Greasing the Contingent Labor Procurement Process

Going online to source its contractors and consultants, Shell Oil division sees process, unit price savings

Tempe, AZ — April 2, 2003 — Shell Oil Products U.S., like most businesses these days, is working diligently to reduce costs in all its spend categories, but one area where the company has focused in particular of late is contingent labor. An analysis last year indicated that the company was missing out on potential cost reductions in this category, but now, by implementing a new process based on an online tool for procuring and managing contractors and consultants, the company is looking to strike big savings on the millions its spends every year for contingent labor.

The Houston-based U.S. oil products subsidiary of Shell Oil Company, an affiliate of the Royal Dutch/Shell Group, markets a variety of petroleum and other products to consumers and businesses in a variety of sectors, including through the company's network of nearly 9,000 gas stations in the Western United States.

Last year, the company took a hard look at how it handled contingent labor — principally for professional consulting, information technology, accounting, temporary and administrative services — and concluded that there was room for improvement in how Shell procured and managed this area of its spend, according to Kim Chapman, contingent workforce & discontinued operations team leader for Shell Oil Products US. "We found that it wasn't being managed well within the company from a process point of view or from a strategic sourcing perspective," explains Chapman.

In fact, the company found that different business units within Shell were using different, typically manual processes to manage varying sets of contractors. The company was missing out both on the potential unit cost savings that could be achieved by concentrating its spend on fewer suppliers or by using more competitive procedures to award contracts, and on the possible "soft" costs savings that could be achieved by using new technologies to e-enable its contingent labor processes.

In a bid to capture some of those potential savings, Shell undertook an internal study that looked at what other companies were doing in this area to improve their processes, what technologies were available in the marketplace to automate the appropriate processes and what overall solution might best suit Shell's requirements. At the end of the study, the company came up with a game plan to improve its strategic sourcing for contingent labor, to change its controls internally and to identify an internal purchase-to-pay process that could serve as a standard for Shell's managers to use in hiring contractors and consultants.

To identify the technology foundation for its contingent labor initiative, Shell went through a competitive evaluation of a dozen solution providers before narrowing the list down to about a half-dozen technology companies. The finalists subsequently went through a rigorous functional, technical and operational due diligence process, which included having the providers come out to the company's Houston headquarters to go through various preset demonstration scenarios that mirrored how Shell wanted to use the solution within its own environment. Shell then required each vendor to detail the operational impact of its solution on Shell's domestic and international divisions, as well as the impact on different functional constituencies within those divisions.

At the end of the day, Shell settled on IQNavigator, a Denver-based provider of a hosted solution for procuring and managing contingent labor. IQNavigator's offering, dubbed IQNavigator5, includes both an e-marketplace environment for sourcing contingent labor and tools for managing a company's spend in this area. The solution's functionality ranges from supplier qualification, requests for proposals, and contractor and consultant selection and on-boarding, to engagement management, time and expense entry, invoicing and payment. The provider also is able to integrate its solution with backend systems within an enterprise, for instance, to automate payment through an enterprise resource planning (ERP) system.

One factor in IQNavigator's favor, according to Chapman, was that the provider's revenue model called for the contingent labor suppliers, rather than the buying organization (in this case, Shell), to pay for the service based on a percentage of the billable activity that they put through the system, so the ongoing cost to Shell would be essentially nil. IQNavigator contends that the suppliers themselves see sufficient savings from using the system, and have the potential to acquire sufficient additional business, that it's worth their while to pay the fee in order to maintain their business with companies such as Shell.

Other factors in shell decision included the capabilities of the IQNavigator solution. "We saw that the high level of functionality in the IQNavigator tool gave us the ability to get more savings than some of the tools that had a lower level of functionality," Chapman says. "Moreover," notes Tom Sitoski, contingent workforce management technical project manager for Shell, "IQNavigator's track record for rapid and successful implementations weighed heavily in its favor."

Shell signed a contract with IQNavigator last October and was up and running at Shell Oil Products U.S. by December. The implementation included integration with the financials module of Shell's SAP ERP system, a critical component of the company's initiative to automate its purchase-to-pay cycle for contingent labor. Importantly from Shell's perspective, the integration with SAP did not significantly raise the cost of the project. "We'd had a number of people tell us that it would cost us a million dollars to build an interface to SAP," Chapman says. "But we were able to work with IQNavigator to build an interface — to feed information into SAP from the IQNavigator system for booking the accounting and setting up payment through SAP — for just over $50,000."

Chapman says that the IQNavigator is actually very easy to use but that, as is frequently (if not always) the case with any technology project, the change management involved in implementing the system was not so easy. "People are much more attached to a contractual consultant as a person," he notes, "so it was much more personal to them than just changing out a printer. If you start changing the way that they manage these contractors, or if you start putting more rigor around that, you get a reasonable amount of pushback."

To counter that resistance, Shell and IQNavigator worked together to educate affected stakeholders early on about the new process being put in place and to keep them informed about the project's progress. Shell's team also strove to create an environment in which stakeholders could get answers to questions they had about an ongoing or looming implementation as the solution was rolled out to different groups within the company. In addition, Chapman credits high-level support for the implementation as key to bringing stakeholders into the process. "We were fortunate enough to have high-level executive sponsorship, and we reviewed our proposals with the complete executive team on a regular basis, so we had the push from the top down, which really helped," he says.

On the supplier side, Shell saw some initial pushback, too, both due to the process changes necessitated by the project and due to concerns about having to pay the fee to operate on the IQNavigator network. But Chapman says that by and large the suppliers have accepted the argument that they will see benefits from using the system — such as process costs savings from e-enabling their accounting with Shell — and have been willing to go along with the change. Of course, those suppliers that Shell brings into the IQNavigator system have the additional incentive of gaining access to a larger slice of the company's contingent labor spend for their particular categories (IT, administrative, accounting and so on), since Shell has been working to consolidate its contingent labor supply base as part of its broader effort to be more strategic about how it procures this area of its spend.

Overall in the oil products division, Shell is looking to cover about 400 contractors. Internally, Chapman estimates that Shell users — ranging from hiring managers to, potentially, approvers of work orders — probably will number about 100 people.

In terms of the return on investment that Shell expected going into the implementation, the anticipated benefits included both the process cost savings from moving toward a more electronic purchase-to-pay process and the hard cost savings from attaining better contractor rates through the IQNavigator labor market.

Further, the solution provides tools that let Shell better manage its contingent workforce, allowing the company to take advantage of discounts based on volume, overtime and early payment. Shell has looked to the solution's business intelligence capabilities to help the company analyze purchasing metrics to optimize supplier-base allocation, future pricing negotiations and contract terms. And Laura Mitchell, contingent workforce management category manager at the oil products division, points out additional benefits of the solution, including "monitoring contractor assignment terms to preclude potential co-employment issues and generating detailed reports on services spending, supplier performance, billing rate analysis, project updates and process efficiency."

While declining to go into specifics about the realized savings to date, Chapman does say that Shell originally set a goal of about 8 percent savings in the spend category, "and we have substantially exceeded that." He goes on to note that Shell did put together ROI calculations but that, because the company's investment in the system was so low, the figures turned out to be "nonsensical."

As it stands, Shell anticipates rolling out IQNavigator to additional business units in the United States, Canada and Europe. Chapman admits that, compared to some other areas of the company's business, contingent workforce might be somewhat less strategic, but it nevertheless is an important, previously overlooked piece of the spending pie that appears set to yield significant cost reductions. "By putting some focus on it and improving our processes," he says "we've been able to save ourselves considerable amounts of money."
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