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The Evidence: How the Staffing and Contingent Market is Failing Procurement

06/01/2018 By


There’s an incumbent ecosystem in the services procurement universe that has made a business out of delivering the bare minimum to keep customers satisfied and maintain the status quo. No, we’re not referring to the “tools” providers but rather the sad fact is that within the more capable vendor management system (VMS) tool sets today, much of the more advanced capability in these solutions goes untapped or is only partially used.

Who is to blame? It’s easy to shoot the messenger (i.e., staffing firms and the incumbent MSPs). But the blame rests with numerous other parties, as well, including consultancies, outsourcing firms, staffing researchers and, perhaps most serious of all, procurement itself.

In this two-part Spend Matters Plus analysis, a refresh of our original 2014 series, we highlight the contributing factors to how and why the staffing and contingent market is failing procurement, concluding with a prescription to start addressing the challenge. In Part 1, we present the evidence of how the staffing and contingent market is failing procurement.

The How

Before we get to the “why” of the shortfalls of managing the broad swath of contingent labor spend, it is important to address the “how” (i.e., the evidence that shows the services procurement ecosystem is failing procurement and really the broader enterprise). There are numerous elements that combine to make our case. Let’s address just a few of the elements and symptoms:

  • The services procurement savings opportunity remains significant for most companies (even outside of contingent areas), especially compared with indirect and direct spend. In the contingent area, the shift to new talent pools, alumni programs and talent marketplace models that emphasize the direct sourcing and management of talent — with traditional MSPs and staffing firms providing fewer services except perhaps the payroll on a procurement-directed basis — can yield savings for “like” resources of 25%–40% or more. Yet these programs are barely utilized today; penetration levels are microscopic in most cases (in our discussion with organizations, we have not seen penetration levels above 10% in this area, and many programs are less than 1%)
  • Outside of contingent, for example, specialized solution providers and advisors that measure management consultant performance often find 15% or more savings (or credits) are possible to achieve through basic measurement and performance management (not even counting better sourcing). The extent of low-hanging savings fruit is our first symptom that something is amiss
  • The staffing marketplace maintains high levels of inefficiency, as shown by the large mark-ups paid to multiple parties (MSPs, VMS providers and staffing firms themselves) within the talent supply chain in traditional staffing models and the perpetuation of supplier-paid fee models that obfuscate total cost as a standard industry operating model. In addition, there has been limited innovation within the existing staffing and MSP ecosystem to deliver not just more efficiency in the transactional req-to-pay process, but on broader efficiency metrics that focus on costs per capability and/or cost per outcome. Even if we treat underlying workers as “commodities” whose prices can rise and fall with demand, the lack of new levels of savings and efficiency in the delivery of these commodities (i.e., the core and value-added services wrapped around them) is symptomatic of a broader set of issues in which providers are failing to deliver innovation that translates to year-over-year savings and enhanced outcomes for all the non-commodity elements of the services supply chain
  • MSPs are managing “programs” tactically but are not managing sourcing strategically. If you are going to outsource the management of large swaths of spending like various contingent labor segments, you’d hope that the third party would aggressively bring sourcing practices to bear on your benefit. But our research shows that companies are more dissatisfied than they are satisfied when it comes to how well large service providers are aggressively sourcing and bringing best practices to bear on their behalf. And, since an MSP is basically an outcome-oriented BPO provider, you can see the parallels where BPOs are executing tactically rather than innovating and elevating their value. Part of this blame may lie with the MSP’s customer — who is often HR — but the providers themselves need to proactively lead by example
  • Similar to the first observation, customers (i.e., HR and even procurement) are typically not demanding concessions for talent based on innovation or delivery models. Manufacturers and retailers of all sorts often demand year-over-year cost concessions based on anticipated process innovation in the supply chain from suppliers (even in markets with rising commodity prices). This is not so with contingent human capital or even SOW or project-based approaches to services outcomes. In a “healthy” services market, we would expect demanding price concessions to be the norm for everything other than the human capital element, yet this seems to be the exception
  • Procurement organizations still appear stuck in a compliance mindset around contingent labor, especially worker classification and overall risk. It reminds us to some degree of the old controller and procurement obsession of “closing the books” each month or quarter and “keeping the production line” running to the exception of all other activities. With indirect and direct materials, procurement has typically moved on past this mindset today (as has finance, mostly) to explore significant new areas of opportunity to improve the business through savings, working capital optimization and risk reduction and innovation. This is not usually the case with services procurement, and as a result, despite the externalization (and virtualization) of so much of business activities today, significant opportunity remains that falls into the low-hanging fruit category
  • Services supply chains are not managed with the rigor and overall measurement of direct or indirect ones. Our research suggests there is an urgent need for procurement organizations to effectively use continuous improvement (e.g., Six Sigma, Lean) in the services area. As we note in another analysis, “Our research suggests that continuous improvement is generally lacking in the services supply chain — in contrast to manufacturing … Learning from the manufacturing side of the business is critical here — as are the skills. Having services procurement professionals go through lean and green or black belt training is a useful place to begin down a path toward the right skills”
  • Procurement, too, (not just HR) is failing to measure services suppliers on strategic factors. These can include innovation, sustainability and revenue growth. Our research on the topic suggests a significant delta between measurement of services suppliers and those in the indirect or direct material supply chain. Yet “top performing procurement organizations are increasingly tapping suppliers to gain innovative ideas — from driving sustainability programs to focusing on revenue growth … [however] such collaboration is all too often lacking with services suppliers. The scope of supplier innovation must be broadened to cascade across the services supply chain as well. From the crowd sourcing of ideas to formal supplier performance management efforts with top suppliers centered not on penalizing poor performance but rewarding innovation, numerous tactics exist to drive results.” These are not being applied with regular rigor and measurement, according to Spend Matters research

With the evidence in hand of “how” the staffing and contingent ecosystem is failing procurement, we can now turn to the “why.” Stay tuned as our investigation continues.