Why Invest in a Managed Direct Sourcing solution?

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Apr 23, 2021

It’s no secret the contingent workforce is growing rapidly and Managed Direct Sourcing (MDS) can help organisations in supporting this change. In fact, the ‘gig’ or contingent workforce makes up anywhere between 15-25% of the global workforce today and Gartner anticipates a significant upward trend to 40% by 2025. With rising demands for talent, agility and cost savings, contingent workers present a vital solution for tomorrow’s global economy.

In previous posts we explored in-depth how direct sourcing for continent workforce programs works, as well as going on a journey of debunking the most common direct sourcing myths. Like many procurement, category management and HR leaders this has likely led you to explore whether or not you too should invest in Direct Sourcing or the route of Managed Direct Sourcing.

Throughout this article we will give you the critical information on whether Managed Direct Sourcing is right for your contingent workforce program (CWP). Using a traditional decision-making framework, you can extrapolate each of the 8 steps we’ll delve into and apply them to your contingent workforce program. The promise is you will take away a highly accessible, due-diligence guide for weighing up whether Managed Direct Sourcing is right for you.

How are most companies staffing their contingent workforce programs today?

Many companies do not have a consistent approach to hiring and managing their contingent workforce. Rather, they have a loose collection of contractors that are being sourced by a patchwork of staffing suppliers without centralized oversight, management, or a curated talent pool. The costs associated with these contractors are often buried in departmental budgets and the potential risks to the organization are not widely understood.

For large enterprises with an established procurement function, one of the most common approaches is to centralize the contingent workforce program and outsource responsibility to a Managed Service Provider (MSP) who will help the organization reduce costs and mitigate employment risks by overseeing a panel of third party staffing suppliers. However, the MSP layer was added to streamline staffing markups to reduce cost and inefficiencies, however it has created the situation today where many staffing firms compete and work for the same role, with limited success (there can only be one winner), and the winning firms must account for the cost of all their unsuccessful work in the jobs they win.This approach to managing the contingent workforce certainly has its benefits, but it’s still an incredibly costly and inefficient endeavor for all parties involved. Our recommendation? Start looking into Direct Sourcing or Managed Direct Sourcing. We’ll break down the difference between the two to give you a better understanding of what will work for your organization.

What is Direct Sourcing?

‘Direct Sourcing’ is when a company leverages its employer brand and market leading technology to attract and engage a pipeline of qualified contractors, often resulting in substantial cost savings, an improved candidate experience and better quality talent. In short, it’s “DIY for contingent recruitment.” says Linc Markham, previous Global Head of CWP for BP. By building a private, branded ‘talent cloud’ companies are able to rapidly identify and engage with the best available talent for a fraction of the cost of traditional methods.

This approach yields enormous benefits. In cases where the HR function oversees the CWP, the process of sourcing and engaging contractors may be performed by an in-house team of recruiters. For a variety of reasons, however, these tasks are often outsourced to one or more third party providers to manage the direct sourcing strategy.

  • CWPs are commonly managed by the Procurement function in larger organisations with considerable scale. These functional areas typically do not include recruitment teams, but rather procurement disciplines focussed on managing numerous staffing suppliers (vendor management). In smaller organisations, the Talent Acquisition team may play a role in the direct sourcing and recruitment of a portion of their contractor workforce.
  • Outsourced service providers are often used to run the sourcing/curation and/or payroll processes for contractor workforces in order to be the employer of record and reduce the risk of co-employment, while ensuring compliance with the relevant and changing legislations in each region.

What is Managed Direct Sourcing?

Managed Direct Sourcing is the use of third-party staffing suppliers to grow, curate and engage your branded talent pools as a managed service, filling your contingent job requisitions with qualified candidates on demand.

 

MDS programs offer the benefits of traditional direct sourcing strategies, but use external sourcers and curators to manage your branded talent cloud for your contingent workforce. Talent is directly sourced, and the employer brand is leveraged to attract the best talent via a candidate-centric experience.

The key difference here is the curation and management of your own talent cloud, also known as a talent community in some parts of the world.

Let’s now break down the new versus old paradigm of contingent workforce recruitment. See below for key differences between current practices and Managed Direct Sourcing.

The Old Way: Contingent Workforce Hiring The New Way: Managed Direct Sourcing
Multiple staffing suppliers’ source contingent labor Single staffing agency or MSP retained to curate talent in your Talent Cloud
High volume, repeatable roles, recruited for All roles recruited for across your contingent workforce program
Manually sourced and curated by recruiters Use of programmatic job ads, direct sourcing technology with AI matching
Staffing suppliers’ brand is used for sourcing Only brand used, is your employer brand
Relationship with contingent worker resides with the staffing suppliers As you have your own curated Talent Cloud, candidate relationship resides with you
Diversity, Equity and Inclusion (DEI)  recruiting owned by staffing suppliers DEI recruiting metrics improved due to leveraging direct sourcing technology
Candidate experience owned by staffing suppliers Improved candidate experience with SMS and email engagement
Double digit salary mark-ups due to heavy human administration Single digit salary mark-ups due to leveraging latest technology and automation
Ongoing managements fees related to sourcing of talent No upfront fees or ongoing fees, technology only paid for upon  worker placement

Implementing a Decision-Making Model when Analysing MDS

In this section we will cover the 8 key steps for making a decision on whether to invest in a Managed Direct Sourcing solution:

  1. Understand the situation
  2. Define the problem
  3. Define the objectives
  4. Diagnose the problem
  5. Develop alternatives
  6. Evaluate alternatives
  7. Validate alternative
  8. Choose & Implement alternative

1. Understand the situation

Map out your exact CWP to have a clear picture of where efficiencies can be realised. As an example, he is a visual of a traditional CWP:

contingent workforce program diagram

 

There can be a number of variables that come into play here such as, whether or not you have a VMS and/or a MSP. The roles the MSP plays, agreed Statement of Works and so on.

When mapping out your current flow, also add in the fixed costs and variable percentage margins that are payable. As an example, you may have a fixed rate with all staffing suppliers, or variable and have negotiated with each. In this scenario, include a range and where possible the mean rate.

Commonly overlooked questions

Take the time to drill down into where all your costs are that make up your total program spend. It can be tempting to bring different spends together, as we would do as a line item in a budget. For the purpose of analysing whether to invest in Managed Direct Sourcing, it is key that you adopt a good level of granularity in order to understand the real benefits of change.

2. Define the problem

Before considering an investment in Managed Direct Sourcing, you need to clearly articulate the problem you are looking to solve. With any change, you need a robust problem(s) being addressed, with clear results to ensure its worth both the time and financial investment.

Commonly thought of problems with your current CWP:

  • Reduce program spend
  • Reduce program complexity and compliance
  • Improve program visibility
  • Improve Supply chain efficiency
  • Access to top talent
  • Improve time to hire

Commonly overlooked questions

Experience tells us though, as you go deeper into reviewing your contingent workforce program, there are a number of high impact, but little understood questions, that you should consider tackling:

  • Salary creep?
  • DEI recruitment?
  • Reducing the gender pay gap?

These are the questions that are more likely to be part of the common thread that tie your business together, and certainly something your CWP can have an impact on.

3. Define the objectives

Before you move forward with a Managed Direct Sourcing investment, you should define exactly what the objectives are. Examples include, but are not limited to;

Objective/Problem Why is this Important?
Reduce program spend We have benchmarked both internally, and against external resources, and believe we can reduce our total program spend. Thus, saving the business money.
Reduce program complexity We believe the complexity of our CWP is creating inefficiencies, and thus unnecessary extra expenditure.
Improve program visibility Without a clear sight on the program, suppliers, and talent we can’t find data points to improve.
Improve supply chain efficiency Better supplier engagement in other  parts of our business has resulted in either service enhancements and/or reduced costs.
Access to top talent Talent is at the core of delivering our company priorities.
Improve time to hire Given the nature of the contingent workforce projects, each lost day impacts ability to deliver on projects.
Defend against salary creep We have no visibility on whether we have exposure to salary creep or how to defend against this.
DEI recruitment DEI is of core importance to our business, and this needs to flow over to contingent workforce engagement.
Reducing the gender pay gap This is an important societal issue that we want to address as more of our workforce is hired on a contingent basis.

4. Diagnose the problem

When choosing which objectives and problems within your contingent workforce program to address, understanding why the problem exists is key. For the purpose of this exercise in evaluating whether or not to invest in Managed Direct Sourcing, a commonly overlooked step is to ensure you are finding the root causes, and not just the symptoms. If you only find the symptoms at this stage, you are less likely to see overall program improvement.

Taking the objectives and problems identified in the table above, let’s work through the why behind them:

Objective/Problem Why is this Important?
Reduce program spend

While this can come from many places, total program spend can be attributed to inefficiencies within multiple steps of the program. Two examples include:

  •  Inconsistent, and above market rate, staffing supplier fees.
  • Legacy agreements with all stakeholders that are not fit for purpose for the requirements of today.
Reduce program complexity As the percentage of your workforce has grown for contingent workers, so has the size of your CWP. What has happened though is the program complexity has increased as the program size has scaled, leading to growing pains.
Improve program visibility

As CWP sizes have grown, so has the complexity and number of suppliers. With more suppliers, comes the challenge of tougher visibility.

Improve supply chain efficiency Legacy agreements based on legacy requirements.
Access to top talent The perception is that staffing agencies have access to all the top talent, whereas top talent can be selective of the brands they work for, but not the staffing agencies they contract through.
Improve time to hire Time to hire increases due to an inefficient recruitment process.
Defend against salary creep Without visibility and access to talent directly, you feel compelled to pay above market rates as you have fewer options.
DEI recruitment Staffing suppliers in your CWP are not mandated to address DEI recruitment as part of their engagement.
Reducing the gender pay gap Staffing suppliers in your CWP are not mandated to reduce the gender pay gap as part of their engagement.

5. Develop alternatives

Following on from your response to step 1, ‘defining the situation’, this is a crucial step in evaluating whether to invest in Managed Direct Sourcing especially given the plethora of high value content out in the world today.

Here is a table you can use to create your own alternative development scenarios from:

Objective/Problem Why is this Important?

It is important you have this step done in detail to be able to fully evaluate if an alternative works better for your CWP.

6. Evaluate alternatives

Without trying to oversimplify a complex part of your CWP, when you distil it down there are 3 alternatives you have when deciding on how to attract and engage leading contingent talent:

  • Use a panel of 3rd party staffing suppliers and their teams of recruiters, sometimes with the supervision of a MSP partner. This is how most contingent workforce programs currently operate.
  • Develop an in-house direct sourcing program with the help of your Talent Acquisition team. This has been met with mixed results, given the differences between permanent and contingent recruitment.
  • Initiate Managed Direct Sourcing with your own Talent Cloud of leading contingent workers, curated by a retained staffing supplier or MSP.

Benefits to continued use of 3rd Staffing Suppliers

  • No change management required

Benefits to using in-house resources to do direct sourcing

  • Reduced fees for direct appointments
  • Team is experienced in representing the company brand
  • Consistent engagement and approach

Benefits to investing in Managed Direct Sourcing

  • Reduced program spend
  • Reduced program complexity
  • Improved program visibility
  • Access to top talent
  • Improved time to hire
  • Reduced salary creep
  • DEI recruitment improvements
  • Reducing the gender pay gap

7. Validate alternative

With so many benefits derived from adopting the progressive model of Managed Direct Sourcing, the question of who in the market is doing this arises? And doing it well?

For a great outline of a successful Direct Sourcing program, download The Direct Sourcing Playbook from Raise Recruiting.

8. Choose & Implement alternative

Given the focus of the post, and the problems and objectives discussed, the chosen alternative would be to invest in a Managed Direct Sourcing program. The first step is to understand the exact structure of your Managed Direct Sourcing program.

This visual best shows what a Managed Direct Sourcing program looks like:

managed direct sourcing program structure

The first step is to identify who would be your specialist Managed Direct Sourcing partner. Pioneers of this model are staffing suppliers who have evolved their current offerings to embrace the MDS model. They bring with them years, and decades, of relevant experience so as you have a specialist to bring this innovation to market for you.

Your MDS partner needs to have the right technology powering the engine though. Direct sourcing technology is of paramount importance to the success of any MDS program. Without the right technology the program simply will not be a success. It is prudent to ensure that you understand the technology that is powering your MDS partner’s work. MSPs have long had proprietary technology, that they still often share powers direct sourcing, but be sure to review if they have a large headcount of recruiters doing manual work. This will tell you the story behind their proprietary technology very quickly.

When reviewing the latest technology that should be used on your MDS program, take a look at leading industry Analysts Ardent Partners 2021 Digital Staffing Platforms Report here.

How to proceed with your Managed Direct Sourcing decision

Globally, the world of work is undergoing unparalleled shifts. It is likely you are currently seeing your workforce dynamics and ecosystems shift significantly with a rising number of contingent workers. With this comes the need to move with the times and retain full ownership and control of how your total workforce is managed.

Hence why many are considering or already investing in a Managed Direct Sourcing program.

In summary, key reasons companies are investing in Managed Direct Sourcing typically boils down to few major benefits.

  • It is in an iterative program change, versus a total transformation
  • There are no upfront costs, and it is paid on performance, thus reducing exposure and risk
  • MDS provides key ‘human’ benefits such as improvements in DEI and gender recruitment & pay gap reduction

With this in mind, the question really becomes why wouldn’t you invest in Managed Direct Sourcing?

Get in touch with our team today to learn how Managed Direct Sourcing can help your organization.