Contingent Labor Cost Reduc+on Strategies for the Oil and Gas Sector

Transcription

1 White Paper Contingent Labor Cost Reduc+on Strategies for the Oil and Gas Sector With the recent collapse in crude oil prices, much of the oil and gas sector finds itself under substantial pressure to reduce costs. Because most oil and gas companies heavily rely on contingent labor, with independent contractors comprising up to 50 percent of many workforces, there are tangible opportunities for cost reduction associated with the management of the contingent workforce. This White Paper explores the reasons this is the case and proposes six topics oil and gas companies need to consider when assessing their contingent labor for cost reduction. The oil and gas sector is known for its rapid and dramatic fluctuations. The latest downturn in crude oil prices is a perfect example. In June 2014, oil prices hit a peak of $107.26; seven months later, oil was trading for less than $50 per barrel. Hard- To- Find Talent To offset the precipitous drop in revenue, many oil and gas executives focused their attention on cost reduction. And for the U.S. market, cost cutting is particularly prevalent, where the cost of production for shale fields is higher than those in other markets. In response, as often happens during an industry downturn, a number of leading oil and gas companies recently revealed plans to shrink their workforces in coming weeks and months. As upstream projects in the oil and gas sector are often in some of the tightest labor markets of the world and moreover require very specific, highskilled talent, contingent labor is seen as a strategic supplement or alternative to full-time staff PRO Unlimited, Inc. Page -1-

2 Up to 10 Percent Cost Reduc+on With a vendor-neutral model such as the integrated VMS-MSP solution from PRO, oil and gas clients realize between a 5 and 10 percent reduction in costs. Cost Reduction: Look to Contingent Labor One of the most obvious reasons oil and gas companies should look at contingent labor is that the loss of full-time employees typically incurs a d e t r i m e n t a l, l o n g - t e r m i m p a c t o n t h e organization. Replacing highly skilled, tenured employees once the market recovers can be difficult. Moreover, the time spent retooling staffs can even result in lost revenue opportunities. Contingent Workers as an Industry Mainstay Historically, oil and gas companies have relied heavily on contingent labor, as compared to other industries. Contingent workers comprise up to 50 percent of many workforces in the oil and gas sector. 1 The volatility of crude oil prices and the need for highly specialized skill sets often per project are the primary reasons contingent labor plays a more important role in oil and gas than in other industries. But the advantages of maintaining such a high percentage of the workforce as contingent labor extend far beyond being able to quickly and easily scale the labor roster up and down. As upstream projects in the oil and gas sector are often in some of the tightest labor markets of the world and moreover require very specific, high-skilled talent, contingent labor is seen as a strategic supplement or alternative to full-time staff. In particular, as many of those projects are time-specific engagements, engaging full-time staff for each of the tasks is often difficult or even impossible. With this in mind, how a company manages its contingent labor is critically important especially when costs are factored into the equation. Nevertheless, while full-time workforce reductions may still be necessary for many oil and gas companies, a company s contingent workforce might be a better place to start. By absorbing some of these cost-reduction mandates within the contingent workforce, organizations can avoid o r g a n i z a t i o n a l c h u r n a n d m o r e over p u t themselves in a better position to capitalize on production opportunities when oil prices rebound. Yet there is a gap in how well contingent labor is being leveraged. Most believe contingent workers provide tangible value: 48 percent of oil and gas companies believe contingent workers enable them to find highly specialized skill sets, while 63 percent indicate contingent labor helps them bridge the project-skills gap. 2 However, the marks from industry executives differ significantly: only 17 percent rate the work their companies are getting from contingent workers as high (73 percent put it at medium, and 2015 PRO Unlimited, Inc. Page -2-

3 10 percent rank it poor). 3 There is obvious room for improvement, at least from the perspective of the executive suite. 6 Considerations When Assessing Contingent Labor Because of the unique nuances that come with contingent labor utilization in the oil and gas sector, coupled with stringent environmental and regulatory requirements, the importance of how it is managed is heightened. Better management systems and practices maximize contingent labor spend while mitigating risks. The end result includes reduced costs. The following are some of the things oil and gas companies need to consider when assessing their contingent labor approaches. Noncompliance Examples in Oil and Gas Two recent cases in the oil and gas sector demonstrate the importance of good risk hygiene. First example. In December 2014, the Department of Labor awarded 5,310 oil and gas workers in Pennsylvania and West Virginia nearly $4.5 million due to various violations of the Fair Labor Standards Act. One of the reasons cited was worker misclassification. Second example. On November 3, 2014, an oil-rig consultant filed a class-action lawsuit seeking to represent 25 other oil-rig consultants who performed work on offshore drilling rigs in the Gulf of Mexico for Onward LLC. The lawsuit claims the consultants were improperly classified as independent contractors during a four-month period when they performed work for Onward. Documentation submitted with the case indicates the company hired, trained, and supervised the consultants daily work as if they were employees, required them to comply with instructions on how to do their work, required their attendance at an onshore training course, and set all days and hours of the work. At the end of the fourmonth timeframe, the consultants were reclassified as employees but denied pay for all hours worked and for overtime PRO Unlimited, Inc. Page -3-

4 1. Centralized Management and Standardization Centralized management and standardization are the first recommendations the Aberdeen Group made in a study of contingent labor management practices in the energy and utilities sectors: If contract labor is not managed centrally, it can lead to a groundswell of additional costs and fees (with the inclusion of services in the contingent labor space). 4 One of the ways oil and gas companies standardize and centralize the management of contingent labor is through the use of vendor management system (VMS) and managed service provider (MSP) solutions. A VMS platform hosted in the cloud centralizes management of all contingent workforce management activities and processes. A MSP program places consultants onsite to help manage all aspects of a contingent labor program. PRO employs a combined VMS-MSP approach on the premise that clients gain greater value from an integrated technology-consulting program. 2. Transparency and Visibility The following is a checklist of some of the questions that procurement and HR leaders need to ensure are included in their centralized view and management of contingent workers: Identification of all managers who are using contingent labor Classification of all workers, including those who are seasonal employees Governance controls and processes used to control overtime costs Tenure rationalization based on variable needs with documentation, tracking, and reporting Use of adaptable-sourcing models for talent acquisition Quantitative scorecards, vendor forums, and manager and worker surveys Use of standard HR practices and protocols Centralized documentation and standard contracts to manage and update agreements Standardized Fair Labor Standards Act (FLSA) and wage/hour compliance guidance Bridging the Talent Gap The ability to have an integrated line of sight across all aspects of contingent labor spend and management must accompany the move to centralization. Those responsible for managing the organization s contingent workforce require a centralized view of all aspects of labor utilization and management. 48% of oil and gas companies believe contingent workers enable them to find highly specialized skill sets, while 63% indicate contingent labor helps them bridge the project-skills gap 2015 PRO Unlimited, Inc. Page -4-

5 3. Talent Sourcing Oil and gas companies that limit their talent procurement to a handful of sources see higher costs. It is a simple outcome of the law of supply and demand. There are multiple ways to source contingent talent: Staff augmentation. The most prevalent is staff augmentation through staffing agencies. The breadth of a supplier network is particularly important here; specifically, the inclusion of small, boutique staffing agencies that specialize in hardto-find, highly specialized skill sets can be the difference between finding the right worker and not finding one. Self-sourcing. Because many of the roles and projects that contingent workers are being recruited to fill in the oil and gas sector require skill sets that are highly unique, managers turn to self-sourcing. Here, managers reengage with former employees and independent contractors, retirees seeking temporary assignments, and other talent in their network who possess these specialized skill sets and experience. SOW-based projects. Statement-of-work (SOW)- based projects are becoming increasingly prevalent in the oil and gas section (see below for more detail on how SOW contingent labor utilization is on the upswing). These projects, which are demarcated with a beginning and end, draw heavily upon contingent workers to meet highly specialized skill-set requirements. PRO applies a vendor-neutral talent supply chain model where suppliers and the talent they provide are evaluated and sourced on a level playing field. This approach also means multiple suppliers are engaged for talent acquisition. 50% of Oil and Gas Workers Contingent workers comprise upwards of 50% of many workforces in the oil and gas sector. So what types of results do oil and gas companies typically see when deploying PRO s VMS-MSP solution? When it comes to cost reduction, the business outcomes can be substantial. Most see between a 5 percent and 10 percent reduction in costs. For previously unmanaged contingent labor programs with high-adoption levels, savings in excess of 10 percent are often realized. Given many contingent labor budgets in the oil and gas sector are in the tens of millions of dollars, the savings are dramatic extending into the millions of dollars annually. Factors such as vendor rationalization, variable overtime management practices, and partnership in talent management practices are important influencers in regards to the type and size of potential cost savings PRO Unlimited, Inc. Page -5-

6 The concurrent widening of the supplier network and inclusion of governance controls also improves talent quality. As an example, hiring managers using PRO s VMS-MSP solution see an average increase in available talent pools of 43 percent. Further, PRO clients (in the oil and gas sector) typically observe length of stay tenure of nine-and-a-half months, with an average full-time conversion rate of 22 percent. The latter is a particularly important point since a significant number of contingent workers are sourced on a try-and-buy basis. Managers want to determine if the worker is an appropriate fit before assuming the responsibilities that come with a full-time employee status. 6 The implications of quality have other impacts as well. For example, failing to source the best, most qualified talent can have a detrimental impact. Sixty percent of safety incidents on oil and gas job sites 4. Mitigation Risks Any benefits an oil and gas company achieves through cost reduction can quickly evaporate in the face of worker misclassification, co-employment, or noncompliance with the Patient Affordability and Care Act (ACA) (viz., staffing suppliers must conform with ACA requirements). For any organization using over 20 or 30 contingent workers in more than just intermittent assignments, there is a valid business case for some form of a managed service, with a vendor management system (VMS) and managed service provider (MSP) being the ideal scenario. Simply put, as a company s contingent workforce grows in size and complexity, so does its risk posture. The consultative expertise of the MSP helps mitigate potential compliance risks, while the VMS platform subsumes all contingent workforce management tasks underneath one technology umbrella. The integrated VMS-MSP approach of PRO enables organizations to gain the full potential of both solutions. Centralized Management If contract labor is not managed centrally, it can lead to a groundswell of additional costs and fees (with the inclusion of services in the contingent labor space). Source: Aberdeen Group, Improving Cost and Quality Control Within Contingent Labor Management: The Energy/Utilities Viewpoint, Aberdeen Sector Insights, August PRO Unlimited, Inc. Page -6-

7 Cost of U.S. Shale During the current downturn in the oil and gas sector, the importance of shaving costs is greater in the U.S., where the cost of production for shale fields is higher than those in other markets. spend is in the top five areas of budget allocation for many oil and gas companies, 9 while Bain notes that some companies are increasing full-time staff needed to manage the contingent workers on SOW-based projects by 80 percent. 10 Even during an industry downturn like the current one, labor shortages in some market segments and skill sets will continue to exist. For SOW-based projects, strategic, upfront planning must occur. For organizations with an MSP, consultation in advance can help offset delays and labor cost increases. Indeed, the rise in labor cost is a pressing issue; oil and gas companies report a 30 percent increase in labor costs for projects after they are underway SOW-Based Projects Staff augmentation is one of the ways companies leverage contingent labor. But as the staffing i n d u s t r y h a s e v o l v e d a n d t h e b u s i n e s s requirements of companies using contingent talent have changed, a more strategic means of engaging contingent workers has arisen. Specifically, companies are increasingly turning toward contingent labor as a strategic resource when staffing statement-of-work (SOW) projects. 8 SOW-based projects are commonplace in the oil and gas industry, as companies recognize the importance of sourcing and managing the right talent. For these time-based projects (defined by a beginning and an end), highly specialized talent is a critical asset, often making the difference between profit and loss, success and failure. Much of the talent on these SOW-based projects is contingent. Accenture reports that contingent SOW labor PRO s integrated VMS-MSP solution enables clients to plan labor sourcing for SOW-based projects in advance. Further, data analytics within PRO s VMS platform, Wand, allows clients to source talent based on real-time market rates. Since the type and size of the business outcomes are variable, dependent on the nature of the SOW project and required skill levels, the results of the VMS-MSP solution vary. PRO clients sourcing contingent talent for SOW projects typically see anywhere from a two percent to eight percent reduction in costs, sometimes even higher. New, first-generation SOW clients normally realize seven percent or more, since the potential business outcomes are greater due to their starting points Workforce Management Automation and transparent management of various tasks and workflows of contingent workers is crucial. Lack of systems and processes thereof results in 2015 PRO Unlimited, Inc. Page -7-

8 operational inefficiencies and enhanced risks. Visibility needs to extend to the managerial level; simply delivering reporting and management capabilities to program owners is insufficient. The Aberdeen Group describes the impact: Managers will have greater visibility into the availability and current allocation of skilled workers which, in turn, will enable organizations to more effectively expand or reduce their contingent workforce based on market fluctuations and demands. 13 Because many managers and nearly all workers in the oil and gas sector are mobile, the software platform must be multichannel, enabling managers and workers to communicate and initiate workflows via their mobile devices. PRO launched the industry s first native mobile app, Wand, for the Apple iphone in March 2014 and the Apple ipad in October 2014, and oil and gas clients have been among the earliest and highest adopters for both managers and workers. Indeed, the rate of adoption for oil and gas is twofold higher than any other industry segment. Because contingent labor comprises a larger workforce percentage in oil and gas than in other industry segments, the potential business outcomes are greater. The relevance of cost reduction gains much greater traction during industry downturns such as the one that overtook the sector in late PRO s integrated, vendor-neutral VMS-MSP solution can fuel much needed cost savings, while helping to protect against noncompliance risks. To find out if PRO s Payrolling Services, 1099 Business Validation Services, or VMS-MSP Solution are right for your organization, contract us today via or phone ( ) today. Mobile Manager and Workers Because many managers and nearly all workers in the oil and gas sector are mobile, the software platform must be multichannel. Fueling the Management of Contingent Labor For many oil and gas enterprises, the breadth and complexity of their use of contingent labor dictates the need for a comprehensive solution involving both a VMS platform and MSP program. PRO has decades of experience working with leading enterprises to address their unique industry circumstances with a combined technologyservices approach PRO Unlimited, Inc. Page -8-

9 Figure 1: Contingent Labor Management in the Oil and Gas Sector Filling the Gap 48 percent of oil and gas companies believe contingent workers help them to find highly specialized skill sets; 63 percent indicate contingent labor helps them bridge the project-skills gap. However, industry executives rate only 17 percent of the work their companies get from contingent workers as high (as compared to average by 73 percent and 10 percent as poor). There is obviously room for improvement in how contingent labor is managed, at least from the perspective of the executive suite. Reducing the Cost Under PRO s integrated VMS-MSP model, most enterprises see a 5 percent to 10 percent reduction in contingent labor costs. Previously unmanaged contingent labor programs with high adoption levels observe 10 percent or higher. Sourcing the Talent With PRO s vendor-neutral VMS-MSP approach, managers see an average increase in talent pools of 43 percent. Average length of tenure for contingent workers is 9.5 months, and average full-time conversion rate is 22 percent (as many employ a tryand-buy approach). Mitigating Risk Oil and gas worksites are highly fissured, and any benefits gained through cost reduction can quickly evaporate with worker misclassification. Having a trusted MSP advisor such as PRO, coupled with a VMS like Wand, helps mitigate risks. Staffing the SOW SOW projects are becoming widespread particularly so in the oil and gas sector. Increases in labor costs and the difficulty in finding high-skilled, specialized workers causes SOW labor costs to increase an average of 30 percent. PRO s VMS-MSP solution delivers between two and eight percent cost reductions for SOW projects (for existing clients), and typically seven percent or more for new clients. Going Mobile 71 percent of workers in the oil and gas sector use mobile devices for work-related purposes. PRO s Wand mobile app for the iphone and ipad have been warmly embraced by oil and gas managers and workers; in both instances, the adoption rate is twofold higher than in any other industry segment PRO Unlimited, Inc. Page -9-

10 1 Accenture, STATS: Making the Most of Contingent Labor in Oil and Gas, November 26, Accenture, STATS: New Tactics Needed to Manage Contingent Labor in Oil and Gas, October 24, Accenture, Developing Strategies for the Effective Delivery of Capital Projects: Global Survey of the Energy Industry, Aberdeen Group, Improving Cost and Quality Control Within Contingent Labor Management: The Energy/Utilities Viewpoint, Aberdeen Sector Insights, August 2010, pg This number is based on an analysis of prospect and customer data from the oil and gas sector by PRO Unlimited s Data, Analytics, and Metrics team. 9 Accenture, A Perspective on Contingent Labor Management in Refining, Robert Nava and Tiziano Rivolta, Large Project Management in Oil and Gas, Bain & Company, May 29, Accenture, A Perspective on Contingent Labor Management in Refining. 12 Based on data provided by PRO s Data, Analytics, and Metrics team. 13 Aberdeen Group, Improving Cost and Quality Control, pg Cited as the second highest contingent workforce management priority, behind cost, by oil and gas companies (Aberdeen Group, Improve Cost and Quality Control ). 7 Cited by Accenture, Part 1: Reliance on Extended Workforce Increases Risks for Companies Managing Contingent Labor, December Tyler Womack, 2014 Contingent Buyers Survey: Short-Term and Long-Term Contingent Workforce Projections, Staffing Industry Analysts, May 22, About PRO Unlimited Follow us on: F L T PRO Unlimited, through its vendor-neutral Managed Service Provider (MSP) and Vendor Management System (VMS) solutions, helps organizations address the costs, risks, and quality issues associated with managing a contingent workforce. A pioneer and innovator in the VMS and MSP space, PRO offers solutions for e-procurement and management of contingent labor, 1099/co-employment risk management, and third-party payroll for client-sourced contract talent Glades Road, Suite 208, Boca Raton, Florida information@prounlimited.com PRO Unlimited, All Rights Reserved