Manage by Rate? Manage by Margin? It's a confusing world out there ...

In the past few years, I've seen the increasing trend of Corporate HR and Procurement departments paying attending to their contractor spend.

Back in the good old days, when a hiring freeze was put in that generally meant a wealth of need for contractors .. after all, the work has to get done right? It seemed like the wild west when I first got into the business .. companies just wanted a body in a chair, and didn't get too concerned about how much money they were being charged (never mind how much lined the agency's pocket!)

Now, we see RFPs asking agencies to commit to rate cards (sometimes reasonable, sometimes really unreasonable), or maximum margins, or even worse - both!

I believe a company's understanding of their contractor spend is a very powerful thing .. it helps with budgeting, forecasting, maximizing efficiencies .. just to name a few benefits. In addition, it can help companies to see that hiring freezes that make managers circumvent the intentions of the pull back by bringing in contractors just spends the same money (or more!) and simply shifts the line item on the financial statement.

However, when a company starts to implement controls on contractor spend things can get confusing.

Putting in a rate card is a good start .. it helps to align internal compensation rates for fairness and pay equity; it helps managers better forecast their budget; it provides a baseline value for what skills should cost. But what happens when a company puts in a rate card that sets rates really low? On the one hand it can save the company a lot of money - there will always be contractors who will work for a lower rate because they need the job; there will always be an agency that cuts their margin just to get the placement. But on average, is the company sacrificing the value of having a contractor who potentially could finish the work faster and produce a better end result? In addition, the company can damage their reputation in the skills market place .. if you always pay low, you'll never attract top talent.

So how about managing by instilling maximum margins for agencies, is that any better? On it's own, a company could potentially to reduce their overall cost particularly for going forward. As well, it puts all agencies on the same footing. But doesn't it potentially just commoditize what the agencies are doing for you? It ties their hands from being able to "help you out" on one contractor's budget, and give them the ability to make it up on another. As well, all agencies are not created equal. Some just find resumes and forward them over, some go to the effort of actually talking to the candidate first, some interview candidates before they get submitted, and some even do all that and references! Is it fair to let the one who does the least work get paid the same margin?

I personally believe that a rate card based on solid market intelligence that is implemented only with small adjustments to compensate for the cachet the company may enjoy (or not), or for geographical convenience (or inconvenience) is the best way to go. If you put in a rate card that is relevant to the market, you'll be able to attract excellent quality candidates that will help the work get done faster and better. In addition with a good rate card, agency margins will manage themselves. A contractor generally has a very good idea of what he/she is worth, and if you have a bill rate target, the agencies participating will have to fall within a small percentage differential to effectively compete against each other to not only attract your attention but also the candidate's right of representation.

I'm interested in hearing your thoughts on the battle to manage contractor spend. Looking forward to a good debate!

Happy sourcing.

Views: 74

Comment by Zahra Sandberg on January 27, 2010 at 2:28pm
This is exactly what my firm went through last year, expecting contract staffing to skyrocket - when instead we were forced to renegotiate rates - some to a level where we have little to no profit margin left. We are one of those firms who does the whole bit, interview, references, etc. before we submit. It forced us to seek new business that was healthier for us. In the end we did a ton of Direct Hire! I agree with you- the best solution is that there should be a max bill rate set by the client based on 'solid market intelligence' as you put it, so we can find the best talent within the pay range. The question is just how do we influence procurement to do so?

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