The Dynamics of Contingent Labor

By Justin Falgione

Contingent labor (IT and other white-collar positions, as well as industrial and clerical positions) will incur continuous cost pressure throughout 2007. Other services that contain a significant labor component (i.e. facilities services, professional services) will experience pricing pressure as well. There are a number of factors that will contribute to this dynamic, including the following:

Continued robust demand for contingent labor in all labor categories, as companies continue to utilize a temporary workforce to manage fluctuating or seasonal demand, complete discrete projects and fill positions where they are reticent to commit to full-time hiring.

The slower economy between 2002 and 2005, which resulted in a number of workers receiving pay increases that essentially equaled the increase in the cost of living, but did not provide for a significant amount of incentive-based raises. As the service economy improves, workers (especially higher performers) will require pay increases in excess of the cost of living to be retained, and providers will need to pass these costs on to their customers.

 The unemployment rate in the United States, which remains well below 5 percent and should remain at or below this level for most of 2007. This will continue the supply/demand imbalance in the contingent labor industry, where demand remains high, but the number of unemployed personnel to fill contingent employment requirements remains limited.

 The anticipated increase in the federal minimum wage rate by the new Congress early in 2007 from $5.15 to $7.25 per hour. The actual change in the hourly rate will not immediately impact many service providers, since they are already paying in excess of this rate in many service categories. However, at some point they may be competing with other services sectors (such as retail, food service and hospitality) for employees once those employers increase their wages as mandated by the minimum wage legislation.

 A continued shortage of IT contingent labor in a number of major metropolitan areas, as there is continued demand for Oracle and other enterprise resource planning (ERP) programmers, Web programmers, networking and communication analysts, and application developers.

These factors will necessitate that procurement and human resource personnel take certain steps to ensure a consistent supply of contingent labor at “market” rates. These strategies include:

 Ensure that all contracts with contingent labor providers enable transparency to all mark-up components to: a) avoid excessive overhead or other cost allocations; b) quantify costs associated with recruiting in a tight job market; and c) provide visibility into the state and federal unemployment cost mark-up components, which could fluctuate as the unemployment rate increases.

Establish longer-term relationships with preferred providers to ensure proper leveraging of contingent labor volumes and a continuous flow of qualified candidates. Keep in mind that more than one preferred provider may be required for each labor category (e.g. financial, clerical, etc.) as the supply of contingent workers remains constrained.

Implement management systems and other internal processes to facilitate proper contingent labor demand management. As the use of contingent labor remains high, these systems will limit the inflow of temporary workers to actual organizational requirements, and make sure that assignments remain within the intended timeframe.

Certain labor categories in Western Europe are also anticipated to incur significant cost increases due to a shortage of qualified personnel. These categories include accountants and information technology labor (mostly programmers and developers) as IT investment continues its rapid growth.

The use of contingent labor is expected to continue to increase over the next two years, and the low unemployment rate in the United States will continue the supply/demand imbalance experienced over the last 12 months. It will be important for organizations to apply strategic sourcing practices for all labor and labor-based categories to maintain cost control, and to ensure that contingent labor remains an effective tool to balance labor costs with variable demand for the organization’s products and services.

About the Author: Justin Falgione is a senior category manager in the Global Services Organization at Ariba, a global provider of spend management solutions.

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