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Feature: The Other SOWCWS 30 August 2.15

CWS 30


By Jason Ezratty

Three programmers walk into a bar. After ordering beers and exchanging pleasantries, they begin discussing what they do for a living. All of them work at the same corporation. All of them develop internal applications that integrate with ERP systems. All of them have the same skill level and experience. However, one is an employee, one is a temp and the third a consultant. And each is compensated at very different levels under very different terms and conditions.

This scenario is not at all unique. Nearly every company has resources of multiple types performing the same or similar functions. There are two groups in corporations today: those trying to get the work done and those trying to ensure that work is getting done legally and cost-effectively. Blipping loudly on the radar of HR and procurement professionals -- seeking safeguards and savings against a multitude of threats -- are consultants sourced through Statement statement of Work work (SOW) contracts, which are often costlier than other forms of contingent labor.

Looking Back

Over the last several years, the definition of contingent worker has evolved to include statement of work consultants. Originally, "contingent worker" seemed to emerge as yet another euphemism for temporary status because most perceived the term "temp" as a pejorative, lesser status. However, as the skills being sought on a fixed-term basis elevated, and corresponding bill rates appreciated, some temps took on the label of consultant creating some confusion. Both labels "temp" and "consultant" connote non-employee status; however, "consultant" is believed to bring a more dignified perception. These terms carry weight beyond public perception. Traditionally, temps are fixed-term employees of temp staffing agencies and are paid based on the number of hours they worked. Consultants are conventionally defined as employees of consulting firms and are paid a salary.

SOW $

One of the key differences between engaging temps and consultants is whether the company or the supplier assumes the risk for properly completing the work product. Consulting firms sell solutions -- an end result, not just the use of a resource for a given period of time. Solution details and expectations are documented in an SOW contract that contains a discrete set of milestones, activities, and deliverables that define the anticipated outcomes of a services engagement. Payment terms are often tied to successful completion of said milestones, activities, and deliverables, so if the project takes longer than originally anticipated, the supplier is expected to keep its resources working until successful completion at no extra cost to the company.

For example, in the software consulting business, the liability of successfully completing a SOW-defined application can make testing and debugging cycles a stressful period. When a supplier underestimates the level of effort a project will require, or, if the customer successfully balloons scope expectations (known as "scope creep" in project parlance), consulting suppliers may find themselves in a situation of diminished or even negative margins. Conversely, if a company staffs an extended software project with temps, the temp agency simply enjoys an extended period of billing and the company assumes the resulting risk.

That scenario may make it seem like SOW work would save a company money, but that may not be the case. Typically, though, consulting projects, whether billed on a time-and-materials or fixed-price basis, are more expensive than their temp services analogs, and often significantly so. Some of this premium is the result of the elevated risk the supplier is assuming and some for the specialized, supposedly superior resources. In the modern world of creative workforce planning, however, these traditions and conventions have been thrown out the window. Consulting firms are increasingly sourcing their project talent through temp channels themselves, thereby diminishing the value proposition of having a seasoned team of individuals with good working chemistry.

Accordingly, as managers turn to SOW consulting as an alternative source of talent to avoid headcount and tenure restrictions, costs for services increase. In essence, the creation and enforcement of policies whose aims were to curb human resource-related costs are actually costing companies more in corporate overhead as well as project talent.

Recourse

As contingent workforce programs continue to mature, achieve performance targets, and globalize, a natural next step in program evolution is to integrate additional contingent worker classifications. A common question we are asked in our consulting practice is: where to begin?

The first step is to understand the size and nature of the problem and to identify the motivators and behaviors driving non-compliant SOW-consulting sourcing. One motivator seems clear: Staffing suppliers seeking to grow (or maintain) sales volumes in a weakened economy. Their sales strategies aim to counteract CW managers' policies. They are helping hiring managers pose as project managers to overcome barriers to entry. Over the last few years, as temp worker headcount and tenure restrictions became more prevalent, managers posed a problem to their suppliers: "I want to bring on resources, and have the budget to do so, but the rules say I can't." Accordingly, staffing suppliers began offering their temp resources under the banner of an SOW.

As it turns out, creating a list of deliverables is not all that hard, especially if the manager in question is simply using it to cloak their true intentions and not actually trying to manage to it. Deliverables can be vague and ultimately ignored when a manager is doing the paperwork simply to get around policies they perceive as obstacles. Therefore, those who say the existence of an SOW or the listing of deliverables is sufficient to classify a contingent worker as SOW consultant likely has "hidden temps" walking their hallways at higher prices, for longer durations, and with lessened onboarding screening.

Closed loophole. Therefore, one of several compelling reasons for integrating SOW spending into a contingent workforce program is to close the SOW loophole. It is a worthy investment to create a front-end vetting process to clarify genuine SOW spend from misclassified temps. Indeed, reclassification savings can be significant, ranging from 30 percent to 60 percent or even more on individual rates, depending on baseline conditions.

Competitive bidding. Another savings-based incentive is the ability to bid SOW project work competitively per transaction in a way that makes practical sense. In a 2009 polling of eight MSP suppliers, overall hard savings resulting from integrating SOW transactions into contingent workforce program processes ranged from 5 percent to 30 percent, with an average of 12 percent. In addition to checking unchecked pricing, competitive bidding helps to ensure companies realize the best solution. As enlightened companies repeatedly point out, value is a product of output quality, not just price and quantity. For this reason, when consulting firms are trying to break into new accounts, they often flex muscle on the solution-side of their proposals, not just price.

However, even the best performing and most fairly-priced consulting firms loath competitive bidding on accounts they are already servicing. After building hard-won relationships, extending favors and other no-cost value-adding benefits, suppliers often feel they have earned a direct-source privilege. And, perhaps some have. However, competitive bidding isn't meant to undermine positive relationships between customers and suppliers. As seen on the more mature temp-labor side of contingent workforce programs, competitive bidding helps to create a more fair and level playing field for the suppliers. Even without competitive bidding, just having access to historical SOW pricing is reported to bring in 6 percent on contract savings. And, with e-enabled sourcing and invoicing efficiencies, contingent workforce managers are often able to negotiate early-pay discounts and volume rebates.

On/offboarding efficiencies. Beyond hard cost savings, yet another compelling reason to integrate SOW activity into a contingent workforce program is onboarding/offboarding controls and efficiencies. Without a central data repository of who is coming and going, and who ought not return, effective controls become impossible. Equipment allocations, worker return eligibility checks, background checks, drug screening, network ID administration, photo ID badging, desk and phone assignments -- each of these downstream elements can be made more efficient and effective with a central data repository and transactional system such as a VMS. While a VMS is not the only technology able to accomplish this task, it is best suited to do so because it is the only known technology to seamlessly support the complete worker lifecycle -- the highly sought-after one-stop-shop. To this point, if you want someone to fill out an onboarding form properly, make it easy to do so, and tell all parties involved that money won't flow until it is done properly. Similarly, by tying offboarding tasks to PO end dates, the gap between when someone leaves and when his or her access to systems and facilities is terminated can be shrunk to nothing.

Intellectual property protection. Finally, in an era where contingent workers are accessing, handling, and generating proprietary or otherwise sensitive information, having legal and systematic controls in place is vital. Intellectual property (IP) agreements are commonplace expectations within employee relationships and should be for consultants, too. Considering the degree of dependency on consultants and the core strategic projects they participate in, IP controls are equally important -- if not more so -- with the consultant population because of the definitively short-term and unbound nature of the relationship. Unlike employee relationships where we ponder the likelihood of a worker someday working with another company, or even competitor, consultants must work with other entities lest they go out of business. IP and confidentiality agreements are standard components of the modern contingent workforce management program and can readily systematize compliance with SOW consultants.

Dealing with Reality

You can expect to hit some initial resistance from SOW suppliers. Nobody likes anyone or anything coming between them and their customers. MSP and VMS suppliers claim adoption rates greater than 90 percent, but this is predominantly in the IT SOW space. Of course, every situation is different and actual rates may be higher or lower depending on your unique circumstances. SOW services providers tend to put up similar resistance to MSP program management that staffing agencies did earlier on in the maturity of temp staffing contingent classification. SOW suppliers, especially high-end management consulting firms, have strong relationships high up in the hierarchy and their push-back tends to carry greater weight.

Most professional MSP companies have been offering SOW sourcing and invoicing services for about six years. And, while they have come a long way over these six years there is still much room for maturity in terms of process and technology. Most firms have hired experts in SOW sourcing to bolster their ranks, but having people who know what they are talking about is only one piece in getting the infrastructure right. Because precious few managers know how to write good SOWs in the first place, building the process has an educational component that is tricky when trying to woo reluctant managers with too much on their plates already.

In previous years, simply tracking milestones in an online application and paying out according to schedule was best in class; now, such an arrangement is more common and customers are continually asking their MSP/VMS partners to do more.

However, considering the relatively early stage of evolution souring SOW services within a VMS/MSP program, most of us feel a degree of impatience. And, considering the status quo most companies are still emerging from -- slow, manual processes devoid of data support and third-party benchmarks -- solution sophistication will likely continue to ease in slowly because the basic processing controls will be the basis of winning new accounts for years to come. However, there certainly are MSP programs that have moved beyond mere transactional administrative support. There are some companies, like NextSource, for example, that are willing to assume full responsibility for successful project completion -- acting as a prime contractor of sorts for certain IT-related programs. While most would not go this far, SOW drafting and negotiation, RFP bid response scoring, legal negotiation, and hands-on milestone tracking are being offered by leading MSPs.

HR can curb or even freeze employee headcount budgets but managers will bring on their resources as temporary workers. HR can restrict temp headcounts, and even limit the tenure they are permitted to remain on contract, but managers will bring on their resources as consultants on SOW contracts. Accordingly, non-employee resources are increasingly being assumed as part of "Plan A" when figuring out how to get things done.

If you are integrating SOW volume into an existing contingent workforce management program, past performance and the testimony of benefited stakeholders should help make the case for scope expansion. If you are creating a new program from scratch, beginning with SOW volume in scope is often met with resistance because there isn't an internal precedent to point to for assurance. However, if SOW consultants are already used as a prevalent alternative to temps, you may not have a choice.

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