As organizations increasingly rely on contingent or contract workers to fill mission-critical roles, business leaders are looking for ways to boost their company’s bottom line savings. One scenario where this can be the case is the MSP/Vendor rate of third-party payroll utilization - the percentage of spend for contingent or contract workers who are sourced directly by the organization and W2 payrolled by a third party vendor.
Increasing third-party payroll utilization offers many benefits to companies, from driving down costs to streamlining the talent acquisition processes and even reducing risk. Not all vendors, however, are structured for or support this approach. For example, when utilizing a staffing firm or staffing-aligned MSP to source for your open positions, be prepared to face markups that can range from 35% to 50% for agency-supplied workers.
Rather than accept these markups unconditionally, business leaders should look for opportunities available through a more proactive approach. McKinsey estimated 30% of the American workforce — 49 million people — are freelance by choice. By sourcing talent directly and payrolling them through a third-party payroll vendor, decision-makers can drastically reduce time to fill contingent positions and increase worker satisfaction as reported by hiring managers.
The most attractive benefit, however, is the potential cost savings associated with this workforce model. By avoiding staffing agency markups, organizations can capture savings as high as 20% or more according to our findings. What makes it even more enticing is the ability to avoid compliance risks such as ensuring workers are properly classified and paid.
Here’s some steps to take if you’d like to follow this approach
Does your HR department have the resources to self-identify workers? You’ll need to make sure your HR department is appropriately staffed and has the expertise to source the right talent for your business needs. This might require adding industry-experienced recruiters to your team. There are additional costs by following this practice but, per our analysis, the savings you’ll receive by eliminating the staffing agency markups far outweigh the added costs incurred.
Does your third-party payroll vendor have robust and well-managed payrolling capability and technology to track time, billing and expenses? You should always inquire about your provider’s systems capabilities and whether or not it supplies the right metrics for your business, such as workers’ time, spend, payroll utilization and expense. This data is crucial in achieving a successful outsourced worker payroll model.
Does your third-party payroll vendor price accordingly to payroll utilization? You’ll want to make sure you and your provider agree on volume discounts driven by payroll utilization. It’s common to increase payroll utilization from a range of 10% - 40% or more to unlock volume discount savings that could add up in the hundreds of thousands to millions of dollars per year.
Does your third-party payroll present data that show how other clients have benefited from their third-party payroll services? Although many providers will offer third-party payrolling options the best predictor of program success is whether your vendor has previously delivered real savings that improve your return on investment.
Ultimately, it comes down to evaluating whether using a third-party payroll vendor is the right workforce model for your organization and partnering with a provider that understands your contingent workforce program and is on the same page with your business goals rather than looking to increase its profit margins. Please reach out to NexusCW team for more information regarding third-party payrolling options.