A critical consideration for many contingent workforce program managers is being able to document savings and contribute to the bottom line. This is one of the key justifications for many companies in deploying a program at all. Over the past few weeks, a number of buyers have called us to discuss how they are currently capturing savings under existing definitions and in hopes of identifying opportunities for expanding that savings definition to further validate program value. This is no small challenge, especially when it comes to statement-of-work projects.
Most companies classify savings one of two ways: hard savings and soft savings. Hard savings is often tied to a reduction in budgeted expense. If you paid $10 for a pencil last year and $9 this year, that one-dollar difference is hard savings. Soft savings, also known as cost avoidance, is usually process-related savings. While it is important to capture soft savings for most programs, it’s the hard savings companies typically care about most. They are items that have a direct and attributable impact on a company’s bottom line through the reduction in budgeted spend to run the business. Where this gets challenging in CW management is in the infinite permutations of human capital that could influence cost. This is especially true in statement-of-work arrangements. By their very nature, SOWs are different from one another, so comparing year-over-year cost can be quite challenging. So in order to make sure your hard work gets recognized, you will need to validate your savings methodology with your internal finance groups. Here are a few ways to measure savings in an SOW program:
Negotiated savings for final bidder. This is the reduction in the bid cost from the initial submittal for the winning provider. For example, a provider came in with a SOW for $50,000 and the program office negotiated it down to $45,000. The $5,000 would be negotiated savings. With some exceptions, this is the most common method but an argument can be made that this is cost avoidance and therefore falls into the category of soft savings.
Winning bid below average. This is where a program office may measure the average submitted rate from multiple providers and subtract the winning bid from that average to identify potential savings. Again an argument could be made that this is also a cost avoidance.
Capital Reduction Savings. This is in my opinion one of the best ways to argue for SOW cost savings in a CW program. This is where the capital requirement (against budget, business case or forecast) is reduced. The tangible benefit is the difference between the original, agreed-upon budget and the final cost. For example, company “X” needs to deploy a server farm in Potosi, Mo. The multidisciplinary project team undertakes some initial market research and generates an outline business case with a budget of $550,000 and solicits capital approval for that amount. Following a successful tendering exercise, the best-value bid of $475,000 is selected and executed, for a reduction of $75,000.
This is by no means an exhaustive list of SOW savings levers and we will explore this topic in greater detail in our CCWP SOW Management Expert Certification program, which is currently under development. But with a little creativity, you can make a real impact when it comes to savings and your program.