Services spend has always presented an extra challenge for procurement and tested the strategic sourcing process. This is especially true with the services spend owned by Human Resources: namely, temporary employees and contractors, which are commonly referred to as the contingent workforce.
The delicate balance between cost and quality in contingent workforce contracts is often addressed by using a ‘cost plus’ pricing and negotiation strategy. In other words, procurement does not negotiate the salary range of the contingent employee – because that might result in an unqualified candidate, which, in turn, reflects poorly on the strategic sourcing process. Instead, procurement negotiates the ‘plus,’ or the margin the agency charges the company over and above the ‘pass through’ salary, that they use to fill roles, handle the administration of employees and make a profit.
Although the ‘cost plus’ approach goes a long way towards demonstrating to HR that strategic sourcing doesn’t have to award based solely on lowest cost, it still limits procurement’s involvement to managing prices in a category when there are many opportunities to create additional value.
Procurement can help create additional value in many categories
Risk Management: There are risks when you transfer responsibility for a task or objective to a third party, no matter how well-crafted the contract. Procurement can play an active role in helping HR identify and track contingent workforce risk levels, including those that come from security lapses, regulatory compliance and the need for third parties to have access to internal information and systems.
Analysis and Reconciliation: There is plenty of work that needs to be done upon execution of a contingent workforce contract– such as tracking and analyzing the employee data provided by service providers. For example, timesheets may be collected or centralized by the service provider, but the data still has to be reconciled with the contract and variances must be investigated, both from the point of demand and from the service provider. Procurement is well positioned to play an active role in this area due to the fact that they already have analytics experience and because procurement systems often have the capability to handle the reconciliation process.
Value Creation: Meeting the expected salary range for a contingent resource and negotiating an acceptable profit margin for the service provider are good first steps, but they usually meet status quo expectations rather than exceeding them. Given procurement’s experience with managing supplier relationships, they can identify opportunities for the service provider to play a larger role – making recommendations or providing additional value-add services that contribute to overall effectiveness from a contingent workforce program.
Like with every other cross-functional effort, procurement needs to build a solid, trust-based relationship with HR before attempting to manage contingent workforce spend. Rather than simply keeping costs as low as possible while still meeting the established needs of the organization, procurement should help HR find the optimal balance between cost and plus and then go on to maximize the total value created with the contingent workforce service provider.