November 19, 2021

Taking the Hot Air out of Labor Market Inflation: Identifying Stranded OpEx to Fund Digital Growth

Chris White
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The Problem: Double-Digit Inflation in Labor & Services Markets heading into 2022

Is your EPS (earnings per share) growing at 30% year over year? Most likely not, but your technical labor rates are growing by that much, if not more. If your hiring teams are lucky enough to be finding the right candidates with the right skills in the first place, it’s a seller’s market when it comes to closing those deals. While there’s no getting around the reality of having to meet demand where it is, just throwing money at the problem rarely correlates to improved buyer outcomes. Though it surely adds to the margins your suppliers and managed service providers are receiving.

Left unmanaged, rising extended workforce costs take their toll on earnings. Money alone is not the problem, though; lack of access to the right data for making better resourcing decisions about required skills for the work is the problem. The good news is, with the help of better insight into the component design of work, your teams can repurpose OpEx run rate to fuel stronger resource allocations, especially in OpEx-intensive digital projects.

The Solution: CFO-Led Re-Framing of Services Conversation from Bill Rate to Pay Rate

Solely focusing on bill rate is not sustainable and does not get at the challenges enterprises are having in acquiring key labor, most notably digital skills. Getting the right pay in the hands of the right resources is the better objective to focus on. While supply-side intermediaries are regularly engaged to help enterprise buyers with the problem of widening digital skill gaps, their business incentives drive them to make the problem worse, not better, as they take an increased cut of the opportunity an inflating rate labor rate market presents.

All of that said, Finance can help control the problem in a bottom’s-up, data-based manner and in collaboration with IT, Procurement, and Talent. Aligning your approach can ensure as much of your spending is going to the right candidates and resources performing the work and not into the suppliers’ pockets.

The Math: Pay Rate (increasing at 30%+YOY) + Supplier Margin (30% Min.) = Bill Rate

While there are no natural marketplace incentives to flip the conversation between buyers and suppliers from one of bill rate to one of pay rate, experience has shown that customers who assert control over this conversation with objective market data can drive a mutually beneficial outcome for both parties.

The good news is that the data required for getting started on organizing then optimizing this spend in a better way is within your reach and should not require a massive internal lift to pull together.

What you need:

·  List of all external resources and services, including start and end dates

·  Bill rates and pay rates for each role, broken down to supplier level

·  OpEx and CapEx designation

·  Existing work locations, to help ensure like-for-like outcomes

 

CFO Checklist: Key Steps to Addressing Controllable Inflation for Extended Workforce

1. The Resource Mix: How much of the work in your enterprise is handled by non-employees? For most organizations, this number is now more than 50%.
2. The Financials: How much are you spending annually, quarterly, even daily and, hourly for your non-employee labor? Actual invoice analytics shows that 30%+ is addressable supplier margin, not inflation.
3. The Outcome: Running the extended workforce program as a business yields rapid weaning of yesterday’s OpEx feeding supplier margins into a rapid repurposing for today’s OpEx-intensive cloud and digital

Key Takeaway:  Don’t Accept All Inflation as a Given!

·  Don’t Assume all Rate Increases are warranted in order to get the Talent your Org needs

·  Buy-Side Must Change the Conversation with Service Suppliers from Bill Rate to Pay Rate

·  Getting at the right Extended Workforce Unit Cost changes narrative from Editorial to Empirical

·  Work From Anywhere(WFA) adoption also impacts your Extended Workforce (expanded talent pools, economic benefits, etc.)

·  Informed Data Makes the Tough Questions Easier:  

·  How much are we spending? Do we have this data? Who is accountable?

·  Accelerate Sustainable Value and Scale with Automation of your Extended Workforce Program

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