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How to create cost savings through your contingent workforce
In the current economic and operating environment, minimising costs has become increasingly important for organisations around the world and one major cost factor to consider is labour spend. Deciding the split of permanent and contingent workers and evaluating the financial impact is a key part of this.
Current trends show that temporary labour is becoming more appealing to many businesses, with a report from Gartner (Cost Cutting and Employee Experience Survey, April 2020) stating that 32% of organisations are replacing full time employees with contingent workers as a cost saving effort.
So if you’re thinking of adding more flex into your workforce or are looking to save further costs through your existing contingent workforce, how do you go about it?
Our recent bite sized webinar ‘How to create cost savings through your contingent workforce’ explores the true cost of contractors and looks into a variety of methods to save costs; from the supply chain and the contractor base to the hidden costs. Access the on-demand version, or continue reading for a summary of the webinar.
Cost of contractors vs. permanent staff
One of the most common phrases we hear about contingent labour is "contractors are expensive... aren't they?". If you simply looked at a worker's daily rate and compared it to a permanent member of staff doing a similar role, you would almost certainly come to that conclusion. However, once you consider the fact that a contractor is a short-term investment, and that permanent staff members also entail costs such as hiring, training and infrastructure, you find that actually a contingent workforce can be a cost-effective way to power your business.
Paul King, Managing Director of Gattaca Solutions summarises some of the main pros and cons of using contractors:
“There is an element of speed; obviously you are bringing people into your business who should be productive and hit the ground running, focused on delivering a specific outcome. It’s also a way of bringing fresh ideas and innovation into your organisation. In terms of employment overheads, these are minimal or zero for contractors.”
“On the cons side, contractors might not be bought into your brand, they might not live and breathe your culture, there might be some risk to some compliance elements unless they are really well managed. Are you going to get that value add? Or are they just going to do their day job rather than going the extra mile you might expect from your permanent staff?”
Once you’ve weighed up the use of contractors in your business, you can look at ways to keep control of contingent workforce costs.
Breakdown of contractor total spend figure
Understanding how to calculate the contractor total spend figure is key in identifying ways to manage the costs. There are three main areas that these costs fall into:
- Supply chain: This includes contractor attraction and sourcing, vetting & compliance management, timesheet management & pay-rolling and finally, agency margin. The supply chain typically accounts for less than 20% of the total cost.
- Contractor base: This includes the pay to the contractor, as well as taxes, expenses and insurances. This is the money you pay to get the outputs that you require and comprises the remaining 80% of the known costs.
- Hidden costs & opportunities: This portion includes the time taken to deliver projects, the productivity and efficiency achieved per hour/day, commodity or services, incremental or pass through of risk, whether pay is linked to time or a deliverable, management time and investment. This element of spend is hard to quantify but in our experience represents a valuable mix of both untapped cost savings and opportunities for new or enhanced revenue streams.
James Parnell, Certified Contingent Workforce Practitioner at Gattaca Solutions explains the difficulty in driving down costs from the contractor base even though it makes up the largest proportion of total spend:
“Over 80% of this total cost of ownership is tied up within the aggregated pay rates of the contractors, with a maximum of 20% being the supplier costs. The reward of deriving cost savings from your contractor base can be significant, but it will require more effort. Although the hidden costs and opportunity section is harder to define and quantify, as by definition it refers to costs unknown to you, from our experience it can be comparable to the value of contractor costs.”
Cost savings from the supply chain
Making up a maximum 20% of the total cost of ownership, supply chain cost is often the area seen as the lower hanging fruit, and the one we experience most customers looking to address first as any impact of costs saved is only really on your supplier base.
If we bring some concepts of economies of scale and reward versus commitment, negotiating savings here may be a very effective way for your business to achieve savings. For example, giving one or more of your suppliers a larger portion of your business as part of a negotiation should render greater savings. It does of course need a very carefully considered approach. Relationships with suppliers are partnerships centred around ensuring your business achieves better outcomes, so it’s paramount your quest to reduce costs is not detrimental to the value provided by your suppliers.
Here are some of the ways savings can be achieved:
- Supplier rate review - Negotiated rates upon renewal or via increased exclusivity
- Migration opportunities - Moving contractors from existing suppliers and onto payroll rates
- Tenure rate discounts - Margin reductions as time-based milestones are hit
- Referrals/direct - Lower margins for payroll contractors
- Incentives/penalties - Performance-related risk/reward, governed by SLAs and KPIs
- Volume rebates - Kickback when pre-determined spend milestones are hit
- Process gains - E.g. Invoicing, onboarding, vacancy management
All of these initiatives require effective control, governance and rationalisation over your supply chain, and this is most effectively achieved through the implementation of a Managed Service Programme (MSP). In our experience, companies can expect to save 10-20% on supplier costs when transitioning from a Preferred Supplier List (PSL) model to an MSP.
Cost savings from the contractor base
Making up 80% of your spend, this area cannot not be ignored when looking at potential cost savings. However, it’s also important to remember that this is the pot from which your contract workforce is remunerated to achieve the business outcomes you need. Therefore, whilst it may sound a lot, it’s not all up for grabs, and effort into achieving savings through this area of spend here will need to be higher, but so can the reward, if you get it right. Some of the key cost saving initiatives explored through the contractor base include:
- Referral process - Reduced margin for pay-rolling referred contractors
- Tenure management - Contract length governance to cut down on over-extensions
- Contractor furloughs - Enforced leave, i.e. 2-week Christmas shutdown
- Workforce management - Improving talent pooling or worker redeployment onto new projects at the end of their tenure to reduce sourcing costs
- Worker ‘right sizing’ – Determining which outcomes require highly-skilled (and paid) workers and which can be achieved with lower-cost workers – using this flexibly across project lifecycles
- Daily rate conversion – Converting workers from hourly rates to daily rates to encourage consistency of costs in timesheets
- Overtime management - A structured process & governance to reduce unplanned overtime
James Parnell explains some of the difficulties in achieving savings from this type of cost:
“From our experience, cost savings strategies in this category are hard to introduce successfully if being driven solely by a procurement department, and will require backing from across the business with proper engagement, and executive sponsorship crucial.”
Cost savings and opportunities from efficiencies & other initiatives
Like contractor base cost savings, this is a higher-effort, higher-reward area, and can address those hidden costs we referred to earlier. However it’s not just about savings – get these things right and you are highly likely to also generate additional revenue for your business.
- Workforce planning - A holistic, strategic approach
- Statement of work - Outcome-based engagement
- Improved time-to-hire - Quicker productivity
- Time-to-productivity – Onboarding
- Contractor retention - Contractor care, slick timesheet and payment processes
- Mitigated risk - Governance, clear SLAs and KPIs to avoid risk of non-compliance
- Alumni management
Some of these areas are also closely inter-linked. For example, you could wrap better workforce planning, improving time-to-hire, increasing productivity, alumni management and contractor retention into an initiative focused on workforce redeployment.
There are a lot of factors involved in saving costs and creating new opportunities through your contingent workforce. Different businesses across different industries will find different combinations of these cost saving initiatives more suitable for them in the short, medium or long-term.
Keen to understand more about a Managed Service Programme and how it can help your business achieve the cost savings you need?
Find out what is an MSP including the types of MSP and benefits of an MSP, take our MSP health-check or download our 12 key pillars of a flexible workforce solution.
Or, if you’ve enjoyed reading this article, why not watch the 30-minute webinar in which our expert speakers Paul King and James Parnell explain all of these initiatives in more detail.