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The importance of…managing demand

Posted on 12/01/2017 by Jon Milton in Category Managed Services

In the first of a series of spotlight articles on contingent staffing we offer some tips and guidance for organisations looking to gain greater value from their use of agency staff through the effective control of demand. In some cases this has seen us help our customers to realise savings of up to 75% on annualised expenditure, and is arguably the best way to reduce cost in this category. 

Agency staff are for many organisations an essential component of their workforce, providing amongst other things scalability, flexibility and expertise. It is very easy however to let the costs associated with them spiral out of control without an appropriate level of governance.

The agency staff cost profile

If you take a close look at the total charge rate for an agency worker you will see 5 main component parts:

       ·       pay rate  

       ·       holiday pay

       ·       employers national insurance

       ·       pension auto enrolment fee and

       ·       agency margin.  

Using a worked example of £15 per hour pay rate to the worker, and £1.50 in agency margin, the total cost for the worker equates to about £20.30 per hour once the statutory costs have been applied.

The agency margin element therefore constitutes a mere 8% of the total charge. 92% of cost in this instance is attributed to an agencies cost of sale.

Extrapolated over expenditure of say £10m per annum, you can see that the agency margin – the amount that is traditionally negotiated within a procurement exercise and then controlled by contract – is £800,000. So if you want to make 10% savings or more on total spend, you have to start thinking out of the box.

How this cost profile can get out of control

Temporary workers should be just that, workers that are engaged for a temporary period. Why then, is it that some workers are engaged for 9 months or longer?

We carried out some analysis for a manufacturing organisation recently that had had the same temporary worker engaged since 1981, and another since 1987. Whilst this is an extreme example, it is certainly not isolated. Carrying out the same analysis with a bank, we identified several workers who had been engaged for 3 years or more – the customer actually thought they were permanent employees!

Placing this into a financial context, let’s say that the £20.30 pay rate described above has been agreed for a 3 month business case. The cost for this, assuming a 40 hour week across 12 weeks is £9,744 (£20.30 x 40 x 12). Now let’s say that the same worker is in place for 12 months – the cost rises to £42,224 (£20.30 x 40 x 52). The difference of £32,480 therefore represents an eye-watering 330% increase to the committed cost.

Within your own organisation you may feel that this cost risk is under control, but is it really? Going back to the bank that we spoke with, they certainly did. Any PO approvals for <£50k financial commitment required executive board sign off. The majority of contractors engaged cost the business over £50k, but every time the PO approached the magical sign off figure, the cunning line manager would simply create a new PO, and then repeat the process ad infinitum. Approvals are in any case, only effective if someone is prepared to say ‘no’, and as discussed above, the real damage is done thought stealth.

How to take control back

Within our managed service models we approach demand management in two way: at a transactional level, and strategically.

Transactional demand management is as it sounds – best practice controls that place governance over the order approval process, channel opportunity to replacement channels (internal agency, employability provider and so on) and effectively manage tenure.

Strategic demand management refers to the analysis of usage and the implementation of affirmative action to eliminate waste, such as; challenging hiring behaviours; converting workers from temporary to permanent status where pertinent to do so; exiting workers that have become part of the furniture; reviewing controls, and changing these controls where required.

In order to implement both approaches, you will need:

      1. A robust system through which contingent staff can be ordered, time-sheeted and invoiced, with flexible approval mechanisms, order allocation controls, tenure controls and detailed management information capability. The system will also need to replicate your organizational structure so that the appropriate permissions and reporting are put into place.

      2. Access to an expert resource that fully understands the contingent recruitment market, can interpret management information and who can use their expertise to advise on opportunities to reduce demand.

      3. A managed supply chain, where the agency’s inherent interest in actively stimulating demand is firmly shackled and under control.

      4. An internal contract manager who is prepared to challenge line manager behaviour and implement change where a business case dictates.

      5. A firm, senior level mandate.  

The benefits

Working with our customers, we have helped them to realise up to 75% in savings on their total spend on temporary workers, and importantly, helped them to maintain their expenditure at this level without compromising the quality of worker provided.

For example, one of our local authority customers spent £12,500,000 in 2012/2013, and through the implementation of a number of the measures discussed above had reduced annualised expenditure to £3,500,000 by 2014/2015, a level which is still maintained in 2017.

More recently we have helped another customer to reduce their annual spend from peak levels of £18m to a steady £5.8 over an 18 month transition period. We have been repeated this pattern across a number of customers - £43m per annum to £19m, £34m to £18m, £7m to £3m and so on, albeit with different metrics applied and over varying time periods.

The overall opportunity within your organisation depend on your own circumstances and the tools available to you to combat demand effectively; either way, it is likely that if you spend in excess of a million on agency staff there will be money to be saved.

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