CWS 3.0: July 24, 2013

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Why Purchase Orders and Contingent Labor Just Don’t Mix

By Steve Knapp

One of the big questions during the implementation of a vendor management system (VMS) is whether or not to continue utilizing purchase orders (POs) from your procurement/ERP system for contingent labor. In many companies, policies have been created in order to ensure that purchasing done with company monies has the appropriate checks and balances. Compliance with Sarbanes-Oxley and separation of duties are often cited when implementing these procedures.

Here are two key questions to ask when implementing your VMS:

  1. Are POs necessary for contingent workers?
  2. Are POs appropriate for contingent workers?

As for the first question, whether POs are necessary, many stakeholders will answer with a resounding yes. Procurement and finance departments within large organizations often set a policy that purchase orders must be used in order to classify your buying as compliant. On its face, this seems sensible. However, it’s important to understand the root cause behind the policy.

 If it is to ensure compliance with checks and balances, approval processes and visibility into spending, a VMS does that. Within the VMS an individual contractor will be represented with a work order or assignment (or whatever your company calls it — maybe even purchase order) that provides a start date; end date; maximum budget; approval process; visibility into consumed budget; and transparent reporting to engagement managers, senior stakeholders, finance, suppliers and so on. So maybe the issue is a technical one.

Often your existing POs feed your data warehouse or business intelligence reporting. Or perhaps various dashboards or financial processes depend upon the information flowing from your current POs. This may be true, but as most sophisticated companies have discovered, if this issue is technical rather than political, there exists a technical solution to overcome this challenge. So perhaps your existing POs are not necessary if you can convince senior stakeholders that a VMS work order provides sufficient controls.

As for whether a PO is appropriate, there is probably more disagreement within organizations. A PO in theory ensures that an approval process is followed and that a certain maximum amount of money is spent. But does this work in practice? In some cases, it does. But far too often, POs for contingent workers are raised only after the person has been identified and the initial duration of the PO is too short. This leads to multiple POs being raised for the same worker with no clear link between them. Additionally, once contingent workers have performed services, they are legally required to be paid in most circumstances, yet the deductions from the PO don’t occur until the supplier sends an invoice well after the work has been performed, creating a time lag between services rendered and the receipt of service. All in all, utilizing your existing PO process tends to lead to a situation that is the opposite of total visibility and control. Worse yet, if you are implementing a VMS solution and wish to set up a parallel process whereby you maintain a PO in your purchasing/ERP system and a work order/assignment in your VMS, you need to develop a process to keep them in sync. Aside from being time consuming and expensive to do this, it’s sometimes not even possible.

Some systems don’t allow for amendments to the PO the way a VMS allows for changes to a work order/assignment. VMS systems have features that are used frequently in the continent world, such as effective dating of rate changes, multiple rate types, multiple cost codes and project codes and in the contingent labor world, rate changes (for statutory or non-statutory issues) occur frequently, end dates often change, cost centers and project codes change during the course of a single assignment and expenses are unpredictable. In short, your existing POs are not designed to cater to the dynamic world of contingent labor services. They were designed to handle goods rather than ongoing services, whereas VMS systems were specifically designed for services procurement.

So when you are implementing a VMS and grappling with the question of whether or not to use your existing POs in the contingent labor management process, take a moment to think about your decision. Are they necessary? Are they appropriate? Of course, even if you answer “no” to both questions, there may still be political or technical challenges to overcome. That’s fine, the right path is not always the easy path. You should take some comfort in knowing that most companies are struggling with the same question. Hopefully you will also see that POs and contingent labor just don’t mix, and will join the other top quartile companies in building a solution that is efficient, comprehensive and fit-for-purpose.

Steve Knapp is senior associate with Brightfield Strategies, which helps Fortune 500 companies with contingent workforce strategies. He can be reached at sknapp@brightfieldstrategies.com.

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