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The 5 Most Common Cost Savings Mistakes

Every customer wants to save money. Go about this goal incorrectly and the results could be costly.

Cost savings are near and dear to all procurement teams, and HR departments also want to help line managers free up their budgets.  Yet, without thoughtful cost savings strategies that consider market conditions, past efforts, and existing trends, some practitioners get overly exuberant in their applications of ill-fated initiatives.  As MSP providers, we help our customers understand smarter ways to save money.

How to Drive MSP Program Value Through Cost Savings

1. Paying below-market pay rates/trying to get the lowest possible markup rates

The reasoning here is simple.  Reduce incremental costs; increase long-term savings.  The issue comes in the forms of reduced talent quality, eroded productivity, negative culture, low worker morale, and high attrition.  All of these “soft” losses have real consequences.

On the markup rate side, if a client reduces a markup by 2%, he or she may view immediate hard savings, but lose ultimately supplier support. Savvy suppliers will channel their best candidates to those customers who pay them fairly for their services.

It is important to remember that there are variables such as training costs, onboarding expenses, losses in production, and increased overtime costs. Brand recognition components such as employee morale drops and local competition should also be considered. He states, “As the MSP provider, we explain how the client may be paying a bit more on the front end, but saving even more on the other. We then recommend the best options for each client, job type, and geographic region and ensure that as the market changes, or data trends, we encourage discussion before significant issues arise.”  Some clients don’t realize that they are underpaying workers!

2. Skimping on safety

Never should cost-cutting increase risks for workplace injuries or create an unsafe environment. A quality MSP provider will advise against an initiative that could haunt a company financially, especially if an injured worker files a worker compensation claim, and safety conditions are found to be inadequate. Safety concerns and employee training often overlap. Resist the urge to cut back on training, which can affect both safety concerns and employee retention. When employees feel prepared and valued, they enter a “psychological contract” with their employer, instead of solely an economic one. Identify cost-effective options such as online training or mentor/peer training. There are creative ways to retain safety and training procedures while still maintaining a budget-friendly attitude.

3. Marketing apathy

The country’s economic temperature influences the decision to cut costs across the board. During an unstable economy, a company may decide to coast on their status quo, their focus less on candidate attraction. “Coasting” is never wise because, while one company coasts, their competitor may be working steadily to unveil a new strategy. This has never been more prevalent than during the pandemic. Companies with strong brands and high employee retention are now faced with finding creative ways to retain their employees as the landscape of work is changing. Many organizations are exploring the value of hybrid work to accommodate their employees’ need for flexibility.

A thoughtful talent acquisition strategy should map processes for attraction during both economic downtimes and boons.  MSP providers help to manage expectations and position customers for ongoing success.  After all, contingent and direct workforces continue to evolve despite—and sometimes due to—market volatility.  Remember, too, that economic downturns often compel companies to seek out new ways to reduce costs, enterprise-wide.  This heightens pressure to make Mistake #1.

4. Not anticipating talent shortages

While experiencing solid flows of quality candidates, companies often utilize the cheapest possible rates. During shortages—like we are experiencing today— there is a decrease in retention. Although these changes may appear to be slow, cost savings are indeed affected, as the need to increase recruiting, training, and onboarding efforts become more significant. Having the lowest markup or bill rate in the area often forces agencies to prioritize their workloads, meaning the lowest profit positions get worked last. The lowest quality candidates are submitted to these clients, as they are all that remain in the talent pool.

By keeping clients informed of industry trends and compensation changes, a quality MSP provider should share strong retention and pipelining practices.

5. Misaligning talent as independent contractors

Some companies unwittingly—or even wittingly—engage talent that should be W2 resources under 1099 paperwork.  There are real draws to this tactic.  Companies get to avoid the normal taxes associated with W2 employer/employee relationships, and more and more resources are open to performing work as independent contractors.  However, strict rules apply to those who can be engaged under a 1099 relationship.  Resources should carry their own business insurances, support multiple customers, direct their own work performance, not be paid on an hourly basis, etc.  Once those lines are blurred, the risks of misclassification rise, as does the potential for costly penalties imposed by the IRS.  This exponentially removes any cost savings upside.

An expert consultation on cost savings strategies that work—and pitfalls that lie in wait—can be invaluable! To learn more about MSP staffing solutions, visit the Managed Service Programs page or get in touch with a recruiter.

This blog was originally published April 10, 2018.

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