Monday, September 10, 2018

What's the Right Model for Acquiring Professional Services?

Is acquiring a paper clip the same as acquiring an IT specialist? Many large companies acquire professional service contractors --- such as IT, marketing and HR --- using a similar program as they use when buying supplies, equipment, raw materials or merchandise.

Yet many hiring managers and contract recruiters find the hiring process is unsatisfactory due to time spent vetting candidates or removing contractors that are a poor fit.

So why is the supplies purchasing model not as effective for professional contractors? An important principle of systems thinking is to apply the right model for the environment. What fits for one context when transplanted to a different context --- even when they appear similar --- may cause problems.

This article explores the rationale for the current model, issues and a better approach.  

Rationale for Paper Clip Purchasing Model
Businesses noticed that costs escalate when individual departments acquire their own supplies. I've seen that first hand at a company where I worked. Identical raw materials from the same vendor were sold to various departments at wildly different prices. One company uncovered that they were buying 424 slightly different versions of a standard gloves used by its factory workers. Compared to the lowest cost glove, the most expensive version was 340% higher.  [1]

The solution to such a mess is to consolidate the number of vendors and products, leverage the firm's buying power to negotiate volume discounts and insert a strong centralized purchasing function. Often systems are implemented to manage the process. 

Given the success of this approach, it is natural to apply it to a similar looking mess as the acquisition of talent. The purchaser / product user is the hiring manager. The providers are the professional services contract recruiting firms. The product is the IT, marketing or HR expert. The mess is created when individual hiring managers develop relationships with their favorite providers. 

How are Paper Clips and IT Specialists Different?
Although similar on the surface, there are important differences between the acquisition models for supplies and talent. Let's explore where they are different and where they are the same. 

1. Product  
For a paper clip, gloves or other standard products, it is straightforward to specify objective criteria to judge the product. Mature products tend to be commodities. This is the opposite with talent.

Hiring managers provide fuzzy specs. Either the specs are too vague that too many ill-suited candidates are presented; or so narrow and specific that few candidates can be found.

Each candidate is a unique combination of experiences, skills and personality quirks. The good recruiters interpret the fuzzy requirements to find the right talent. 

When purchasing puts a wall between recruiters and hiring managers, the dynamics change from relationships to checking the box that the candidate meets the requisition requirements often leading to disappointing results.

2. Negotiations 
Decentralized purchasing allows the provider to exploit those product users who are poor negotiators. This is true for both supplies and talent. 

3. Cost Structure 
Centralized purchasing increases the volume to each preferred provider and more volume reduces the provider's costs and that savings can be shared with the purchaser. Although true for standard supplies, surprisingly this is not the case for talent. 

Unlike paper clips, consolidating to fewer providers may create less incentive for the contract recruiter.
  •  Each search for a contract recruiter is a new competition, while paper clips are bought in bulk.
  • With centralized purchasing, the contract recruiter is likely to compete with many more firms for that search. Previously the hiring manager had a few favorites.
  • With more competition for each opening, there is less incentive for the contract recruiter to work diligently on the opening since many other firms are going after the same pool of candidates. It becomes a race to present as many candidates as possible rather than a few quality candidates.

Acquiring more talent from a particular contract recruiter does not reduce costs dramatically since each new search incurs its own set of costs. Also the professionals have a market rate and are not under the control of the contract recruiter.  

Contract recruiters have some flexibility on price. They may reduce their margin. The best way to reduce price is to remind providers that there is a competitive pool of other vendors waiting to replace them. 

What Model Works Better for Talent
Russell Ackoff, a pioneering system thinker, cautioned against using mechanistic type models such as the purchasing of paper clips to humans.  “In the long run, such mismatches produce less desirable results because critical aspects of the social system are omitted.” continues Ackoff “The more skilled the workers, the harder they are to replace.” [2]

A better model for contract talent acquisition is a hybrid approach. Specifically:
  • Centralized purchasing to resolve the issue where product users are on average poorer negotiators than the purchasing professionals. Centralized purchasing would define consistent contract terms / conditions and rate structure. Systems are useful to manage. 
  • The hiring manager and contractor recruiters would build strong relationships to facilitate matching the best talent for an opening.  
This hybrid approach allows each group to do what they do best while eliminating weaknesses of the paper clip model.

      1.  The gloves example was used in the book by the Heath Brothers Switch: How to Change Things When Change is Hard.
2.  Systems thinking is highlighted in Russell Ackoff’s book Re-creating the Corporation.

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