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Are you paying too much for directly sourced contingent workers?

Sep 11, 2019

Alex MacKenzie
Alex MacKenzie

Engaging temporary talent can be a risky but rewarding business for companies who operate a contingent worker program.

Organizations that are tapping into the temporary talent pool have unprecedented access to employing niche talent, with a current pick of 42 million independent workers in the U.S. alone. And many employers are turning to direct sourcing to align recruitment efforts with their cost saving objectives -- so much so that it comprises 50 per cent of an organization's workforce.

Direct sourcing occurs when an organization acquires talent through internal recruitment efforts rather than through an external staffing or services vendor. It can be accomplished formally through an internal recruitment program or informally through the efforts of individual hiring managers. Yet, many organizations aren’t prepared to effectively manage the costs of a direct sourcing program.

The numbers may surprise you.

According to SIA’s biannual research in The U.S. Gig economy – 2018 edition, contingent work in the U.S. accounted for $864 billion in 2017 (a market growth of 4 per cent on annualized basis), with $43 billion spent on directly sourced contingent workers.

And payrolling/payment services are one of the busiest spaces in human capital management.

Moreover, a recent contractor pay rate study conducted by Procom finds contractors directly sourced through the efforts of a hiring manager were paid (on average) a premium of 14-18 per cent over those sourced through a staffing or services vendor.

Why is this happening?

Informal programs are usually managed by a hiring manager who sources contingent workers directly and often at a higher rate card than necessary.

When directly sourcing talent, it’s common for an individual hiring manager to already have a particular candidate in mind (a referral from someone currently on the hiring manager’s team or someone who has worked for that hiring manager in the past), and is more interested in quickly getting a resource in place, rather than opening the direct sourcing process to competition and potentially lowering the rate of pay for the selected contingent worker.

In most cases, the only pricing information available is their knowledge of what they might have paid for similar skills in the past (usually the bill rate) and what the contractor is asking to be paid. Employers familiar with the recruitment process are aware that there’s almost always a difference in rate between a candidate’s initial ask and what the candidate will accept, and being prepared to negotiate is critical to saving on these costs.  

When engaging directly sourced contingent workers, it's important to consider:

1) Are the hiring managers negotiating these rates?
2) Are there competitive pressures?
3) Who will have the upper hand during the negotiation process?
4) How many hiring managers are prepared to call out the difference between a bill rate and a pay rate?
5) How many hiring managers understand that they should be negotiating contractors to the pay rate rather than the bill rates?

The benefits of partnering with a preferred vendor
To compliment their current direct sourcing efforts (or to implement a formal program), competitive organizations will engage a preferred vendor/staffing partner to help manage the complexities that come with a directly sourced contingent workforce.

A good direct sourcing program should place similar compliance and rate rules on both sourcing channels, so that they’re aligned with the organization’s business strategy, deliver strong procurement value and meet similar risk management imperatives.

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