Headcount Shell Game Part 1: Grey spend causes and costs

It’s been called rogue spend, maverick spend, or, my preference, the less blame-shifting grey spend. It’s a headcount shell game. Dreaded by many CW program managers everywhere — when engagement managers bypass the program to acquire talent on their own. Your program’s entire purpose is to source nonemployee talent for your organization while balancing quality, cost, efficiency and risk. You’ve developed and fine-tuned processes to meet your stakeholders’ needs, and some managers still don’t use it. Maybe it’s just for some roles; maybe it’s just some of the time, but those one-offs add up.

Typically, suppliers, Human resources, procurement and line managers all want to do the right thing when it comes to sourcing talent. But they also need to get work done, to hit their goals and get that bonus and promotion. So what leads them to avoid what is a seemingly straightforward CW process and send large amounts of hourly CW spend through statements-of-work or pricey service contracts? Is it cost, poor usability, too many approvals, confusion of multiple processes, or all the above?

In this two-part post, I will explore this practice of grey spend — namely what causes it, the damage it does and how to fix it.

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The Causes of Grey Spend

Motivation for this rogue behavior can come in various forms.

Penny pinchers. HR, finance and leadership want to count heads and money in the budget. Budgets are important, but when hiring managers perceive they cannot get their vital project done without an additional head, they will seek ways to meet that need.

Process hurdles. A long HR headcount approval process, followed by a procurement process, etc. Those same managers who might be willing to go through the proper channels but are stymied by process hurdles. They need their project done yesterday.

Self-sourcers. Managers want to avoid the legal /HR ping-pong match that often occurs over whether a requested role is managed service, staff aug., IC, etc. So they opt out of the discussion and just source themselves, typically going through a services contract.

The Damage of Grey Spend

The damage of such behavior can be great, including more obvious (direct, increased costs, for example). But there are hidden dangers as well.

Grey spend leads to many problems for the organization. The lack of visibility of the non-employee workforce exposes the company to regulatory, safety, access and onboarding risks. In addition, improper worker classification and vetting carries significant risk in back pay and penalties, as well as an impact to brand reputation.

From a budgeting standpoint, not only can going rogue affect the bottom line in terms of current costs, but the lack of visibility affects the organization’s ability to budget or forecast accurately going forward.

Then there’s the issue of sub-contracting that may be taking place without your knowledge. Multiple sub-vendor layers can lead to additional costs of 20% to 60% — even 200%. And because of subbing, workers may be paid under-market rates to offset the multiple layers of markups, which can in the long run affect your talent brand. And sometimes, I’ve seen staffing providers supplying to the company directly and then behind the scenes as well, serving as sub-suppliers to some of the company’s other service providers, creating a duplicitous situation. And then there’s the fairness factor. The suppliers serving your program that are following the rules lose opportunities to companies that are not.

Alternatively, your rogue hires may be overpaid, which affects the program downstream if you want to convert that worker to employee status. This hidden workforce erodes benefits of outsourcing and even impacts being an employee. Employees who see this buying behavior can feel they are underpaid, undervalued and possibly leave to pursue services roles that pay more and are responsible for less. In my next post I’ll reveal measures you can take to discourage grey spend and return the buying power to your process.

Linc Markham

Linc Markham
Linc Markham is a contingent workforce consultant and former global HR and contingent workforce director for BP. Connect with him on LinkedIn.

Linc Markham

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