Am I getting my money’s worth or getting what I am paying for?
How to tell the difference
How do you know if you are getting the best deal?
When your company purchases any capital equipment a very well thought out process takes place. This process is very specific in design with the sole desired outcome of maximizing value for the dollar. It is a standard business practice in any successful operation today where efficiency and results mean everything. The practice I am speaking of is determining the “Total Cost of Ownership” of the product.
As it relates to capital equipment purchases, total cost of ownership will typically factor the original cost of the equipment, the life-expectancy of the equipment, tax implications and depreciation schedules, leasing terms or financing costs, the cost of consumables that may be required to operate the equipment, maintenance schedules and costs, projected resale value and marketability, space requirements and build-out costs, ability to upgrade, delivery, installation, and transitioning costs, including downtime, and similar. To put it briefly: Price isn’t cost.
However, far less often do companies apply the standards of TCO to their purchases of services, and in the case of purchasing contract staffing, almost never. Oddly, a company that uses TCO as a standard for purchasing a $500,000 piece of capital equipment, will apply nothing close to that process to purchase a $3,000,000 contract labor solution, an amount six times greater.
Consider this case study in point.
Company A is a large retail distribution center in a major metro area. It handles dozens of lines and hundreds of SKUs. Much of their product line changes with the seasons causing several small spikes during the year and a large upswing in business before the holidays. Accuracy in picking is critical. Client charge backs for errors are high, along with the associated rework costs.
Three years ago a decision was made purchase a pick to light system to improve efficiency, speed up the pick rate and improve accuracy. The entire “C” suite was involved in the process as well as, operations and Human Resources. A capital investment of $500,000 was made and the system delivered as promised. Accuracy and speed improved, efficiency was increased and the company saved several hundred thousands of dollars. The process worked, all the stake holders participated, the “C” suite had all their issues addressed, the operations team had all their requirements met and the purchase was a success.
Less obvious in the equation to the casual observer, was the extent to which the success of the pick to light system was impacted by the quality of the temporary staffing solution. Because company A had partnered with a staffing service that placed a premium on the quality and performance of the temporary associates who implemented the process, productivity was high, mistakes and waste were kept at a minimum, Company A’s customers were happy and remained loyal, and the return on the $500,000 investment in the pick to light system was maximized.
Two years later Company A acquires several new large clients and expands rapidly. The seasonal demand results in a drastically increased need for additional labor. Someone at a very senior level looks at the rapid increase in labor costs, notices that it’s a much bigger number than in the past, and sends a directive down through the organization to reduce the contract labor spend. Procurement is directed to evaluate their staffing spend and drive cost out of it. The task is pretty straightforward, “we need a lot more temporary associates, but we need to get them for less.”
An RFP bidding process is initiated. Human Resources is tasked with vetting the staffing services that elect to bid, but mainly based on procurement requirements that means meeting two criteria:
- Does the staffing service have the ability to get us the people we need?
- Will the price it low enough to win the bid.
And while all of this was going on, operations was essentially left out of the process because they were too busy or not deemed an essential part of the procurement process. There was no direct involvement by members of the C-Suite, because the purchase of contract labor is essentially being viewed as a commodity.
Those staffing services that wished to bid were denied access to the key stakeholders that live with the daily outcomes of their contract labor workforce. The staffing services were limited to obtaining basic information; pay rate, base job descriptions, shift times, and similar. No criteria were established or considered related to job performance metrics, engineered labor standards and KPIs, benchmark testing to ensure successful skill sets, safety histories, compliance, insurance minimums, or retention rates.
The incumbent staffing service submits a fairly competitive bid to retain the business, but because they are not willing to cut corners or compromise their standards for providing a quality, efficient, and productive workforce, they are priced out of consideration, and will no longer be privileged to work with Company A.
The ultimate outcome of the RFP bidding process resulted in the following:
- The initial bidder couldn’t fill the need and four additional services were brought in to supplement
- Lower quality associates resulted in the need for greater headcount and elevated overtime costs. It now takes 20 workers to perform the work of 17.
- Turnover was out of control, resulting in increased training costs, and reducing productivity levels while a continuous stream of new workers learns the job, only to leave it within days.
- Accuracy was affected resulting in more mistakes, necessary rework, more charge backs, increased shipping costs, and placing relationships with customers at risk.
- Productivity declined, daily case count rates dropped, and the cost-per-unit out the door increased.
- Managers and supervisors spent more time serving as watch dogs, mitigating mistakes, resolving conflicts, and training new people.
- Accident rates and related costs increased.
- Damage to equipment and repair costs rose significantly.
- Incidents of theft increased dramatically.
- The return on investment in the pick to light system was diluted.
- An additional HR person needed to be hired to deal with the daily contract staffing crises.
- Total labor costs as a percentage of operating costs rose substantially and disproportionately.
- Supplemental help spend ballooned to over three million dollars, and the overall total cost of ownership increased dramatically, but went unmeasured.
Sound familiar? Here’s the worst part sadly: Company A followed the same bidding process the following year with the exception of adding an onsite management requirement to help control the chaos. Bidders were asked to increase cost and lower the price again and they did, with the same results as before.
- Decreased the price but increased the cost!
This happens everyday. The entire company is involved in the one-time purchase of the pick to light system, but the process for purchasing staffing resembles the process used to buy towels and toilet paper for the restrooms.
$500,000 one time vs. $3,000,000 every year. Where do you think the largest potential savings exist?
- Improving quality of associate can realistically reduce head count by 17 -20 %
- Improving quality almost always reduces overtime
- Improving quality reduces all the other cost increases mentioned earlier; training, errors, rework, charge backs etc.
Add it all up and it is substantially greater than a 5% markup reduction.
This scenario is with one location. The problem is greater with multiple locations when either Human Resources or Procurement are tasked with purchasing staffing from a central location. The large majority treat every location the same, don’t communicate with the people downstream that have to live with their choices and the results are the same or worse. I have talked to dozens of companies that are begging to fix the problem at the local level only to be told they can’t because of a contract negotiated at corporate.
Why doesn’t the “C” suite want to know more and play a more direct role in their multimillion dollar staffing investment? Why isn’t operations involved in sharing the performance metrics with the supplier? Why doesn’t procurement take the time to speak to the stake holders that live with the choices they make? Why doesn’t Human Resource allow the prospective suppliers the opportunity to speak with everyone involved, particularly those who live in the trenches with the temporary associates?
This seems to be unique to the purchase of staffing solutions! Almost nothing else for a business is purchased in the way staffing is purchased. It’s little wonder client satisfaction with their staffing services has dropped 17.5% from 2010 to 2011 based on the nationwide Inavero study.
If you are currently unsatisfied with your staffing solution maybe you should review your procurement process and buy staffing like everything else you buy, Total Cost of Ownership.