There is always tremendous interest and discussion among contingent workforce managers about the “right” way to price contingent labor. Data from Staffing Industry Analysts’ annual Contingent Buyer Survey show CW managers approach pricing in a variety of ways (see chart). What are the drivers that help make that decision?
Click image to enlarge.
Source: Staffing Industry Analysts’ 2012 Contingent Worker Buyer Survey
Bill Rate Model
In a bill rate pricing model, managers are often focused on three things:
- Allowing greater supplier flexibility in providing contingent labor to the company.
- Maintaining a higher level of consistency between the wage rates paid to the contractors working in the same job title.
- Strong market intelligence about the wage and bill rates paid to the skills required.
Let's go into these three in more detail.
Flexibility. Greater supplier flexibility can come from allowing the supplier(s) supporting the contingent workforce program to average out the margins received across a larger number of contractors. Sometimes the supplier will receive a tight markup in order to bring in a resource at a higher wage but within the bill rate established, and sometimes the supplier will see a higher markup when candidates are more broadly available and wage is not as difficult to negotiate. In the end, such a pricing model can be beneficial to the buyer/supplier relationship, giving the suppliers enough flexibility to engage the market for CW labor at an acceptable margin for the program as a whole.
Wage consistency. By setting and holding to a bill rate for all suppliers, there is more comfort in knowing that the range of pay rates between like skills is relatively tight, and therefore the wages paid are typically closer together. As contingent workers share more and more information with each other either in person or via social media, pay parity can have a important impact.
Benchmarking rates. If the skills being acquired are more commoditized and readily available in the marketplace, such as call center skills and help desk skills, it can be advantageous to utilize a bill rate pricing model. Careful and consistent review of the changes in the local market environment is needed, as new buyers for the same skills or reduced local demand can both have an impact on the required bill rate for a skill.
According to the 2012 Contingent Buyer Survey, 64 percent of buyers use a “pay rate plus markup model,”making it one of the most common pricing models in the marketplace. Often companies that use markup pricing models in order to:
- Control the supplier cost model at the transaction level.
- allow for wage fluctuations where a wide range of wages for a single skill may demand a broader pricing model.
Cost control. Markup pricing models can give buyers a strong sense of control over the purchase of CW labor. Establishing a set markup means that the suppliers will not gouge the buyer in any single transaction. When using multiple suppliers to support the CW program. this can enable the buyer to obtain the resources needed with the comfort of knowing that a limited amount of the bill rate is going to the supplier.
Wage fluctuations. For high-end talent, such as IT, there can be a wide range of wages for what appears to be a single job title. However, job titles can often be misleading and not correctly identify the actual skills required for the position. Other factors such as the assignment duration, assignment location, travel requirements, complex/multiple skills requirements, specific industry knowledge or language speaking demands can all impact the true “cost” of a CW placement. When a company has a wide range of skills required and few contractors performing those roles, a markup model may be the way to go.
These are just some of the factors that come into play when deciding on your CW pricing model. As you evaluate your program, find those internal and external drivers that have the greatest impact specific to your program, and look for a pricing model which when implemented best fits your needs and delivers in terms of cost, performance, and delivery.
Kirk Reade is a senior associate with Brightfield Strategies, which helps Fortune 500 companies with contingent workforce strategy initiatives. He can be reached at email@example.com.