Updated: Jun 20, 2019
There are several terms for it:
· Tail spend
· Rogue Spend
· Small vendor management
There is a simple definition for it: The Pareto Principle. The Pareto Principle for contingent workforce states that 80% of spend is with 20% of your suppliers. As such, 20% of spend is with a large set of or about 80% of your suppliers.
Contingent workforce programs must be at a specific level of maturity and user satisfaction to manage this Rouge Spend as they are often unique situations or suppliers. About six years ago, while supporting a premier business-related social networking client, a colleague was upset by the large group of suppliers with very little spend billing directly outside the program. The client wanted her to focus on servicing the core suppliers and the hiring managers that were dissatisfied with the level of support. I understood that concept the client was trying to implement. Several years prior, I had launched a program at a nation-wide telecommunications client. By year two, we had that program stabilized, and we had great adoption from core suppliers, hiring managers, and executives. We then took on Rouge Spend. I scoured accounts payable reports for the words: staffing, personnel, LLC, individual’s names, and even googling the ones I did not know.
Once identified, we would deploy change management through ongoing education of stakeholders and communications with the suppliers. Gaining buy-in from hiring managers was easier as we had proof points, executive support, and successes in accordance with the maturity of the program. However, gaining supplier buy-in was like hitting a brick wall. To break through that wall, these suppliers need to understand the objectives for the customer and the benefit to their organization to join the program. When engaging suppliers, it's critical to understand their business model. This is a far superior position to communicate the benefits of the supplier engaging in the program. The adage of WIFM – What’s in it for me?
For Independent Contractors, you are first validating to ensure they indeed qualify as Independent Contractors. They are becoming familiar with this process as news of significant fines to large organizations regularly make the headlines. But what’s in it for them to go through the process of being validated and paid through your program? Most often, it’s a streamlined and faster payment process. A fundamental problem for freelancers is getting paid. A study conducted by PayPal last year showed that 58% of freelancers had experienced issues with getting paid. The study focuses on Southeast Asia, but the freelancers union and the “Freelance Isn’t Free,” bill in New York City shows that it is an issue in the United States as well. A secondary factor could be their redeployment if your VMS technology is configured to create talent pools. They could be called upon again and again to provide service to this client, but I would focus on the payments.
For Specialized Staffing firms, they may be familiar with formalized contingent workforce programs and MSP, but they often elect not to participate in the program either at their discretion or based on direction from the hiring manager. The benefits for them may be an increased business. While specialized, there could be an opportunity for them to either partner within that client program or if an MSP within other programs to earn more business. So be flexible on your contractual terms as specialized firms often invest in training for their workforce so key terms of a standard staffing agreement may not apply to them. They are not likely to accept a 90 or 180 conversion period. So being cognizant of their requirements is required to gain agreement.
Additionally, in this bucket of specialized staffing firms are those with access to specific workers. They may own the visa of an individual worker, be able to facilitate a visa or some other benefit to your organization. Knowing their workforce will help you realize how they benefit from the program.
Another group is small consulting firms where there are just a few, often defined as “less than 10,” total employees. They have one insurance policy that covers all the partners or employees of this organization. These small consulting firms often specialize in a specific niche of your customers business. The benefits for these firms could be a combination of Independent Contractors. Where a small business would certainly prefer consistent, dependable cash flow, specialized firms might prefer you redeploy their talent into other areas of that customer, or in an MSP where you have customers in a similar line of work.
The final bucket is staffing suppliers. These suppliers have the same business model as your preferred supplier, but for one reason or another, they are supporting your hiring managers outside of your program. When looking at these suppliers, it's critical to remember that while they represent a small amount of spend in this program with this client, they likely can support more. Gain information on their relationship with the manager(s) they are supporting, and why are they engaged? Is it for just that one worker or did the manager go around the process because they had success with them filling roles recently? If they have been successful, consider offering them a probationary period of 90 or 120 days as a Tier 1 supplier. See if they can augment your current supplier list. If given a fair shot to compete, are they likely to sign up for the opportunity with the same terms as your preferred supplier base. Alternately, if they made one placement twelve months ago and haven’t used to source since, look to the contract terms they have in place now. Is there the possibility of converting the worker to full time or transitioning to an approved supplier?
Getting controls and visibility to this population helps extend the benefits you are already receiving in your contingent workforce program. Key amongst them: reduction of risk. The Independent Contractor population and small suppliers pose worker misclassification risk. All categories of the Rouge Supplier may not have insurance at compliant levels or at all. Are your Rouge Suppliers completing the required on boarding documentation or process for access to your systems or equipment? Tracz Consulting would love to partner with you on reigning in your Rouge Spend. Schedule a consultation today to see how we can help!