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Contingent Labor Contracts: Do It Right, Save Millions; Do It Wrong, Spend Millions

September 6, 2011
Related Topics: Top Stories - Frontpage, Contingent Staffing, Candidate Sourcing, Workforce Planning, Featured Article
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Hiring contingent workforces and managing related compliance issues accounts for significant human resources department time and resources but can also present a considerable opportunity for executives to wring out large cost savings.
Securing workers for categories including manual labor, clerical, information technology, and consultants account for 30 to 60 percent of a Fortune 1000 company's expenditures, representing billions in spending.
As baby boomers retire and the economy continues to sputter, strategically leveraging contingent labor continues to increase. And, as the labor market becomes more global, contingent workforces will become even more strategic to an organization's operations, thereby driving increased flexibility and the need for proactive management and automation.
Securing a qualified contingent workforce is often placed within the larger category of services procurement, which includes hiring both contingent workers and engaging statement-of-work contracts around human-driven services, such as facilities management, hospitality services, IT contractors, etc.
With multiple services being contracted around different requirements and skill sets, many HR and procurement professionals struggle to automate the process—especially for complex services such as consulting, IT development, marketing and outsourced services. As a result, there are significant inefficiencies in how these services are sourced, purchased, tracked, invoiced and paid—leaving tens of millions of dollars in untapped savings.
Key challenges in hiring/managing contingent labor include:
  • Labor procurement is decentralized: Disjointed buying and management of contingent labor makes implementing a centralized services procurement system problematic.
  • Comparing labor providers is difficult: Labor-powered services are inherently subjective—quality, delivery and commitment play key roles in evaluating and selecting a provider. Also, different managers may use varying descriptions, contract structures and pricing for the same service, making comparing bids from multiple staffing providers difficult.
  • Distinctive attributes for services: Unique contingent labor requirements such as skill sets, work methods, flexibility and price structures complicate comparisons. Similarly, the process for confirming that a particular service is received or complete can be different.
  • Location selection tricky: Choosing the location for a particular type of service can be complicated. For example, if the HR team is trying to hire an IT programmer, it's helpful to know if the going rate is $48 an hour in New York vs. $42 an hour in Michigan. The decision may be also complicated by other factors, e.g., employee's manager's location or whether in-person oversight is necessary.
  • Compliance requirements are global and varied: Since contingent workers deliver services worldwide, compliance with various government regulations, e.g., co-employment laws (employees vs. temporary staff), labor laws from Occupational Safety & Health Administration and privacy laws is required.
Today, organizations that successfully integrate some automation into their contingent labor hiring or purchasing processes enjoy an average savings of 10 percent-plus by gaining control and visibility over that spending. Here is a best-practice approach for automating your contingent labor program.
Define overall strategy 
Start by defining the intended outcome for the contingent labor hiring/management process. For example, do you need to comply with Sarbanes-Oxley or standardize direct and indirect labor programs globally to reduce costs? Next, identify the priority labor spending categories—assembly line, administrative support, etc., and the corresponding business units, and determine the sequence for system deployment. It is critical to build a cross-organizational team based on targeted categories and to secure strong executive sponsorship. For a global program, garner buy-in from individual localities first to ensure government regulations and business needs are met.
Enforce policies
Next, introduce controls to realize savings from policies and negotiated contracts. The system should allow the organization to start with a level of automation within its comfort zone and move to a more rigorous model that encompasses more service categories over time. Ultimately, the more categories of labor managed through automation, the more cost savings the HR department will drive for the business. Apply and maintain a discipline of controls around the process:
  • Enforce preferred labor supplier selections to reduce “maverick” spending with unapproved suppliers.
  • Implement full agreement between invoices and contracted terms during the invoice approval process; ensure the ability to reject/delay questionable invoices.
  • Capture discounts and early payment rebates and identify additional savings opportunities.
  • Automate controls for operational, safety and HR laws and policies to mitigate noncompliance risks. Controls include tenure rules, on-/off-boarding requirements, certifications, safety prerequisites and diversity standards.
It is also critical to confirm adherence to compliance regulations to ensure temporary workers are categorized correctly. This is especially timely as thousands of new auditors are working to confirm appropriate government taxes are paid based on proper employee/contractor classifications.
A more streamlined, efficient approach to procuring and managing contingent labor is within reach for most companies, but some automation is necessary for strengthening the process. HR departments can then ensure they are securing the right talent with matching skill sets for specific job functions and locations, while driving substantial savings and ensuring full compliance with labor regulations.
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