Indirect Spend – Why you might be looking at the tip of the iceberg

Apr 15, 2020 | Workforce Management

How big an issue is hidden talent spend? Find out by reading this article

Sometimes it’s hard to get a finger on the pulse of your total contingent workforce spend. How do you reduce contingent labor costs? And could it be you’re only looking at the tip of the iceberg when it comes to indirect sourcing costs? Read this article to learn more.

With COVID-19 slowing the world of business down, the outlook for 2020 is looking pretty bleak. Like any ‘blip’ in market conditions, it’s likely that the next few months will see a staggering start to economic recovery, interrupted by sudden spikes in demand for talent. 

There’s never been a more important time to reduce contingent labor costs. One of the obvious areas to consider is the cost of talent. In most businesses, labor represents the biggest cost. In the context of contingent and contracted labor, getting to grips with the true cost of resourcing can be more challenging. Few organizations hold a central budget for all contingent and contracted talent. How do you know the true cost of your indirect spend? In this article we dig deeper into the subject by answering three questions: 

  1. How common is it not to have a clear appreciation of indirect costs? 
  2. What are the reasons that make it so difficult to get right? 
  3. What can talent and procurement leaders do to bring their indirect costs under control?

How common is it not to have a clear appreciation of indirect costs?

The simple answer is that a lack of clarity over total indirect spend is a very common issue with firms that do not have a Managed Service Provision or Vendor Management System in place. More often than not, it’s the start-point for Workspend engagements; and it’s the justification to move towards a managed and transparent situation. For our workplace program managers and consultants–out every day working with our enterprise customers–their first activity for new customers is to gather together an understanding of the various sourcing routes and vendor relationships that exist in their talent ecosystem.

What are the reasons that make it so difficult to get right?

For many large firms, it’s a disconnect between the HR, Procurement, TA and Finance departments–the absence of any clear responsibility or accountability for total indirect labor spend–that creates a free-for-all on sources and rates. If you want to reduce contingent labor costs, you need to start here. If there is no Vendor Management System (VMS) to aid comparisons and benchmarking, then there’s no visibility. Finance releases payments to invoices, and no one has the big picture of the supplier base, with managers adding suppliers as and when required.

The symptoms of poor control are easily visible. For example, whenever we ask a new customer if they have a single figure on their financial system that gives them the TOTAL INDIRECT LABOR SPEND for their organization in the current fiscal year, the answer is almost inevitably no. I’ve personally never encountered an enterprise that operates a separate budget line for indirect labor spend across their operations ‘pre-MSP.’ 

The principal difficulty for most organizations is that decisions around resourcing typically happen at a departmental level, and may come in several contract formats that may include charges/invoices from:

  • Temp and contingent worker staffing suppliers
  • Self-employed contractors and gig workers (frequently hidden away under departmental project costs and budgets)
  • Statement of Work contractors (or indeed companies)

Even if we were to just consider staffing suppliers, it’s quite likely, prior to the establishment of a centralized program, there will exist a mix of departmental and corporate-wide agreements–and rates, terms, policies, and insurance terms will be all over the place because it’s not possible to easily do any across the board comparisons. 

The consequences of poor indirect supply-chain governance and procurement controls

The lack of transparency that exists can allow suppliers to bypass centralized service provisioners if a Statement of Work (for example) is not a part of a Managed Service Provision or a similar arrangement. This also means that the rate card will not be applicable in their case. 

I should make the point that it’s not just in small companies where the challenges of knowing what to do to reduce contingent labor costs arise. I’ve seen this same situation present in the programs of two large oil companies! In fact, sometimes, larger organizations have bigger challenges because they have a huge supplier base, and this makes it difficult to enforce controls. Without regulation and internal process controls, hiring managers, at the department level, can ride roughshod over any agreed procurement arrangements to add consultancies and staffing suppliers at their fancy.

The consequential impacts of having no centralized program (or technology to monitor it) include:

  • No rate cards and inevitably higher rates
  • No transparency over charges – and therefore some staffing suppliers will be charging inflated rates or offering aggressive conditions of sale
  • No reporting – making it impossible for anyone to do anything about it!

What can talent and procurement leaders do to bring their indirect costs under control?

The introduction of a centralized Managed Service Provision (MSP) through an expert partner underpinned by a Vendor Management System (VMS) to bring transparency over operations helps to reduce the rogue spend significantly. For organizations that have never operated an MSP service (supported by a good VMS) it’s not usual for new MSP projects deliver 15% immediate savings–IF NOT MORE. 

With the introduction of an MSP/VMS solution, along with change management, rates are visible to everyone and the process has to be followed. Effective controls can be put in place to reduce the risk posed by “rogue spend” and unvetted suppliers.

Final Thoughts

Hidden spend can disguise inflated agency rates

The message is simple; if you want to reduce contingent labor costsm, you need to start with an appreciation of your baseline. If you don’t have a centralized view of Total Labor Spend, OR the sourcing options departmental managers are using, OR the rates and terms of suppliers, then the probability is YOU ARE PAYING TOO MUCH FOR YOUR TALENT. Hidden spend disguises the true cost of indirect talent and means your organization will be operating with an inflated ‘business-as-usual’ level of cost that it can (in truth) easily do something about.

All it takes is for someone to raise the debate. So, DO YOU KNOW THE TOTAL COST OF YOUR INDIRECT WORKFORCE SO FAR THIS FISCAL YEAR?

About the Author

Sameer Srivastava has over twelve years experience in designing, implementing and managing MSP programs in Europe, Asia and the US. His current responsibilities include oversight of Workspend’s Strategic Center of Excellence based in New Delhi, India, and business operations in APAC and EMEA. Prior to joining Workspend, Sameer was leading Kelly OCG’s Implementation services in EMEA and later went to head their MSP and RPO Operations in India. Post Kelly OCG, Sameer was at Allegis Global Solutions where he managed Implementation and Operational teams in India. Sameer also has experience working as an IT and Change Management Consultant in the US and the UK. Sameer holds a bachelor’s in computer science from the University of Nebraska, Lincoln (USA) and an MBA from Cranfield University (UK). He can be contacted at [email protected] or follow him on LinkedIn.