Last year, we had to cut back on contingent staff dramatically, while asking our suppliers to reduce rates and cut worker pay rates. This year, there is a continued expectation for saving money, but I'm concerned that we have cut as much as we can. We are seeing an increase in usage and I expect that to continue for some time, so I'm concerned that last year's price cuts may have an overall negative effect on our program as the competition for talent increases. How do I know when my rates are too low?
Contracts and pricing strategies are favorite topics of mine. I speak to 30 or 40 contingent workforce managers a week, and the number one concern in the past year was, "How can I save money?" I am excited to be addressing my favorite topic, but at the same time, my warnings about the consequences of too-drastic cost reductions often fall on deaf ears. Don't get me wrong; I like helping other CW managers save money, but too often, short-term cost savings can have negative consequences both in the near term and long term. It's like squeezing a balloon.
You asked: "How do I know when my rates are too low?" Here I will discuss just a few things to look out for. Many managed service providers and vendor management systems have some ability to track these metrics.
Time to Fill
There are multiple ways a company may manage and track time to fill -- as a percentage of requisitions placed to those received or days from the date a requisition is released to the date it is filled. For the sake of this discussion, I will look at days from release to placement. While I may have said in the past that fill rates may not be effective for contract management in an SLA given all the moving parts, it is often, nonetheless, a fairly good indicator of program performance overall. Seeing a significant increase in the time it takes to fill a requisition may be your first indicator that your rate card may be too low.
Early Voluntary Terminations
This metric measures how often contingent workers choose to leave an assignment prior to the scheduled assignment end-date. It is most often a relatively low number, usually significantly less than 5 percent.
In a previous column, I discussed the concept of the "wage curve," a mathematical formula that ties the unemployment rate to changes in pay rates (Contingent Workforce Strategies, May/June 2009). What the wage curve states is that there is a mathematical correlation between the unemployment rate and wages: when the unemployment rate goes up, wages go down and vice versa. So, as unemployment goes down in your area -- even for just a given skill set - you should see incremental increases in the underlying pay rate.
When this happens, your current contingent workers will start to see that their newer colleagues may be getting paid more or that there are opportunities that are more lucrative than their current assignment. As a result, they may choose to leave before the expected end-date. If you start to see increases in your early term rates, you may want to look at your pay rates against the current market conditions. This usually is one of the best indicators that your pay rates may be too low and need to be revisited.
Candidate Submittals to Placements
Tracking the number of submissions against placements -- which we highly recommend -- is often a very good indicator of how well your supply base is performing. A high ratio of submissions to placement would suggest that your vendors are not paying attention to requisitions or your job descriptions are poorly written.
For the purposes of this discussion, though, any significant changes (up or down) in your vendors' submittal rates warrant further scrutiny. While a reduction in the number of submittals is an obvious indicator of poor performance and by extension possible poor incentives, an atypical increase is also a good indicator that your rate structure may need to be reviewed.
This may not be so obvious, but when you consider the process by which companies recruit and place candidates, it makes perfect sense. The process by which recruiters find candidates is called "sourcing" and it is these types of activities that make for the basis for a staffing business.
Most staffing firms place candidates in one of two ways. In the first way, you'll submit a requisition to the firm for your job opening. The firm's recruiters may go to existing networks, troll contacts or look at previous placements to identify the appropriate candidates. They may conduct pre-interviews and testing in an effort to keep the number of submittals low. This is the preferred method.
Recruiters are often paid on commission and the commission is often based on the profitability of the contingent placement. When you consider that good recruiters are hard to find and are compensated very well, it doesn't take a rocket scientist to determine that if your placements have low profitability, the recruiters are not going to be inclined to work their hardest to source you the best candidate. They are still expected to perform within your program and your SLAs may require that they respond, so they may decide only to send you candidates out of their database.
All staffing firms keep a database of available candidates and manage a proprietary database of thousands. In the past, it was the depth of this database that separated the successful firms from the unsuccessful, but now, with the advent of the Internet, these databases are less of a competitive differentiator. There is nothing inherently wrong with sourcing from an internal database, but often the candidates sourced in this manner may not be as effective of a match as those candidates sourced specifically for your unique requisition.
Additionally, because it is as easy as clicking a button to send a candidate from a database, a recruiter may choose to send multiple candidates in the hope that one of them will hit the mark. This process is called "shot-gunning." It's much easier for recruiter to shotgun a low profitability placement with the hopes of getting the candidate on site.
So, if you have a low-value placement or, your contract is not very profitable for the staffing firm and the recruiter, they may choose just to send a bunch of candidates straight from the database, which would translate to a high submittal-to-placement ratio. Therefore, if you see significant changes in this ratio, you may need to re-examine your rate structure, specifically as it relates to gross margin or other metrics of vendor profitability.
There are dozens of ways in which companies can look to save money, and as always, it's a good idea to make sure that you have market-competitive rates. You want rates that provide appropriate levels of savings and quality, while at the same time ensuring that you properly incentivize your providers to deliver the best possible candidates and service. Savings and quality do not have to be mutually exclusive, and by managing your program with the success of both your internal and external customers in mind, you can best ensure long-term success.
Bryan T. Peña is director of Contingent Workforce Strategies and Research at Staffing Industry Analysts. He can be reached at bpena@staffingindustry.com.
