Oh, the joys of counting savings. It’s a fact that the more mature your contingent labor program is, the harder it becomes to squeeze more savings out of your contract. You’ve reduced markups to be competitive; you’ve used various discounts, etc. You may have found that you are running RFPs simply because it’s part of your procurement rules and standard contracting cycle, though you’re unconvinced you’ll get more off the great prices you already have.
But your head of procurement has a highly visible savings target to meet, accountable to senior stakeholders. As contingent labor is a huge spend category for most companies, you may have to be inventive to come up with the numbers. Companies have different ways of counting savings – using annual or multi-year baselines, or even whether process savings or cost avoidance are acceptable. Heaven knows it drives buyers and their suppliers up a wall trying to trackthem all!
It’s understandable, given the pressure, to want to get creative with your contingent labor savings methodologies. I’ve seen the three strategies below used before; would they be used in your company? And do they deliver?
Savings from Rate Card. A rate card can be used as a hard or soft guideline for what market pay rates are for a defined set of job descriptions in set locations. If a successful candidate comes in below rate card, that can be counted as a cost avoidance saving. But is it? It is not unheard of for rate cards to be inflated to make it easier to recruit, increase supplier profits on higher pay rates, and document such “savings” when a rate is agreed below rate card. Independent benchmarking can help in this area.
Savings from a “List” Markup Price. A client asked in their RFP what the ‘list’ markup would be – in the event they engaged a worker from that agency without an overarching, procurement-negotiated, framework agreement. The client would realistically never pay the list price, but wanted to know what it was to justify the existence of the procurement department and exercise, on the premise that without procurement, the client would pay list price. This cost avoidance borders on fluffy.
Savings from Forced Furloughs. Forcing your contingent workers to take a break will certainly deliver cash savings – but they come at a cost of lost productivity. Is that lost productivity worth it? It could mean the delay to product launch or project delivery.
The reality is that none of these strategies produce pure savings. The conversation needs to move away from savings and to value once your contract has matured. Ask the questions:
- Do I have a market mature contract? You’ll know if your prices and discounts did not move significantly from last RFP to this RFP. There is nothing wrong with having a market mature contract, and heads of procurement need to recognize this.
- As far as individual workers are concerned, are you getting the right price for that person at the time? Use external, independent benchmarks where possible to know what the market rate is for the level of experience you’re seeking, and match that to the candidate you want. This may be an imperfect science, and you’ll have to be comfortable with that imperfection. Some candidates may be a better cultural fit, have less experience, more experience, better availability, etc. to what you seek – and prices can reflect that, same as how they can reflect your employer brand and market positioning. If you are paying close to market rate, you should be confident that you are getting the best value.
- Crucially, are we fulfilling the overall talent strategy for the organization? A contract with the best rates is worthless if vacancies are left unfilled and hiring managers go elsewhere. Match your contingent labor demand to the overall workforce plan for the organization by taking a total talent management approach.
It’s time to move beyond counting savings for savings’ sake and creating unnecessary bureaucracy for buyers and suppliers alike. It’s time to move to a more mature approach: a value-based one, making sure your organization has the talent they need when they need it at the right price. Master that on an ongoing basis, and you’ll have a healthy organization built for sustainable growth.
