Top Areas for Sourcing
Additional Active Categories
Market Buzz and Trends to Watch
Contingent labor, covering the broad spectrum from ‘temps’ to ‘contractors’, is typically one of the largest indirect spend categories in many organizations and therefore presents a number of opportunities to identify and generate savings. Business ‘ownership’ of contingent labor varies from company to company, often residing with either HR or Procurement (or both) or owned by the relevant department, IT contractors being a good example. Strong category ownership is the key to successful delivery of savings and is found through sturdy, direct relationships between the business line managers, their preferred suppliers and the temporary personnel they provide.
Top Areas for Sourcing
1. Professional (White Collar) – 6-15 Percent Savings
There are four main sources of savings within contingent labor:
- Sourcing and negotiation: as the most obvious source of savings, this covers everything from leveraging volume with suppliers, negotiating better rates to setting and negotiating pay rates.
- Technology implementation: if the size of the spend on contingent labor warrants it, there are plenty of Vendor Management System (VMS) technology options available, ranging from staffing companies’ proprietary products to independent software companies who are generally considered to have market leading offerings. Technology underpins an effective contingent labor program. Without it, visibility into the nature of the spend and the ability to automate processes are very limited.
- Process and policy: by ensuring ownership, process and policy are optimal for the category and will deliver additional savings.
- Category management: without strong and experienced category management, organizations will struggle to identify and deliver additional savings. Knowledgeable category experts armed with benchmarking reports and data from the VMS can implement demand management processes and generate substantial savings.
In many cases, mark-up percentage rates have already been addressed through traditional sourcing, but rate reductions and savings can still be generated through alternative approaches such as benchmarking, demand management and effective category management. Additionally, the implementation of a VMS tool can generate cost compression due to improved compliance, better rate assessments and more active management of the spend. VMS tools work particularly well in the contingent labor sub-category.
2. Light Industrial (Blue Collar) – 5-12 Percent Savings
Savings potential for light industrial work is closely dependent on the current supplier model. If the client is switching from one Master Vendor or Managed Service Provider (MSP) to another, there may not be significant opportunities other than small amounts of margin reduction and potential pay rate savings derived from standardizing and benchmarking job titles and pay rates. If implementing a MSP for the first time there are likely to be larger savings available from the sources mentioned above. VMS technology, a complex, industrial manufacturing environment, is still in its infancy in many regions of the world and fully realized benefits from implementing a VMS tool might not be available in the short term.
3. Pharmacy Benefits Management – 3-12 Percent Savings
Pharmacy Benefit Management (PBM) services are one of the few areas of claims driven costs that procurement can have significant impact on delivering savings. A large percent of benefit costs for employers are claims driven and therefore difficult to address in a standard procurement process. Prescription costs however, are significantly driven by two levers that can be addressed by the procurement process: drug discounts and drug rebates. Based on the significant cost of drug claims, a savings of even a few percent of claims can amount to savings exceeding those of other categories.
PBM is provided either as a carve-in service through an employer’s medical provider or a carve-out service through an independent PBM provider. While there are arguments for both methods, most large employers use a carve-out service. Both rebates and discounts tend to be more competitively priced in a carve-out environment, however, we have seen carve-in providers deliver significant savings at times when participating in a competitive bid. Supplier consolidation in the market due to merger and acquisition activity has limited the choice of viable suppliers, but there is still active competition in the market. As the industry is in the process of redefining itself through recent acquisitions and suppliers are vying to aggressively capture business, pharmacy benefits management presents an attractive sourcing opportunity.
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Additional Active Categories
||Administrative and clerical positions are currently attractive due to the number of available resources capable of filling these roles. Recruiting cost is limited and unemployment rates remain high, these two factors compress the mark-up percentage and pay rate respectively, which yield lower bill rates for companies sourcing these positions.
||An increased number of clients are considering a MSP solution in lieu of working with a high number of direct service providers. Though the initial transition demands time and resources, the benefits of working with a centralized provider outweighs these significantly in the long run. Active management of a company’s temp labor program, with a fully implemented VMS tool will drive out cost, improve compliance, ensure supplier consolidation and increase flexibility in reporting.
||The two primary offerings in this category are Short Term Disability administration services and Long Term Disability Insurance. A good number of companies are still administering their Short Term Disability in-house and savings from outsourcing this process can be significant, usually in the range of 5- 10%. Sourcing of Long Term Disability Insurance will normally provide an additional savings of between 3-10%, based on a company’s claim experience level and size of the opportunity.
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Market Buzz and Trends to Watch
Consolidation and Acquisition
There has been significant consolidation at the top of the market in the last 3-4 years with the latest development being Randstad’s recent announcement of their acquisition of SFN Group (inclusive of Spherion), which, when combined, will be the 3rd largest staffing firm in the US by revenue.
This consolidation broadly mirrors activity at both Adecco (who bought Spring, MPS Group, Drake Beam Morin and a number of other companies) and Manpower (who bought Comsys and Tapfin). We expect to see these firms delivering a fuller spectrum of services including Outplacement, HR Consulting, RPO solutions and Training & Development as they position themselves beyond pure ‘staffing’. The rest of the market remains fragmented with potential for further consolidation. Competition between the big players is intense, so buyers of contingent labor should not be disadvantaged by this consolidation.
When Chimes and its parent company Axium (at the time, the largest global VMS/MSP provider) went out of business in 2008, end users and suppliers in the Chimes programs were left in a difficult situation, as they were stranded without both a provider and a technology solution. Since then, there has been a distinct trend in end users implementing VMS technology independently of the staffing firm or MSP. Often companies will go to market for a VMS provider and staffing provider separately, arranging the staffing firms around the VMS, either in the form of an MSP or Preferred Supplier List.
We see this trend continuing as the global footprint of VMS providers increases to match that of the client base. Clients will implement the VMS as a global solution, standardizing contingent labor procurement processes as much as local requirements allow. The staffing solution can then be determined on a regional, local or per category basis where it makes sense to do so. It also allows clients the flexibility to change staffing provider without disrupting the VMS and vice versa.
Express Scripts acquires Medco Health Solutions
The purchase of Medco Health Solutions by Express Scripts, if approved, will be the largest ever acquisition in the healthcare industry. It is estimated the new company would control over one-third of the market and overtake Caremark CVS as the largest Pharmacy Benefit Manager.
While approval of the acquisition will be under significant government scrutiny, most analysts are predicting the acquisition will go through by the summer of 2012. An announcement, earlier this year, that Express Scripts would no longer offer Walgreens as part of their network has also created some trepidation on the effect this will have on the new combined offering. Over the past year, the PBM market has been very aggressive in terms of pricing and services and both these announcements will keep or improve this aggressiveness as each company looks to capitalize on their perceived strengths and their competitor’s weaknesses. A sourcing event begun at the end of this year and the beginning of next year for a 1/1/2013 Plan year should yield significant gains in both savings and scope of services.