Beating the Market

Client saves with rate benchmarking

By Dave Kain

I have been managing my company’s contingent labor program for 10 years. I have experienced reorganizations, significant acquisitions and divestitures, and management changes over that time. However, coming from the sourcing world there has been one constant throughout the life of the program: the pursuit of cost savings.

Sourcing historically will recognize improvements in process efficiencies, mitigation of risks, and improvements in quality, but unless they can be measured and drop to the bottom line they tend to be ancillary benefits.

In the first years of managing the program, I was able to demonstrate reductions in markups by moving to a managed environment. About three years in, I came to realize that changing statutory costs and market conditions were driving costs up, and it became more challenging to identify savings.

We considered measuring average bill rates, but realized that was as much a measure of the skill set mix in the organization as it was a measurement of actual changes in bill rates.

After a fair amount of thought, I concluded that the only solution that would provide year-over-year repeat able savings was effective rate bench marking. If I could demonstrate that my actual bill rates were lower than the rates paid by other companies with a similar size and skill set match, I could generate savings annually. The solution was not only repeatable; it automatically factored in pricing changes that were caused by changing demand.

The supplier connection. I also realized that however good I might think I was, I would not be able to significantly beat market prices. I knew I would have to make us an attractive client to the suppliers if I were to get them to offer the rates I wanted. If I could improve process efficiencies for the suppliers, making it easier for them to do business with us, and reduce the supplier base to drive more volume to the top performers, I felt I could beat market pricing by 3 percent to 5 percent. With that completed, the next task was to vet the strategy through the finance organization to confirm that they would approve this savings methodology.

Once approvals were received, and with the theory in hand, it was time to develop an execution strategy. We have one managed service program in place in the U.S. and a second in the U.K. I asked them to help flesh out the specific issues that needed to be solved. These were the larger issues:

1. Determining how to map our job titles to other companies’ job titles
2. How to map locations to market segments
3. How to make rate adjustments for the different market segments
4. How to select and evaluate data sources that would provide rate benchmark data
5. What weight to give each of the data sources
6. How to factor recruited vs. payrolled contractors

I was lucky that both of my MSP providers are part of large staffing organizations, so they both had a great deal of customer data available that they could aggregate, as well as subscriptions to services that also provided this type of data.

Having this data enabled us to measure our actual pay rates against the market quarterly. Over the last several years we have demonstrated that our rates are 7 percent to 8 percent less than market rates. We do recognize that these are influenced by the number of payrolled contractors on assignment.

In addition to the cost avoidance, this rate benchmark data also provided additional benefits. It allows us to more accurately evaluate and adjust our rate cards quarterly. It allowed us to change our rate card from a min-max strategy to a min-market average strategy. Although the change is subtle, we have found that it influences the target bill rates that hiring managers set for a specific assignment and which are provided to the staffing suppliers.

We have seen significant benefits from implementing a rate bench marking strategy into our program. The one overriding thing we learned is we never would have been able to implement the initiative, or realize the benefits we have, without the support of our MSP partners. Only by developing and maintaining strong partnerships with our MSPs has the program been able to realize any level of success that we have achieved.

Dave Kain is director, global sourcing at Thomson Reuters.