Every successful business entity prospers on the development and execution of its core competencies. It helps that after an initial examination of applicable core competencies in a business, the efficacious organization will have a maniacal focus on leveraging those stated core competencies. Yet many buyer CW management programs, industry-wide, demand their staffing partners focus on something that is far beyond their core competencies.
In some instances, these demands are due to risk-shifting agendas impressed upon the program office by others within the buyer organization. These requirements are company-wide dependencies that are arbitrarily dictated and must be incorporated in the CW program’s execution structure. Leaving staffing partners to commit to unnatural strategies to comply with the requirements — most poorly and at risk of failure to all those involved.
Here are two examples.
An insurance company. Risk-shifting is nothing new in the formulation of corporate service delivery partnerships. It can be seen in various ways in contractual language and structure, the most obvious example being the indemnification clauses that have become standard fair.
Indemnification occurs when one party assumes liability for a situation (regardless of whose responsibility it is) and relieves the other parties of the financial consequences and responsibility. Indemnification does not relieve a company of legal risk, however; it is only meant to make a company whole in the event of a covered (indemnified) loss. While they are often considered such, indemnification clauses are not insurance. Insurance is a contractual agreement designed to avoid risk, and insurance policies often no longer cover risk transfers.
Also known as hold harmless clauses, indemnification clauses are often demanded by corporate buyers as part of their standard agreements with staffing providers/partners. But frequently, neither party really understands the clauses’ implications. Indemnification clauses come from attorneys and risk managers who try to shift the financial risk away from their organizations, even though the financial shift may not accurately reflect accountability. As a result, the party responsible for a loss may not be required to pay for it or — in too many cases — the entire clause may be deemed invalid by the courts if drafted improperly.
The bottom-line is the buyer organization, through a risk-shifting strategy, is forcing the staffing partner/MSP to act as an insurance company in the risk mitigation of the relationship. Besides the fact that most staffing partners do not retain the risk-mitigation, skillsets required to understand the risk mitigation capability they need to provide in the relationship, they also do not have the financial wherewithal to fund the consequence of the coverage responsibility to which they have committed. Indemnification clauses in your staffing contracts may seem clever, but may in fact be a toothless strategy better suited for an insurance product from an actual insurance company.
A bank. Over the last decade or more, we have seen net payment rules for staffing services rendered extend out beyond 30 days to 60, 90 and even more. These are forms of trade credit that specify the net amount of the invoice expected to be paid in full and received by the service provider within 30, 60 and 90 days after the product or services are delivered.
Put simply, if you use such lengthy payment terms, you are asking your staffing partner to be a bank. For most products — office supplies, for example — such payment terms may not amount to a burden on the supplier, as such payment terms may extend down the supply chain. But staffing suppliers’ own working capital requirements are based on paying contingent workers on a weekly basis. It does not seem much of a partnership to withhold payment for 60, 90 — and in some cases, 120 days! — when that partner has financed the service well before that timeframe.
Many buyers simply have not realized the enormity of the payment terms. In many cases, though, this is indeed the chosen strategy. Is it effective to financially stress service delivery partners while you are also asking them to be innovative in their delivery of the quality, contingent workforce services your company requires? Under these financial conditions, not much funding might be available to be innovative, and when market pricing strength is in the service delivery providers advantage, inappropriate cost of money elements will be applied to the overall service costs compared to existing, competitive bank funding rates. It will not seem as an appropriate choice during that timeframe.
There are standard mitigation requirements that need to be established to protect corporations from general risks of doing business while enabling them to maintain competitive advantages. But some strategies might do more harm than good. On the surface, treating your staffing /CW program partners as an insurance company or a bank might appear an effective business strategy, but upon closer examination, they do not have the capabilities or competencies to do so, and placing such burdens on them may be more damaging to your program in the long run.