By Bob Harrell
An increasing number of businesses are choosing to shift a segment of their enterprise's human capital needs to contract services. It's one of the great wonders of today's business world why otherwise competent managers move a growing flow of expense into a black hole — labor costs without control and visibility.
I was a young manager 40-plus years ago when my Fortune 50 employer realized, for the first time, that labor costs didn't end with active employment. We hired workers, and more than 30 years later they retired. Yet labor (retirement) costs continued for another 25 years. We did the math and discovered that the employment costs over 55 years yielded a much higher wage rate than my company had anticipated. We thought the answer was to contract hourly work rather than hire new employees.
By Bob Harrell
An increasing number of businesses are choosing to shift a segment of their enterprise's human capital needs to contract services. It's one of the great wonders of today's business world why otherwise competent managers move a growing flow of expense into a black hole — labor costs without control and visibility.
I was a young manager 40-plus years ago when my Fortune 50 employer realized, for the first time, that labor costs didn't end with active employment. We hired workers, and more than 30 years later they retired. Yet labor (retirement) costs continued for another 25 years. We did the math and discovered that the employment costs over 55 years yielded a much higher wage rate than my company had anticipated. We thought the answer was to contract hourly work rather than hire new employees.
Before contracting for labor became fashionable, managers used time and attendance and payroll systems to control hours and labor costs. These systems were a good start on internal control of headcount and labor costs, relying on voluntary reporting of employees' work hours. It was "close enough" reporting and control. Other actions of supervisors and managers — walking around, asking questions, observing — filled in the gaps. Life was pretty good when everyone knew everyone else, by face and voice, in their department or division.
As the use of labor resources moved out of sight (to the other side of the world), traditional labor reporting systems took on even greater significance to managers. Clearly, it's difficult for the manager in Chicago to walk the manufacturing line in China, Brazil and Texas. Control and reporting of labor costs and productivity are hard to accomplish when manufacturing and service operations are scattered to the winds.
As managers wring all the benefits from low-wage areas, they start to look for new cost advantages. Many are considering contracting. Contracting has obvious advantages: relatively easy to turn on and off (certainly easier than hiring and firing employees); no continuing costs after the work has been accomplished; and frankly it's easier to direct a contractor than an employee.
But contracting also has one huge drawback. While the old fashioned time and attendance and payroll systems controlled hours and labor costs, contractor charges (and hours reported) are processed not by the payroll system, but by Accounts Payable. Unfortunately A/P systems are good at recognizing liabilities and directing the flow of funds to vendors, but they're not good at labor hour and cost reporting, much less control.
As managers move more labor over the horizon and into corporate systems never designed to control and report contractor costs, organizations lose visibility and responsiveness, causing projects to come in late and over budget. In response, forward-thinking companies are using new technology and best practices to better manage costs and collaborate with the growing contractor segment of their workforce.
If your company is not using these new solutions to manage contractor costs, not only are you missing out on the savings that they can deliver. You might just be letting your labor costs slip into that black hole — and that's no great wonder of the world.
About the Author: Bob Harrell is president and CEO of Management Controls, Inc., a leading developer of contractor cost management software. He can be reached at 800-532-8348, or [email protected]. More information on Management Controls at www.mccorp.com.
