BlogPurchase Orders and Contingent Labor

Purchase Orders and Contingent Labor: The Oil and Vinegar of the Business World?

by Steve Knapp, Vice President, Consulting

You’re implementing a Vendor Management System (VMS). Should you continue using Purchase Orders (POs) from your procurement/ERP system for contingent labor?

The short answer is, it depends. In many companies, regulations exist to prove that purchasing done with company monies has the appropriate checks and balances. Maybe these regulations are built around compliance with Sarbanes-Oxley or Separation of Duties.

Two Questions to Ask About POs

Whatever the case may be, here are the two key questions to ask when implementing your VMS:

  1. Are POs necessary for contingent workers?
  2. Are POs appropriate for contingent workers?

Are POs Necessary?

As for the first question, whether POs are necessary, many stakeholders will answer with a resounding “Yes.” Procurement and finance departments within large organizations require that contingent labor be purchased on a PO to be compliant.

On its face, this seems sensible. But it might be redundant. Are you using a PO to ensure compliance with checks and balances, approval processes and visibility into spending? A VMS already does that.

Within the VMS, an individual contractor is represented with a work order or assignment (whatever your company calls it…maybe even ‘purchase order’). This work order provides a start date, end date, maximum budget, approval process visibility into consumed budget, transparent reporting to engagement managers, senior stakeholders, finance, suppliers, and so on. With all of that detail listed in one place, a PO may not be necessary.

Maybe the issue is a technical one. Often, your existing POs feed your data warehouse or business intelligence reporting. Or perhaps various dashboards or financial processes depend upon information flow from your current POs. As most sophisticated companies have discovered, there is a purely technical solution for overcoming this challenge. Perhaps your existing POs are not necessary if you can convince senior stakeholders that a VMS work order provides sufficient controls.

Are POs Appropriate?

As for the second question, whether a PO is appropriate, there is probably more disagreement from organization to organization. In theory, a PO ensures an approval process for money spending and spending caps. Does this work in practice? Yes, in some cases.

But far too often, POs for contingent workers are raised only AFTER the person has been identified, and for too short a duration. This leads to multiple POs being raised for the same worker, with no clear link between them. Additionally, once a contingent worker has performed services, they are legally required to be paid. Yet deductions from the PO doesn’t occur until well after the work has been performed. When the supplier sends an invoice, it creates a time lag between services rendered and the receipt of service. All in all, your existing PO process tends to lead to a situation that is the opposite of total visibility and control.

Worse yet, if you choose to implement a VMS solution and set up a parallel PO process for each work order, you have to find a way to sync them. This is time-consuming, expensive, and sometimes not even possible. Some PO systems don’t allow for amendments to the PO the way VMS systems allow for changes to a work order/assignment.

The Bottom Line

VMS systems have features that are used frequently in the contingent world. They account for effective dating of rate changes, multiple rate types, multiple cost codes and project codes. In the contingent labor world, rate changes (for statutory or non-statutory issues) occur frequently, and end dates often change. Cost centers and project codes can change during the course of a single assignment, and expenses are unpredictable. With all of those variables, your existing POs are not designed to cater to the dynamic world of contingent labor services. They were designed to handle goods rather than ongoing services. VMS systems, on the other hand, are tailor-made for services procurement.

Now What?

As you implement a VMS and grapple with the question of whether or not to use your existing Purchase Orders to manage contingent labor, take a moment to reflect. Are POs necessary? Are they appropriate? Of course, even if you answer “no” to both questions, there may still be political or technical challenges to overcome.

The right path is not always the easy path. Take some comfort in knowing that most companies struggle with the same question. Brightfield can help you join the other top quartile companies in building a solution that is efficient, comprehensive and fit-for-purpose.