, technology and political trends of era. Increasing skills specialization in highly targeted areas, the ending of the traditional “life employment contract” between worker and company, the embrace of greater variability in corporate cost structures, and the need to “flex” to meet demand-driven requirements all contributed to a staffing market that would ultimately represent approximately 2% of the labor workforce. Yet new trends appear to be favoring alternative models to staffing for contingent (non-employee) workers.

In this Spend Matters Plus research brief, we introduce the the reasoning behind why staffing firms will begin to increasingly share overall contingent market share with alternative models including the direct hire of freelancers/independent contractors, talent marketplaces, individual “out-tasking,” alumni and shared interest pools and related models. We also provide a readiness checklist for procurement organizations increasingly tasked with managing services spend that will offer a quick, honest assessment to show if they are ready (or not) for new models.

Information Asymmetry: The Basis of Staffing Firm Dominance

Staffing firms were so important during the last century that, as noted in the first installment of this analysis, the BLS did not even collect data on “flexible staffing arrangements” outside of agency staffing until 1995 (which curiously is the year Larry Page met Sergey Brin while graduate students at Stanford, and the last restrictions for the use of the internet to carry commercial traffic were lifted).

Spend Matters believes staffing firms emerged as a dominant intermediary and model for one key reason during this time: they stood in the middle of information from both the demand and supply side of the labor equation. After all, they had information on workers — skills, education, past performance — and relationships with hiring managers. Granted, companies had information on their own temporary labor needs, but their HR departments were strained to keep pace with employee hiring, compliance and other issues.

As a result, individual workers and companies were able to meet in the middle directly through staffing models because of a lack of end-to-end transparency in non full-time hiring. Hence the staffing firm model emerged, really as a predecessor to managed services providers (MSPs), to take on the recruitment of non-employee talent as an outsourced function. (Additional specialization and process ownership would come into play with the rise of the MSP model in the past two decades.)

Toward Services Procurement Disintermediation

The rise of the internet, mobile and other technologies has created monumental levels of transparency in different markets in recent years. Amazon disintermediated retail sales environments (starting with bookstores) and now provides different platforms for businesses for all sizes to sell through its website and leverage its infrastructure (including financing, warehousing, distribution and online catalog/content management). Similarly, eBay created level playing fields through auctions, marketplaces and payments for individuals and companies alike. Google cataloged and curated the world of content as we know it.

Within the contingent workforce areas, new indexes and embedded rate guidance, reports and related data services from PeopleTicker, IQNavigatorFieldglass, Beeline and others (e.g., ZeroChaos from an MSP/solutions perspective) are starting a similar trend to provide information transparency centered on contingent bill rates, pay rates and related data.

As important, the staffing and contingent labor market has barely budged an inch in this time, despite the introduction of enabling infrastructure and technology that can foster levels of transparency in the non-permanent hiring process. In short, organizations still continue to go “indirect” vs. “direct” to the source, in the vast majority of placements, furthering a business model that has its roots closer to the time of Ford’s original factory production environment than the modern Toyota Production System and Six Sigma management approaches.

Of course, nothing is wrong with this. The Model T changed the world (as did contingent labor). But in labor markets in which regulation is not a dominant force (e.g., notably France but also the rest of the E.U.), we believe that significant change is going to prove disruptive in reshaping the staffing industry just as Amazon, eBay, Google, Uber and countless others have reshaped our business and personal lives in other areas and disrupted other industries in the process.

Regulatory pressures in this area abound, there’s a substantial EU directive around staffing that is hard to avoid (e.g., Temporary Agency Work Directive 2008/104/EC). And in the U.S., the IRS is tilting the playing field in a significant way. In both regions, staffing industry insiders we have spoken with agree that labor unions are getting legislation in return for political contributions.

And it’s not just political pressure: the courts have long influenced this direction, as well. Consider, Vizcaino v. Microsoft, 1996, a defining class-action lawsuit where Microsoft eventually settled out of court for $100 million before having to retroactively reclassify temp workers as regular employees, with equity and bonus incentives. At the end of the legal affair, which took 10 years and went up to the 9th Circuit level, one step below the Supreme Court, the IRS had woken up as well and issued a ruling that forced Microsoft to pay additional millions in payroll taxes. (We have covered this in greater detail before.)

Considerations and Questions

Procurement organizations should prepare a checklist for their own efforts when considering the ability to fully leverage new temporary labor opportunities. This list should include the following types of questions:

  • Has procurement established policies, protocols, guidelines and systems for guiding the business to different non-employee talent options and outcomes based on total value and cost?
  • Do we understand the differences between vendor management systems (VMS) focused on contingent labor alone versus those and related technologies that can enable other types of contingent and services spend?
  • Are we aware of all the differences necessary to effectively manage the lifecycle of non-staffing firm contingent resources from onboarding to off-boarding compared with staffing models?
  • Have we explored alternative models for accessing talent such as alumni pools, private talent marketplaces, public talent marketplaces, etc.?
  • Do we have a good understanding of regulatory compliance issues involved in access non-employee talent in new ways?
  • How can we become an “employer of choice” for contingent labor that comes to us directly?
  • Is procurement and HR aligned regarding how such talent will be acquired, whether it emanates from a true talent standpoint (i.e., workforce planning) or from a one-off services procurement activity? Are the various sourcing, buying, and paying processes defined for different contingent labor segments? For the few who answer yes: is the process effective and efficient on a “balanced scorecard” in the eyes of stakeholders

Regarding this last question to ask, most procurement and HR organizations are likely not aligned as well as they could be, especially compared with direct procurement activities. As we note in one research study, “respondents forecasted requirements upfront in their business-planning process at levels that were 32% higher for direct spend compared to contingent labor (this is only 10% lower for indirect materials compared with direct).”

Further, “When asked if their organization had some way of developing capacity to meet demand, 25% more of the respondents did so for direct spend compared to services. Similarly, the numbers were also 25% higher when respondents were asked if they had some type of formal capacity model in place to manage direct spend (in comparison to services).”

Of course, overall, these questions represent just a starting point for evaluating organizational readiness to take advantage of non-staffing contingent workforce talent. As our analysis continues, we will explore why and how procurement should prepare for staffing industry models to become part of a portfolio of contingent and services spending types rather than the dominant industry model and specifically what types of enabling capabilities and technologies can support their efforts.