A Cure for Contingent Costs

August 1, 2003

It’s safe to say that not knowing how many people are on the payroll isn’t prudent. When Shell Oil Products U.S. needed to rein in spending, its contingent workforce stood out as an obvious choice. Spending on contract labor at the division of Shell Oil rang in at $100 million annually two years ago, yet no one seemed to know how many contractors worked there. Every time someone checked, a few more consultants filled their offices. Pay rates for temps working similar jobs were all over the map. And their contracts seemed to last indefinitely.

    Shell wanted to clean up the management of its contingent workforce, and like a growing number of companies, found that an Internet solution was the answer. Now, with a keystroke, managers can instantly find out how many contractors work at Shell and how long they’ve worked there. They can review résumés, see which staffing firms offer the best rates and calculate spending on contractors, all by using a Web-based application from the Denver company IQNavigator. On top of that, Shell expects to slash its contingent-labor costs in half by the end of the year.

    "We were not doing a good job of controlling the spending" on contract labor, says Kim Chapman, Shell’s contingent-workforce team leader at the company’s Houston headquarters. "This area just gets overlooked. Companies treat contractors like employees, and there’s a big opportunity in this area to save and to manage it better."

    In today’s rough economy, as companies make ends meet by hiring contractors rather than full-time employees with benefits, more executives realize it’s critical to control the rising cost of their contingent workforce. Using a Web-based application to manage contractors is a natural move for companies that already use the Internet to electronically procure materials. Market researcher Gartner Group predicts that by 2007, one-third of Fortune 1000 companies will use a services-procurement application. In addition to IQNavigator, other companies such as Fieldglass, White Amber and Elance sell Web procurement applications, which first became available in the late 1990s. And staffing firms are introducing their own systems.

    It’s a resource that’s badly needed, says Elaine Taylor, president of Taylor-Harris, a San Francisco consulting firm that specializes in contingent-workforce management. The process that most companies use to manage their temps is rife with inefficiencies--error-prone timesheets that result in overbilling, slow payment to staffing firms and poor record-keeping that can leave companies on shaky legal ground regarding co-employment issues. Plus, the contingent workforce is expected to grow by almost 50 percent from 2000 to 2010, compared to a 15 percent increase in permanent workers during the same time, according to the Bureau of Labor Statistics.

    "I think this is one of the critical tools that was missing from the toolbox for corporations," Taylor says. "Fortune 500 companies spend hundreds of millions of dollars on their contract workers, and they had no way of managing those workers."

Converting a paper process
    Besides Shell, companies including Northrop Grumman, Motorola, Xerox, KPMG and Wachovia also have replaced their paper-driven approach to hiring contractors with a high-tech process. In the past, when Shell needed a consultant, a hiring manager called a staffing agency--usually one that he had a business card for, or one whose recruiter just took him to lunch, Chapman says. The staffing firm faxed résumés, and a manager reviewed them and filled the job. Little attention was paid to getting the best deal. Once someone had been hired, the payment process was a confusing paper trail of time sheets traveling between the contractor, the staffing firm and different departments at Shell. "The process was totally inefficient," Chapman says. "[The staffing firms] were out-of-pocket for a lot of money."

    By using a system like IQNavigator to hire its 300 contractors, Shell handles everything electronically. A manager sends a standardized job request to a group of preferred staffing firms, spelling out the position’s required skills, experience and other criteria. The staffing agencies bid competitively on the position and send back a list of job candidates, ranked using a skills-matching tool. The manager then sets up interviews on IQNavigator. And once contractors have been hired, their hours are entered into the system, which produces an invoice for payment to the staffing firm. The program alerts managers to important deadlines, such as when a temp’s contract expires and when a temp’s tenure raises a concern about co-employment. Before contractors leave, the system reminds managers to get back their badges and laptops and turn off access to the company’s computer network.

    The global defense manufacturer Northrop Grumman, based in Los Angeles, started using IQNavigator last May to manage more than 350 information technology contractors. It’s too soon to tell how much the company has saved, but managers already have noticed a less redundant hiring process. In the past, the company would often use the same staffing firms, but negotiate new contracts with those firms each time it hired contractors, says Michael Patrick, Northrop’s executive director of workforce recruitment and planning. Now Northrop has one standard agreement with each firm. "That whole process is streamlined with a solution like this," he says. "You see a lot of savings once you start reducing that waste."

    Companies typically pay 1 to 3 percent of contractor billings to use these applications, and can expect to save between 10 and 35 percent in contingent-labor spending over the course of contracts, according to the software companies. A chunk of those savings comes from paying more competitive rates for contractors. Since the staffing firms have access to job requests simultaneously, they’re motivated to offer better rates, says Jai Shekhawat, CEO of Fieldglass in Chicago.

    At Shell, when managers called staffing firms individually, they usually didn’t know the market rate of positions, and ended up paying higher rates. Now "we’re getting better people at better prices," Chapman says. And by using preferred suppliers, Shell can negotiate volume discounts and early-payment discounts.

    Companies also save time through a more efficient hiring and payment process. Instead of sifting through résumés, managers review candidates by striking keys and sending e-mails. "All I’m doing is taking all that paper out of the equation and increasing the flow," says Michael Cruz, executive vice president of marketing and business development for White Amber, based in Lake Success, New York. Instead of taking an average of three to four weeks to fill a position, it takes 7 to 10 days with an automated system, Shekhawat says. The staffing firm gets paid within three days, compared to three months with a manual system.

More visibility
    Web applications also enable managers to track data on contractors that is almost impossible to collect using a paper process. Most applications can run reports on all kinds of measures, such as weekly contractor spending or how much business one staffing firm is getting over another. "By having the data more visible, you can tell if a position is in your budget," says John Martin, IQNavigator’s senior vice president of corporate and product strategy. "You can see spending across the board."

    Having the data centralized has helped Northrop Grumman better gauge the performance of its staffing firms and weed out the less productive firms, Patrick says. Managers can see the number of résumés each firm submits or the percentage of candidates from each firm that get hired. The Web application also offers an "apples-to-apples comparison" of job candidates, says John Dooney, a consultant to the Society for Human Resource Management. Rather than dealing with a recruiter who’s pushing one candidate over another, the hiring manager can see a side-by-side analysis of candidates based on many factors. "It’s all on a spreadsheet," Dooney says. "You can look at who’s the better value."

   Switching to an automated process doesn’t happen overnight. Some hiring managers are more comfortable talking to a familiar recruiter than using a Web browser. At Shell, the transition was fairly smooth, Chapman says. Once managers had received training, they realized that the application made their jobs easier. But to reap big savings, Chapman adds, there must be a cultural shift in the company. Managers should buy into the fact that there are more controls on contractor spending. Now, there’s a greater focus on requiring that managers substantiate the need for contractors and get approval to hire them. As a result, Shell is hiring fewer temps.

    Taylor offers another reminder to managers. The Web applications are strong tools, but they’re not an end-all solution for a mismanaged contingent workforce. In order for the application to be helpful, companies first must follow consistent hiring processes and rules regarding compliance issues such as co-employment. Without that foundation, using these systems can actually get a company into trouble because the programs document everything. The application can offer proof, for example, that a consultant’s tenure was beyond the acceptable limit for a contractor.

    "When these programs are used right, they’re absolutely critical for companies," Taylor says. "You must have control over that human capital--who you have, what you’re paying them. It’s really critical to manage that data."

Workforce Management, August 2003, pp. 51-53 -- Subscribe Now!