Look Beyond the Markup

We all know the standard process to follow with an RFP for contingent labor. First you get the team together, and after a supplier selection process you send out an RFP to the suppliers with all the bells and whistles including all the fun acronyms, MUs, KPIs, SLAs, etc. Plus, there are always great Excel files with pricing tables. Now, don’t get me wrong, of course solid pricing is critical to a well-structured contingent labor supplier sourcing strategy. But what is the impact of all of the conditions we require of our suppliers? When it comes to the best pricing that can be achieved, we can still have a win-win result for both the buyer and supplier.

We also talk a lot about supplier gross margins and the percent of revenue going to the wage of the contractor. Besides wages, the gross margin also includes statutory costs (taxes), benefits, insurance and other direct costs associated with contractors. Staffing Industry Analysts’ 2Q12 Gross Margin and Bill Rate Trends reports shows that the average gross margin percent has historically been in the low 20s, topping out around 24 percent just prior the great recession (see chart below).

But what is the missing piece here? What has been an area of less focus on the supplier cost model? It is the direct internal costs the supplier carries to support their business. Yes it is true that a single buyer of contingent labor will not have a significant impact on an individual supplier’s internal cost structure, but a strong argument can be made during the bidding process that efficiencies and streamlined processes can lead to a more cost-effective relationship that should lead to lower markups and rates while allowing the supplier to retain the needed net profit.

Let’s look at the total supplier cost model. While gross margins are around 23 percent, the average supplier internal costs run approximately 18 percent, leaving a 5 percent profit. The typical costs carried by a supplier are: recruiting costs, general and administrative overhead, management expenses and selling expenses. What can you do during the RFP process to identify possible cost savings for the suppliers that are going to support your account?

With a well-structured program it is possible to reduce the selling expenses associated with servicing your account. Do the suppliers feel they have to continually sell to retain/gain business due to the large number of “approved” suppliers in the program? Is there significant leakage from your leveraged supplier program with rogue stakeholders using non-approved suppliers? Establishing the right model can allow those suppliers selected to spend less time re-selling their services and more time truly servicing your account.

How about your KPIs and established SLAs needed to monitor the success of your program. We all know we need to track critical metrics to assure suppliers, internal users and contractors are all following the rules, as well as the ability (and need) to audit suppliers for adherence to contractual terms. A well-structured contingent workforce program must include many of these features to be best in class. But, are you asking for lots of manual reports or frequent, time-consuming site visits by the supplier’s team. Relationships are critical and information is more important than ever in managing our business. But, know that everything has a cost. Are there efficiencies you can work out with your suppliers to drive down their internal costs and translate those cost savings into the form of lower markup and rates back to you?

So, looking at the total cost of a supplier’s service offering, not just the markup or rate being charged, yields a win-win outcome. Paying attention to ALL of the supplier’s costs can lead to a better negotiating position, less cost to the supplier, and lower costs to your contingent workforce program.

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This post was first published in Contingent Workforce Strategies 3.0, December 12, 2012.

Kirk Reade

Kirk Reade
Kirk Reade is a senior associate with Brightfield Strategies, which helps Fortune 500 companies with contingent workforce strategy initiatives. He can be reached at kreade (at) brightfieldstrategies (dot) com.

Kirk Reade

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