SOW demand is accelerating. Are you ready?
Staffing Industry Review
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Statement-of-work projects historically have been associated with large consulting, engineering, outsourcing, and IT hardware and software firms. But now staffing firms looking to offer higher value and more consultative solutions are becoming more interested in offering SOW services as well.
Helping drive their interest: A trend among contingent workforce programs of assuming management of these types of arrangements. Still, there are important pitfalls for staffing firms to avoid.
CW engagement managers have used SOWs for years, notes Stephen Clancy, senior director of contingent workforce strategies, knowledge and research at SIA. Now, as CW management programs mature and evolve, they are assuming ownership of these engagements.
“Overseeing SOW engagements enables CW programs to address multiple issues pertaining to their use,” Clancy says, such as scope and contract development, overall project management, and optimizing CW solution sourcing partnerships.
In fact, 63% of large staffing client firms’ contingent workforce programs now oversee some level of SOW spend, according to SIA research. That’s up from 42% in 2011. An additional 31% of programs report they are likely to explore encompassing SOW spend within two years.
And as they assume this responsibility, “CW program owners are turning to vendors with whom they have established partner-level relationships and have proven their industry and market expertise,” Clancy says. That growth in SOW business opportunities for staffing firms has been seen in several corners.
Balloon Payments
One feature of some SOW engagement contracts are back-end payments, says Scott Bedell, VP solution design at Beeline.
“It’s a pretty common thing to have a balloon or a hold back,” Bedell says. For example, a $1.2 million year-long contract could be divided into $100,000 a month; however, the client firm would pay just $80,000 to $90,000 per month with $60,000 to $120,000 being made in a final back-end payment at completion and acceptance of project.
“That is their safety blanket for the assurance of the completion of the project, and that’s always been a procurement tactic,” he says.
Because they are buying a result and not just hiring a temporary talent service, the buyer’s strategy is much more detailed and complicated than staff augmentation in terms of resource management, project planning, engagement, financial management and, ultimately, acceptance criteria of the delivered results, adds Stephen Clancy, senior director of contingent workforce strategies, knowledge and research at SIA.
Accelerating Trend
“It’s been a trend now actually for a few years, but more recently I think it has perhaps even accelerated,” says D. Hugo Malan, president at Kelly Science, Engineering, Technology and Telcom. “It’s a fundamental shift in how our clients are thinking about acquiring labor.”
In an SOW arrangement, a staffing firm bills its clients on a fixed-price basis for specific work or service milestones, as opposed to staff augmentation, where firms bill for the time worked. SOW arrangements can be made for a single project or for an ongoing process such as an IT help desk, for example.
“An SOW is a very flexible vehicle, and you can really create a solution that addresses the client’s pain points,” Malan says.
For staffing firms, the sales process and contracts are typically more challenging than those for staff augmentation — and there’s also the risk such contracts bring, as they require deliverables that must be met in a predetermined budget. On the other hand, they offer better margins for staffing firms. And SOW deals can bring a variety of benefits to client companies
One key benefit of SOWs is they can appeal to higher-quality talent. Assignments are more stable, so a staffing firm can offer more attractive benefits to its contingent workers such as healthcare. And working as a contingent in an SOW project can offer variety and other advantages. Some proponents point to more workers being drawn to this workstyle.
Some also point to another benefit: SOW engagements also empower the workers to use their knowledge, skills and experience to deliver results while not always being controlled by the client, as is the case in a staff augmentation engagement.
Talking About Quality
Quality of talent is another benefit for client firms, experts say.
Commoditization of staffing has led to competition among staffing suppliers to deliver people at a set markup, says Randall Hatcher, CEO of MAU, a staffing firm based in Augusta, Georgia, that manages industrial and IT SOW. This can create a race to the bottom with traditional staff augmentation and can affect the type of worker sent.
Some staffing buyers “just weren’t getting the quality of workers that they needed, and they weren’t getting the quality result that they needed,” Hatcher says. But with SOW, they can pay to get both.
And outsourcing to an SOW provider can enable companies to focus on their core products, he says. That removes the headaches of dealing with the staff turnover, potential higher costs and other management responsibilities for noncore services.
For example, in his book The Birth of a New Workforce, Hatcher discusses a paper manufacturer in the 1980s that faced high employment costs from noncore jobs, such as a material handler who was making $80,000 at that manufacturer. The executive wanted to focus on making paper, not figuring out improved ways of packaging, wrapping, sorting and shipping it. “‘We make paper, and I need to spend all my energy thinking about how we can make a higher quality product both faster and cheaper,’” Hatcher quotes the executive as saying.
And in roles that require ever-evolving and growing IT skills, engaging talent on an SOW can free firms from having to manage and hire full-time employees. Instead, they get a rotating workforce with the right skills at the right time, Hatcher says.
“How could you ever hope [to keep a full-time employee] technology savvy enough to keep up with the speed of change?” he says. “You just go out and buy what you need when you need it.”
Recent layoffs at the world’s largest companies, including Intel, Microsoft and Google, also points to another reason to use SOW engagements. As firms cut headcount, work still needs to be done.
This manpower shortage, combined with buyer firms becoming more mature in their ability to define what they want to procure and becoming better at articulating outcomes, is helping encourage SOW engagements, says Maurice Benz, VP of client services at VMS and MSP provider Magnit.
Staff Augmentation in Disguise
One issue that can come up when discussing SOW and the need for tracking it is “rogue spend,” where engagement managers at client companies use a SOW to engage bring in traditional staff augmentation under an SOW contract.
Adding Rigor
SOW spend running through Beeline’s VMS tool has grown about 6% per year over the last 2½ years, says Scott Bedell, VP solution design at Beeline.
As buyers become more comfortable with a tool for SOW spend management, they will run more spend through it by adding categories or executing higher-end SOWs, Bedell says. But they’re not necessarily coming out directly and saying they want to increase SOW spend management. Instead, they are trying to build up tracking in SOW spend over time.
They’re also focused on “having more rigor” to their SOW spend management processes, he says. They want more predictability, fewer change orders, tighter control over the delivery timeline and better control/visibility over the headcount.
“I think there’s still a lot of misclassified spend that should be staff augmentation but somehow is engaged on the statement of work,” Benz says.
In some cases, client firms putting restrictions on headcount or adding other constraints can prompt hiring managers to boost staffing by calling the role an SOW, he says. However, this practice can lead to significant risks to client organizations, such as independent contractor misclassification or ballooning costs by way of scope creep, as providers will charge extra for changes to project requirements midstream.
Such rogue spend definitely growing, SIA’s Clancy says. It may even be something as simple as a project that was not completed on time, leaving an engagement manager unable to continue using temporary workers because of company term limit policies. That engagement manager may see an SOW as a way to keep the workers on. This can lead not only to risk but to higher costs as well.
“What you’re also buying in an SOW engagement is the ‘risk of completion’ promise — you’re shifting that responsibility to the SOW solution provider — and they are also bringing methodologies and resources to meet that core SOW commitment,” Clancy says.
SOW providers typically bring strategies and processes for completing tasks that have proven successful elsewhere. This is also factored into the cost structure.
Some Things to Consider
Those risks and methodologies are important for staffing firms to consider when they are thinking about providing SOW as well.
Whereas client companies face the risk of scope creep adding to their costs, SOW solution providers have their own cost risks to consider. Because SOW deals are done at a fixed price when within scope, things can get unprofitable very quickly if someone gets in over their head. When getting into the SOW business, a staffing firm should pick areas where it has a lot of expertise to ensure the job can get done and at a profit.
“It’s great to grow revenue here, but you’ve got to show up with those methodologies, expertise and solution how-to,” Clancy says.
Still, SOW is an area to which more and more client firms are turning, and it can give staffing firms a “competitive account protective barrier,” Clancy says. If a client wants SOW solutions and a staffing firm can’t supply it, the client may go to another staffing firm that can.
SOW engagements typically have a more complicated sales process and contracts may be more complicated as well, Kelly’s Malan says. Salespeople need the right training to be able to have a conversation with clients about how SOW is beneficial for them. There’s the implementation as well.
“The challenge is you need to design and structure that project. You need to make sure you’ve got the right resources on the project,” he says. “You need to actually supervise and manage the project, and then you need to make sure that you’ve appropriately priced the risk so that you can actually still have reasonable economics.”
Kelly, which brands its SOW operations as statementworX, had to build up that business management capability to ensure everything was in place.
“Our clients seem to be extremely happy, but that was all stuff we had to build before we could be successful,” Malan says.
