The rise of the contingent workforce

The use of third parties to recruit and manage temporary and contract is on the increase. Kevin Barrow outlines sometimes some of the issues procurement directors need to bear in mind if they are planning to take this course.

From 2000 to 2004 there was an increasing move from 'spot recruitment' of temps and contractors to a more service-focused model of contingent workforce management. Many businesses moved away from using staffing companies simply to fill their permanent and temporary vacancies on a reactive basis. Instead, they began asking staffing companies to manage their contingent workforce. Some have even gone a step further by outsourcing responsibility for their entire temporary and permanent recruitment process.

The reasons for businesses relying increasingly on contingent workers are clear: companies do not want to commit to the costs and responsibilities of directly employing staff to resource what are often temporary or highly specialised requirements. They can make substantial savings by using a flexible workforce that can be turned on and off at will and does not increase headcount. They can also achieve significant savings by consolidating and rationalising their often disparate supplier base and exploiting bulk purchasing power.

In addition, a contingent workforce is also often seen as a means of avoiding some of the costs and risks that are associated with the use of permanent workers, although recent Court of Appeal decisions have called this practice into question.

Finally, contingent workers may be the only source of some types of highly skilled and specialised workers. Increasingly, high-quality 'knowledge workers' aspire to operate as independent consultants rather than employees (and the demise of company pension schemes has reduced the attractiveness of long-term employment to these workers). Using contingent workers can also help companies to roll out time-critical projects without having to commit budget to more long-term employment and/or training costs.

But whatever the drivers, decisions about how to engage and manage contingent workers will have an impact throughout the organisation that uses them. If you are a company looking to fully or partly outsource the management of its contingent workforce on a more strategic level, for example by using a managed service provider or MSP, you should consider certain issues.

First, you must ensure that the business, including all stakeholders, understand and support any proposal to appoint an MSP. Failure to secure buy-in at an early stage can lead to what has become known as 'MSP leakage', where hiring managers ignore the new purchasing structures and continue to use their own favourite suppliers. This in turn can damage pricing structures agreed with the MSP for example volume discount arrangements.

Sufficient time must be allocated to allow for full due diligence and scoping and input from the various business units. Thereafter, transition time should be factored in to allow the incoming supplier to take over from either an outgoing supplier or the employing organisation itself. Due diligence can take quite a while, as contingent workers have historically been an archaic and fragmented area of supply for many companies. The reason for this is that there are unusual tax/litigation risks involved, and that no-one ever seems to know where all the existing contracts with existing suppliers are, if they exist at all.

Much time and effort will be spent on choosing preferred suppliers and/or the MSP. The supplier needs to offer the right price and quality combination, while at the same time managing risks and offering good and compatible technology. The suppliers' experience should be checked and site visits carried out.

The scope of the project in terms of numbers and types of contingent workers required should be carefully considered, especially if it is likely to extend beyond the UK or into other areas of HR services, such as payroll and internal redeployment.

The precise nature of the skills required should also be taken into account. You may not need to rely wholly on a contingent workforce. And it should be borne in mind that, like all outsourcing exercises, there is the risk that using contingent workforce will erode your existing skills base. Another consideration is the level of liability for employment and tax risks that staffing companies are expected to bear, and the solution is not always straightforward. Blanket indemnities and insurance are rarely the whole answer.

In addition, if managers ignore the new purchasing structures and use their favourite suppliers, it is likely that there will be inadequate risk mitigation strategies in place for tax and employment claims purposes.

Improved service levels and pricing are quite often drivers for taking on a new preferred supplier. Difficulties arise, however, when there is a failure to baseline current service levels and costs in relation to contingent worker supply. This will cause problems when measuring and rewarding improvements (in a shared savings deal).

If there is an outgoing supplier, it may be subject to an exit plan. In any event, migration of existing arrangements will have to be planned and managed carefully to minimise disruption. Consideration should be given to whether the existing work force will, if necessary, be transferred to the incoming supplier. If so, the way in which this might affect the supplier's pricing and the way the handover takes place, should be considered. Personal data will be transferred between the end user and the staffing company and end users need to ensure they have consent from those concerned to allow this to happen. The end user also needs to make sure it receives formal assignment of intellectual property that is generated by a contingent worker. It is often forgotten that a company has no automatic legal ownership of a contingent worker's work.

There are two common ways of structuring commercial arrangements for the supply of contingent workers. In a 'master vendor' arrangement, the MSP aims to fill the vast majority of the end user's vacancies with its own candidates or those of its sister companies. In the 'vendor neutral' model, the MSP selects candidates from a panel of preferred suppliers, giving each, in theory, an equal opportunity to fill the vacancy and helping to ensure the end user gets the lowest rates. Note that obtaining independent benchmarking data can be notoriously difficult in the area of contingent worker rates, hence the attraction  of the 'vendor neutral' model of supply, in which the market sets the rates. In both arrangements the supplier appointed as MSP essentially sits between the end user and its preferred suppliers and manages permanent and contingent worker requirements on the end user's behalf.

There are also, broadly speaking, two ways of structuring the legal arrangements between the end user and the suppliers. In the 'principal' model, the end user enters into a framework agreement with the MSP. The MSP then enters into direct contracts with each of the suppliers, usually preferred suppliers, for the onward supply of services to the end user.

The benefit of this approach, from the end user's point of view, is that there is one central point of contact, so less bureaucracy is involved. It also outsources risk and liability to the MSP. The drawback is that the end user can become totally reliant on the MSP which can be risky particularly if disputes arise with the MSP while it controls all contracts with suppliers. And there is the risk that the MSP through which large sums will be flowing, becomes insolvent.

In the 'agency' model, the end user retains a direct contractual relationship with each of the suppliers, but appoints the MSP to act as its agent in relation to the management and administration of those third-party suppliers (usually on a vendor neutral basis). Provided the scope of the agency relationship is properly defined and the end user's expectations of the MSP are made clear, there should be little difference in the operation of this model to the principal model.

The legal advantage of the agency model from the end user's perspective is that the risks are spread across various suppliers. In addition, the end user retains control over payment arrangements and can be surer that contractors will be paid. Importantly, the suppliers' contracts are not affected by the MSP's termination, which means that the end user can appoint a replacement supplier without having to novate contracts across. This prevents an MSP from holding the end user to ransom at termination.

The disadvantage of the agency model (especially when it is linked to a vendor neutral approach) is that the supplier will probably not wish to offer quite such good service levels and financial terms, although this is always a matter for negotiation.

Kevin Barrow is head of the HR outsourcing group at solicitors Tarlo Lyons