The market for temporary and contingent labor is growing dramatically year-over-year -- roughly 7-10%, depending on what segments you look at. This is a trend that is likely to continue for the next five or six years. The Harvard Business Review in 2012 projected that eventually contingent labor will make up about 25% of the global workforce and we are well on our way to that. Companies that want to use contingent labor strategically and cost-effectively need to get a lot smarter about how they source and manage this category.
This is a tough category to handle and historically procurement hasn't paid much attention to it. They've engaged Managed Service Providers or implemented Vendor Management Systems to improve their performance and considered it handled. Or, they've ignored it completely, figuring it wasn't that big and besides it's "temporary", so not worth the effort. Neither approach supports developing the institutional knowledge needed to manage the category effectively.
This needs to change. We will see more and longer "temporary" engagements, because there's been a big shift in the temp and contingent labor market over last decade or so. For a long time, temp positions were mainly clerical or administrative. Then we saw a lot of expansion into the IT area for project-based work. Now globalization and the Internet have opened up temp and contingent opportunities for an even broader range of specialized workers.
New opportunity for companies and workers
It makes sense for companies to hire these people on a temp or contingent basis, because they get access to unique skills they don't need all the time, and these are expensive people to have around if you can't keep them active. But it's not just companies that want this. The workforce does too.
If you look underneath the hood of the slow job recovery numbers, you see a decrease in full-time jobs but an increase in temp and contingent labor. There are a couple things driving that. One is that millennials have now fully arrived in the workforce, and they're looking for more freedom in work style and time off. The other is the Affordable Care Act.
No matter how you feel about the Affordable Care Act, it opens up the ability for people to get health insurance in other ways besides full-time employment. This creates a certain amount of flexibility that U.S. workers haven't had before. As the ACA phases in, benefits will no longer be the driver of full-time employment that they have been in the past.
This is a major shift in the workforce, and to employers need to keep up. In general, procurement practices for contingent labor are still pretty unsophisticated, and there are a lot of inefficiencies because there is a real lack of transparency in the marketplace. That makes it challenging to do the research and crunch the numbers, but it can be done. Companies need to then take that information and adapt some of their internal HR processes to be able to compare price and quality and make strategic decisions.
Getting accurate pricing
One of the reasons we don't have transparency is that up until now companies have mainly dealt with contingent labor through temp agencies and placement services, which have mostly dictated prices. The delta between agency bill rate and worker pay rate can be considerable, and it's tough to know what the real going rate should be, how it is trending and how much above or below market you are paying.
Furthermore, this is not like negotiating for a commodity, where you go in with a clearly defined specification and you're essentially negotiating with suppliers around margin or efficiencies they think they can achieve. In this category, you're not negotiating around price. You're negotiating skills, experience and competency. If an agency has somebody who is highly skilled and experienced and bills at $75 an hour, you might be able to get the price down to $60 or $65 but you won't be getting that person, or their equivalent. Most people don't realize that.
So how can you get accurate information about what you should pay for different levels of skills and experience? IQNavigator's IQNdex, Payscale.com, salary.com and Glassdoor all have this kind of information as an add-on to their core business models. Vendor Management Systems and Managed Service Providers like Fieldglass and Pro Unlimited make their data available, but they're also fee-based supplier networks for contingent labor, so they're incented to put out higher numbers because they make a percentage on the billing rate. It's a bit of the fox guarding the henhouse, so you have to factor that in when you're looking at their numbers.
Independent labor market data subscription services like PeopleTicker (full disclosure: I'm an advisor to the company) can be a great resource for getting at the real pay rates for different geographies, without the agency markups.
Some of the limitations of these resources are that they may not have a lot of data points for niche specialties or people who are at the very top of their fields, and the rates may be blended across many geographies and not be applicable to your specific market.
Adapting internal processes
What you ultimately have to do is develop your own internal methodology, because you have to be able to evaluate not just worker-versus-worker or agency-versus-agency, but what you'd pay for a full-time employee versus what you'd pay for contingent labor in the same position. There's a presumption that temp labor is cheaper, but that's not always the case. You need to have a point of comparison to identify the premium you're paying for temp labor, whether that's more or less than you'd pay for an FTE, and which setup makes the most sense for your situation.
The best way to do this is to look at the going rates for full time employees. There are a lot of places to get that kind of intelligence and this is something HR is already good at. Then take your job descriptions and modify them for contractors. There are certain responsibilities that shouldn't be handled by contractors. For example, they shouldn't be managing people or signing contracts. Redact employee responsibilities out of the position descriptions and adjust the pay rate accordingly.
Then, put a number on all the statutory expenses and benefits associated with employees. Most companies know what that is; they know if they are paying someone $50,000 a year in salary, it's costing them $75,000. Once you have that figured out you can do a comparison of whether it's economically sound to hire contingent labor or a full-time employee, and roughly what you should pay for each. The key here is it is not just the cost comparison; flexibility and seasonality may be important considerations for your company as well.
Adding sourcing rigor
This of course presumes that you have good job descriptions. Most companies don't. They bring a lot of rigor to job descriptions for FTEs, but very little to those for contingent labor. Fuzzy position descriptions typically result in fuzzy candidates and/or paying for skills beyond what is needed. Everybody wants a "ninja" or "rockstar," so they write a position description that asks for the sun, the moon and the stars. The likelihood of all those skill sets existing in a single person in the area you're looking for is remote, but what it does is give contingent labor providers the opportunity to upsell you. You can't manage a category like that.
You need to bring the same rigor to writing job descriptions that you would to writing specifications for sourcing any other commodity, so that you have alignment and consistency to make accurate comparisons. Take the time to clean up your job descriptions so they're standardized against the market and prioritized against what you need—back out everything that is not essential. With good job descriptions, you can better use these outside data sources to get closer to what you want. For example, you can see pricing for the same skill sets at an entry, mid and high level.
All of this can help you become a smarter buyer, but even with the best data you can't just buy off the rate card. Two people with identical credentials will be still be very different. They could have an alphabet of letters after their name and still be lousy at what they do. The final step still needs to be an interview process to meet the people and really understand what you're buying, because chances are they could be around for a long time.
Because we're dealing with people here, managing this category will always require a different approach you'd take with a commodity, and it isn't something that can ever be fully automated. However, the growth in this market offers companies new opportunities to gain a competitive advantage by having access to skills and expertise they might not have been able to previously. Those who adapt will have a leg up on the competition and the rest will remain mediocre, so forward-looking companies will find investments in improving well worth the effort.