In my last post I discussed the commoditization of the staffing industry.  How did the most diverse “product” in the world-people-become an undifferentiated commodity distinguished only by its hourly unit price?  Sadly, it is because our clients’ experiences with multiple staffing firms, over time, have convinced them that there isn’t a performance difference worth paying for.

Our clients define the criteria—an hourly bill rate—and we let them do so.  We obediently go along, even though we all know that the productivity equation is far more complex than a bill rate.  Certainly, we need to be concerned about our client’s bottom line if we are going to gain their business.  But the bill rate simply is not the bottom line.  For any given workforce, for any given amount of time, the real bottom line equation is:

• Total labor hours to produce required number of products times the hourly rate;
• Plus: the costs of turnover, absenteeism, no-shows, and unfilled orders (as a function of overtime hours required or the value of products NOT produced/services not delivered);
• Plus: the cost of time spent by client management in training replacement employees or babysitting unmotivated workers;
• Plus: the value of lost production due to time required for replacements to get up to speed (production expectations);
• Plus: the revenue or product that is lost to poor quality caused by inadequate or in-training workers
• Equals: total cost of ownership of the workforce.

Divide total cost of ownership by the number of saleable units produced and you get the labor cost per unit.  That is the real bottom line.

Is there any way a superior staffing firm can positively impact this bottom line number even if the bill rate is higher?  There is, and they do.

Can a client tell you the cost of all these value “leakage” components? Not often.  Do we ask if the client even knows the costs described above?  Not likely.  Do we track them to show the savings we have achieved for our clients?  Do we commit to tracking them if we are the chosen supplier? 

As with all significant business purchases, the supplier who can demonstrate a greater ROI will get the business, whether the initial purchase price is higher or lower in raw dollars. 

If my machine costs $50,000 and produces $300,000 worth of product a month, and my competitor’s machine costs $40,000 and produces $150,000 of product a month, I’ll win the business!  I am more expensive, but my ROI is almost double that of my competitor for only a 25% investment premium.  However, if I just state my machine’s cost without mentioning its output, I will lose. 

Our “labor machine” is no different.  As staffing professionals, we must define the productivity model.  We must provide proof that the design, construction and maintenance of their our machine will generate a lower labor cost per production unit (not per labor hour) than a competitor’s.  Failing this, we will be stuck in commodity hell bargaining over hourly bill rates and giveaways.

Make sense?  Next time I’ll write about providing the productivity proof.