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Contingent workforce

Businesses have dramatically increased their use of contingent workers over the past decade as they struggle with rising labor costs and the need for a workforce that can quickly adapt to market conditions. Contingent workers are people who are not on the company payroll but provide services to an organization, such as contractors, consultants, temps and advisers.

Even in today’s job market, there is a shortage of workers with critical skill sets. This has resulted in a steady, year-over-year growth in the size and cost of the contingent workforce. As the baby boomer generation (about one-third of the U.S. workforce) is starting to retire, companies are bridging the critical skills gap with more contingent workforce. Clients regularly report that the contingent workforce is increasingly being used for strategic reasons, such as supplementing internal talent capabilities as well as for operational reasons such as increasing the flexibility and responsiveness of the workforce. Some large companies estimate that up to 30 percent of their procurement spend goes toward contingent workers.

Other organizations have seen the ranks of contingent workers swell so much that they may represent a larger percentage of the workforce than ”regular” employees. Some of these organizations are overspending to use contingent workers in roles that they could fill at a lower cost with qualified talent elsewhere in the marketplace. The challenge organizations face here is understanding what skills and services contingent workers provide and helping managers make the applicable/specific fact-based decisions on whether to fill a role or skill need with a contingent worker or a full-time employee.

Different cohort, different approach

Although the contingent workforce segment is growing in importance and its size, many organizations may not be skilled at managing it effectively. Major challenges include the lack of an integrated workforce management strategy, ad hoc (and at times high-risk) managerial behavior, poor data management, and inadequate technology. These shortcomings can expose companies to significant business, financial, and public relations risks. Additionally, the lack of an integrated solution across these areas can inhibit an organization’s ability to make decisions about what type of talent to deploy where.

As more companies understand the issues associated with contractors and manage them well, they can benefit from improved operational performance, lower labor costs, informed staffing decisions, more organizational flexibility, and stronger HR alignment with business objectives. This gives them the ability to source and procure contingent workforce talent that is high-quality, aligned to the specific business needs, and available “on demand” to meet immediate talent needs. Managers can make good talent decisions at the time of need, and the processes and systems are in place to manage and mitigate the risk of contingent worker administration across the worker lifecycle.

Conversely, poor management of contingent workers can negate many of their potential benefits. One risk can be legal and regulatory challenges when governments pursue companies that misclassify contingent workers. This can lead to significant penalties, fines, and legal costs. Another potential downside is when managers use the contingent workforce to work around headcount and labor spend controls, driving increases in baseline costs with no discernible increase in value.

In addition, the expanding use of contingent workers can expose companies to competitive risk from the loss of trade secrets, intellectual property, and organizational knowledge. When these workers support business critical functions and interact with customers, the lines between employees and the contingent workforce blurs.

The contingent workforce issue is particularly timely given current market and regulatory conditions. The dynamic nature of marketplace conditions and the talent market are leading organizations to rapidly increase their use of contingent workers so they will have the flexibility to respond as market conditions quickly change, and to help secure talent that is otherwise challenging to source. Additionally, the global regulatory environment is tightening: Governments are investing more in regulatory and investigatory efforts to crack down on companies that may be improperly categorizing workers from a tax perspective or exploiting the “grey space” in labor regulations.

Vision for getting it done

Managing these risks and truly taking advantage of the opportunity requires an enterprise-wide approach based on broad collaboration across the company, with programs targeted to specific business audiences. Leading businesses today are adopting these kinds of broad strategies. They generally involve creating standardized, cross-functional business processes, policies, and roles across business units and regions, supported, where possible, by a single information technology platform. By involving the various internal and external stakeholders in the HR-driven management of this workforce, organizations can mitigate the risks and create the applicable model for ownership and accountability. These internal stakeholders include HR, talent, strategic procurement, finance, IT, security, and real estate, while the external stakeholders may include HR outsourcers, contingent worker firms, and external advisers or consultants. Companies can design their approach to bring transparency to their contingent workforce spend and management, and use the internal processes and technologies in place within the organization.

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