A woman is at the tailor, having a suit fitted. Upon taking measurements and inquiring about her preferences, the tailor pins and hems the suit according to the woman’s taste. It now meets all of her criteria: it is the right style, fabric, color and fit that the woman sought all along. Satisfied with the way the suit looks, the woman approaches the cash register to pay for the service. But, as she reaches for her wallet she hesitates. “I want to get the best value possible,” she explains to the salesperson,” so I need to know: how much do you charge for each hem or pin line? What is your markup on fabric and thread? Your answer will help me determine what I think is a fair price to pay for this fitting"
This particular situation may seem unrealistic for a suit fitting. However, many companies procure their IT staffing services in a similar fashion — to their disadvantage. By setting pay rates and restrictive limits on markups or margins, these companies wrongly view talent acquisition services, and the contingent workers involved, as if they were standardized commodities. The reality is that talent is not a commodity. Thus, when seeking to find the “right” person for a job, there is no “off-the-rack” solution.
The reality is that talent is not a commodity. Thus, when seeking to find the “right” person for a job, there is no “off-the-rack” solution.
There are four primary ways companies set limits on their vendors’ prices:
- Setting bill rates
- Setting pay rates
- Setting mark ups (the percentage difference between the actual cost and the selling price)
- Controlling the margin (the percentage difference between the selling price and the profit)
The idea seems simple enough: Specify bill rate, pay rate, mark up, or margins for each skill set category needed. Limits will be set to achieve the maximum degree of vendor competition based on detailed analysis of rate information and fair market values. Vendors can then choose to engage and compete, or walk away.
Like most things in life, however, procuring IT staffing services is not that cut and dry.
The Grey Areas
- Over-Zealous Providers: Organizations ask their staffing partners to do the nearly impossible. For example, Analyst International, a staffing firm ranked 12th in the industry, recently told shareholders they were going to walk away from $80 million in business with IBM. The staffing firm cited a 4 percent gross profit margin as the reason for its withdraw.
- The Location Factor: Often location is not a consideration in rate comparisons. Consequently, price limitations for key skill sets may fail to account for different supply and demand dynamics in various local markets. Staffing providers, whose sole purpose is to know the local labor markets in which they operate, are often closer to the truth when it comes to understanding fair market rates for skill sets in various locations.
- Vendor Incentives: While a company may deem a rate “fair,” it may not be very profitable for a vendor that is recruiting on multiple client opportunities. As a result, vendors will send their best candidates to the customer that allows the best margin. If another company (or competitor) is willing to pay more for top-quality talent, companies with price restrictions can find themselves selecting consultants from a pool of average consultants. Additionally, by squeezing margins for staffing firms, IT staffing buyers could be pricing themselves out of contention for quality consultants all together.
- Consultant Incentives: Consultants ultimately decide which job offers they want to accept. As is the case with vendor incentives, consultants will—more often than not—opt to work for a company that’s willing to pay them more for the value they bring.
- The Role of Procurement: Often the Procurement department is responsible for limiting vendor prices. While this arrangement can help companies achieve cost-savings, it may not help companies attract and retain the highest-quality resources. The truth is that Procurement departments are not typically measured based on project success or on time completion. Because Procurement is often measured on how much it saves the company money, it is more likely to set conservative prices—even if that means negative (difficult to measure) consequences in terms of productivity, retention and market competitiveness.
- The Nature of a Buyer / Supplier Relationship: What typically stems from a job well done? More work. Given this phenomenon, staffing vendors that want to gain customer loyalty and grow market share will avoid setting the highest possible margins. Most believe that if they can provide a quality resource that works within a client’s budget and helps the client meet project deadlines, they will keep their customers and win even more business in the long term.
Shopping for talent is not the same as shopping for a commodity good. There may only be one or two people in a local market that can successfully fill a role in a particular company. Thus, to obtain the right employees necessary for critical IT undertakings, staffing buyers should ensure their vendor management system fosters healthy competition, without pricing their organization out of the market for top talent.