Calculating the benefit of a Contingent Workforce Solution

The labour market is constantly changing. As a result organisations need to adjust their workforce strategy regularly. In some cases minor adjustments are sufficient. But at the moment we see organisations make major changes in their strategy and its the execution. Writing a good business case is a necessary, but often difficult hurdle to take in the decision making process.

What makes building a solid and clear business case so challenging?
The five main reasons are the following:

1. In most cases the full cost of the ‘as-is’ situation is not clear
2. In many cases the benefits of the ‘to-be’ situation are not translated into their financial value (yet).
3. The importance of having clear categorisation and definitions of classification with different characteristics is underestimated (for example: what costs or benefits are associated with specific groups of workers).
4. The recognition of costs and savings from a financial control perspective may be different from the way other departments see costs and benefits.
5. In some cases it is not about increasing value but about avoiding high(er) opportunity costs. This element is easily overlooked.

In addition, it is often unclear how the operational situation can be measured, monitored and evaluated, to check if the expected outcome is being realised.

All these issues have one common factor; they relate more to good and timely preparation than to necessary skills to write a business case.

Why spend time assessing and understanding your current solution?
Of course it is more interesting to develop a new situation that matches the demands of the labour market, than to examine today’s practice. But to plan for the changes needed and to see the costs involved, you need to understand the current solution.

Is it all about the money?
The benefits of the new situation can more easily be defined in qualitative terms than in costs and financial benefits. Things like ‘getting better access to needed talent’,’ improving the Employer Brand in order to attract and keep the right people’ should of course lead to better filling of vacancies and fewer vacancies. Make sure you have identified the key drivers and related KPIs and know how they generate value in your organisation. This helps find the right balance between added value for all the stakeholders and financial benefits for the organisation.

Which categories should be distinguished?
It is very rare that the need for a workforce is homogeneous. The same goes for the effort needed to find and keep the right workforce for your organisation. On the other hand, working only with unique positions to honour all possible differences, is inefficient and probably not doable. Categorisation and classification are necessary to find the balance between acknowledging differences and still having a workable solution for all stakeholders involved. Most used discriminators are countries (due to different legislation), business units, job types (blue collar, white collar, professionals, IT staff, etc.) and/or contract type (self employed, employed worker from supplier, Gig-worker, etc).

Cost recognition policies?
The recognition of costs and benefits is not always straightforward. Various terms can be heard discussing this topic, for example: Cost avoidance, direct savings (lower cash out) and indirect savings (often process efficiencies), OPEX (running costs) and CAPEX (investments). So it is important to have upfront clarity on these policies.

What saving is a saving?
From a business control perspective, it is often important that elements from the business case can be translated into budgets and monitored in “actual versus budget reporting”. The challenge with indirect savings is that process efficiencies often do not lead to lower costs in budgets. An example of this is a reduction of the number of invoices. A reduction will lower the need for invoice processing, but will probably not lead to an actual FTE reduction in accounts payable. Efficiency has increased, but it is almost impossible to account for reduced costs. Capex investments present other challenges: It is causing a cash out upfront (budget available, cash available?) with a certain depreciation time. However, there’s a risk that if circumstances change, the full amount has to be written off before full depreciation has taken place.

Including opportunity costs?
Last but not least, we are currently seeing business cases in which ‘to-be’ costs increased compared to the ‘as-is’ costs. In the past, many workforce initiatives were driven by cost reduction objectives. This may still be the case, but we are seeing more and more cases with a main focus on attracting the right talent. Maintaining the current situation is not an option, since the recruitment of new staff is stagnating and business continuity is at stake. The opportunity cost of maintaining the existing situation should become part of the business case to be able to properly compare alternatives.

With the right preparation, writing a solid business case for a contingent workforce solution is no rocket science. But it is a valuable instrument to check and validate the benefits of the solution.

Would you like to discuss this topic? Or are you looking for advice on, or support with, tuning and calculating your solution? Please feel free to reach out.