mitigating and managing risk contingent labor: What C-Level Executives Should Know Eric s. williams
Global companies are increasing their reliance on contingent labor but failing to use the same standards of risk control applied to traditional workers. Eric S. Williams, Senior Director Global Services Procurement at KellyOCG, describes the key steps needed to mitigate and manage thirdparty labor risk. contents p3 p5 p7 p13 Introduction Areas of Key Concern Access & Security / 5 On-Boarding / 6 Data Visibility / 6 First Steps to Manage Risk Access & Security / 7 On-Boarding / 9 Vendor Management Systems: Key Considerations & Benefits / 11 Conclusion 2
Introduction Global companies are relying more heavily on contingent labor to control rising labor costs, bridge skills gaps in key geographic areas and high-value disciplines, and respond to fast-moving market conditions with greater agility. According to the 2012 Aberdeen Group survey, the average company s workforce is 26 percent contingent. Experts even speculate that for some global companies, the contingent workforce may represent a higher percent of the total workforce than traditional employees. Eric S. Williams Yet as companies expand their dependence on outsourcing and third party labor, organizational limitations come into plain view; internal processes and systems are typically not adequate to manage the inherent risks of a contingent labor force, not to mention extract maximum value from this critical resource. Among the most common and consequential problems: Regulatory & Compliance Risk: Use of contingent labor exposes companies to serious legal and regulatory risks. Multinational organizations have a difficult time tracking third party labor through a single choke-point, and unwittingly take on high levels of compliance-related risk. A company that misclassifies workers may be subject to audits and penalties, which vary country-by-country. There appears to be growing interest in the US based on a proposed bill amending the Fair Labor Standards as well as newly published rules on worker classification to further regulate this area. Access & Security: Many companies impose less stringent security standards on contingent labor than on employed labor without considering the consequences. A 2011 survey by HireRight found only 48 percent of companies that use contingent labor conduct background checks on those workers. Only 22 percent conducted drug testing. And only seven percent maintained ongoing drug testing. 3
introduction Visibility/Analytics: Many companies cannot assess the amount of third party labor supporting their company, where those individuals are located (geographically and by job category) and what they have access to. Technology: Without an integrated solution to manage vendors, on-board workers and track spending, organizations are ill-equipped to make the strategic decisions necessary to deploy contingent labor efficiently and safely. The commitment among global organizations to solve the problem is growing. Forty-one percent of companies surveyed by Aberdeen Group about workforce issues believe they face increasing risk related to managing contingent labor. And 56 percent reported their top 2012 priority was to improve visibility into all facets of contingent workforce management. The US Labor Department has estimated that up to 30 percent of companies misclassify employees in avoidance of taxes. The attorney general in Ohio believes his state has almost 100,000 misclassified workers a tax loss of $35 million to the state. ACHIEVING A HOLISTIC VIEW OF TALENT To manage a complex global workforce, more and more companies are applying supply chain management principles to talent management. Why? If a company waits for labor demand to peak before restocking their labor pool, it misses out on critical opportunities. Yet, workforce planning can only be as accurate as the business plan it s based on. And these days, most organization s workforce planning efforts are limited to budgeting and headcount planning. Organizations must look across the entire workforce considering full-time employees and third-party labor and align with business goals beyond the shortterm, tactical needs. This holistic view of talent requires the right team, technology, data and processes; organizations willing to invest in this new outlook gain critical agility across global markets. To learn more visit www.kellyocg.com/ Knowledge/White_Papers/ A_Holistic_View_of_Talent/ 4
AREAS OF KEY CONCERN ACCESS & SECURITY Conducting background checks is a routine occurrence when on-boarding employees, but still infrequently imposed on the contingent workforce. Consider a HireRight survey of 1,800 human resources, security and compliance professionals that found 69 percent of companies discovered resume fabrications among job applicants. The US Chamber of Commerce reports US businesses lose $50 billion each year due to employee theft and fraud. Companies performing background checks The lack of scrutiny applied to contingent labor is particularly troubling, says Rob Pickell, senior vice president of customer solutions for HireRight. Because all mid-tier and large companies do screen [employees], you actually have this adverse selection process where there are issues [in the contingent labor pool] relative to their fit within many organizations. They re going to gravitate to temporary jobs, says Pickell. on contingent workers: 66% on employees: 92% Companies must ask: Who has physical access to your company sites? What level of access do workers have and is it appropriate? How long should they have access and how do you de-activate access? How are access badges controlled? Extinguished upon termination? What systems (e.g. computer networks) should these third party resources have access to? How does the company determine who is active? How well does the company protect intangible assets, such as intellectual property? What other assets were issued to third party resources? How was the provisioning process initiated? Are those assets being properly tracked? Have they been returned if the resource is no longer actively supporting your company? 5
AREAS OF KEY CONCERN ON-BOARDING On-boarding contingent workers remains a difficult issue; most companies do not clearly assign which department owns the process, and protocols are typically decentralized and non-standard. Companies must ask: How are on-boarding compliance requirements managed and enforced for third-party labor? Are those processes consistent across the organization? How do you ensure service providers have adhered to their contractual obligations regarding background checks and certifications? Do you have multiple non-standard on-boarding processes? Do your business managers often scramble to ensure third party resources are fully on-boarded and integrated? Poor Control of Access Badges Represents Critical Risk A utility company used a large number of IT contractors, issuing 1,200 active security badges to temporary workers. Over time, management discovered only 400 active contractors were on duty, meaning 800 badges were issued to individuals no longer engaged by the company. These workers had no current relationship to the company, but had physical access to the site through their badges. How widespread is maverick buying (i.e. purchasing contingent labor from vendors that are not qualified, poorly vetted)? DATA VISIBILITY Even companies with good intentions are stymied because they lack an integrated technology solution that can align finance, procurement, HR, legal and regulatory. And without an integrated solution, visibility is typically poor and can have large consequences for risk control and compliance. Companies must ask: What systems are in-place to track selection, on-boarding and performance? Are processes automated such that non-compliance is immediately visible? What visibility and reporting are you able to provide to ensure (a) security and (b) compliance/risk management? 6
FIRST STEPS TO MANAGE RISK ACCESS & SECURITY To drive compliance and visibility, companies must first map all entry points of third party labor. Inventory the entire range of outsourced labor and services, including, but not limited to: Temporary staffing Consultants and independent contractors SOW-based projects IT service providers Maintenance services On-site service providers (e.g. cafeteria, mailroom) Outsourced services, delivered on-site Business process outsourcing Clinical trial outsourcing Finance/Accounting outsourcing Legal outsourcing Recruitment process outsourcing Next, assess and define the appropriate level of access (e.g. physical access and access to systems) for each category of worker. Remember, while access protocols will vary among different types of worker categories, your organizational processes and procedures for vetting and onboarding new workers should still be consistent across all categories. 7
first steps to manage risk Once you ve defined your access and clearance categories or tiers, align these with your supplier-base. By doing so, your company can proactively drive third party resources to the appropriate access level profile associated with the employer of each resource. Supplier contracts and on-boarding requirements should remain consistent within each supplier agreement. Ensure that your company has a consistent and timely audit schedule of its supply-base to ensure the following are in place: Clearly defined and consistent screening standards for all contracts with 3rd party labor vendors (e.g. criminal background checks, drug testing, employment and education verification). Tenure Visibility Do you track contingent worker tenure? Tenure is a common area of non-compliance across the globe; ideally, technology should allow you to automate tenure tracking and flag workers approaching a tenure limit for those categories of third party labor that pose the greatest risk of co-employment. Regular vendor audits on samples of workers to ensure your vendors are consistently screening workers per agreement. Indemnification clauses in all staffing, project, and service agreements. Example: A worker claiming a violation of labor laws such as not receiving overtime may hold both the staffing agency and the client company responsible due to co-employment. A well-executed contract with a staffing vendor can ensure the vendor assumes all legal expenses in such a case. 8
first steps to manage risk ON-BOARDING Aberdeen Group reports that best-in-class contingent worker management is not so different from those established by human capital management experts. In both cases, effective talent management includes on-boarding (e.g. establishing building access, assigning resources) to improve time-to-productivity, and off-boarding (e.g. taking inventory of physical property) to protect physical and intangible assets. Says Aberdeen Group, best-in-class organizations are 40 percent more likely than all others to have these capabilities as part of their contingent labor management programs. Multinational companies that rely on contingent labor should establish consistent onboarding procedures supported by processes and technology. Begin by benchmarking all current on-boarding processes; document the process used for each category of third-party labor. This audit will help you identify gaps and inconsistencies, and the likely cause of each. Is the gap related to technology? Lax processes? Lack of ownership? A combination of many factors? It s important to consider how each problem is related to others. For example, a particular location may require a standard set of documents completed and signed off for each worker; because there is no single point of entry for contingent labor, dozens of managers are responsible for sign off and compliance is low because no one is auditing compliance. The solution to this gap will likely involve a combination of new processes, technology, and greater accountability. A strong on-boarding process will funnel all new contingent workers through a single initiation point, and enforce a standardized set of processes and procedures for all contingent workers, regardless of category of work, pay scale, or geography. To ensure new processes and procedures are sustainable, map out stakeholders in the onboarding process including your internal risk mitigation and compliance office and ask them to participate in the early stages of benchmarking and review. This team will help to 9
first steps to manage risk drive & support changes to onboarding policies and procedures, and help to solidify early and ongoing adoption within your enterprise. Ultimately you will need to assign an outsourced compliance support team to ensure that clear processes and protocols, as well as technology to reinforce those elements, are in effect. Define and enforce how compliance will be measured over time (i.e. who ensures audits are conducted and findings acted upon?). Some companies hire a dedicated contingent workforce manager to monitor the use of contingent labor and ensure compliance. Finally, identify automation opportunities. Ensure technology offers, from a visibility standpoint, a fully auditable approval process. Visibility should include on-demand access to the full range of required documentation for each category of resource (e.g. drug tests, background checks and signed NDAs) and the ability to visually verify reports were reviewed and signed. A Global Perspective on Risk Multinational operations must ensure they follow country-specific laws and regulations when contracting, on-boarding, and dismissing contingent labor. As an example of how diverse these country-by-country regulations can be, consider the case of Brazil. The Brazilian government strictly regulates how companies can use temporary workers: Temporary agency workers can only be hired in urban areas to meet a temporary or seasonal need for employees, or to cope with an extraordinary workload increase; The maximum cumulated duration of temporary agency work contracts is three months, unless otherwise authorized; Temporary agency workers must receive the same pay as a worker doing the same work for the user firm. A vendor management system (VMS) and centralized compliance management service or solution can track these country-by-country idiosyncrasies and flag high-risk hiring and retention practices to ensure strict adherence to local laws. 10
first steps to manage risk VENDOR MANAGEMENT SYSTEMS: KEY CONSIDERATIONS & BENEFITS Most larger organizations with third party services and outsourced workforces will ultimately weigh the benefits of technology partners, in particular VMS tools. A 2012 survey by Aberdeen Group found VMS solutions in use 58 percent more often within best-in-class organizations than in all others. A VMS offers significant efficiencies and risk controls during on-boarding and beyond. VMS tools allow users to incorporate a centralized and automated on-boarding protocol including user and category specific on-boarding checklists. They also have the ability to incorporate elaborate headcount approvals to ensure the appropriate controllers are reviewing and approving headcount and access as needed. The VMS tool can also integrate with a company s back-end security system to: Initiate the badging process; and Provide visibility/acceptance to security personnel that all on-boarding criteria has been met. Enforce access criteria for contingent workers based on their role and location. For example: Defined physical access parameters integrated with the company s access badges, Computer network access parameters integrated with IT; Provisioning (e.g. laptops, workspace) integrated with procurement and facilities. 11
first steps to manage risk A VMS tool is also a critical tool for real-time reporting of security and compliance issues. Using it, management can keep a consistent view of high-risk compliance areas, such as contract compliance, on-boarding policies, third party certifications, safety training, induction compliance, NDAs, security clearance, drug tests and related background checks. What s more, technology solutions give executives better insights into how third party labor is being used currently and how to extract maximum value going forward. For example, which suppliers are companies using category-by-category across the enterprise? Which sourcing or supplier strategies are missing? Aberdeen Group research found that similar to VMS solutions, Managed Service Providers (MSPs) are considered crucial for managing contract talent. MSP and VMS solutions remain the top two offerings currently used by Best-in-Class organizations. 12
conclusion Companies continue to expand their utilization of third party labor and outsourced services, even while governments across the globe ramp up their scrutiny and regulation of contract labor. With risk from outsourced talent on the rise, companies are looking for quick, efficient risk-mitigation controls controls that deliver standardization, visibility and compliance across a corporate enterprise. Centralization, standardization and automation are the three key components to a successful identity management solution and companies ultimately need to decide whether it makes sense to in-source or outsource the management of these processes. Either way, taking the necessary steps to drive all third party labor categories to a single on-boarding solution will help ensure policy and regulatory compliance, as well as contain these resource categories to their appropriate and relevant access levels. REFERENCES More Employers Take on Temps, but Planning is Paramount. Workforce.com. June 5, 2011. Four Tips for Contingent Workforce Background Screening. HireRight January 16, 2012. US Cracks Down on Contractors as Tax Dodge. New York Times. February 17, 2010. (http://www.nytimes. com/2010/02/18/business/18workers.html?pagewanted=all) Contingent Labor Management. May 2011. Aberdeen Group. The Giant Security Hole in Today s Workforce. TM magazine. July 26, 2010. Case from NextSource article provided by Kelly. Full citation, including date, unknown. Screening Your Contingent Workforce: What HR Professionals Should Know. EmployeeScreenIQ. More Employers Take on Temps, but Planning is Paramount Workforce.com. June 5, 2011. Contingent Workforce Management: The Next-Generation Guidebook to Managing the Modern Contingent Workforce Umbrella. 13
About the Author Eric S. Williams is Senior Director, Global Product Lead for Services Procurement Solutions with Kelly Services. With over sixteen years in the outsourcing arena, he is a seasoned procurement and consulting professional with a background in solution design, change management, global program management and project management. Eric is often consulted for his thought leadership on ways to lower costs, improve sourcing strategies, and deliver bottom-line value solutions that optimize the way organizations source for services and talent commodities. About KellyOCG KellyOCG is the Outsourcing and Consulting Group of workforce solutions provider, Kelly Services, Inc. KellyOCG is a global leader in innovative talent management solutions in the areas of Recruitment Process Outsourcing (RPO), Business Process Outsourcing (BPO), Contingent Workforce Outsourcing (CWO), including Independent Contractor Solutions, Human Resources Consulting, Career Transition and Executive Coaching, and Executive Search. KellyOCG was named to the International Association of Outsourcing Professionals 2012 Global Outsourcing 100 list, an annual ranking of the world s best outsourcing service providers and advisors. Further information about KellyOCG may be found at kellyocg.com.