Hiring external resources - when is Statement of Work (SOW) the better option?
In today’s dynamic labour market, organisations are facing huge challenges in managing their workforce. Besides having staff on employment contracts, an increasing number of businesses are hiring contingent workers, either by engaging agency or seconded staff, or by outsourcing projects to vendors or self-employed persons. Contingent workforce management is essential to ensure that these workers are integrated effectively and that they perform their duties as expected. One of the instruments for achieving this is a Statement of Work (SOW).
What types of SOWs are there, what are the differences between them and can all external resources be engaged under an SOW arrangement? And what are the trends in the SOW domain?
What is a Statement of Work (SOW)? A Statement of Work (SOW) is a formal document that outlines the scope, objectives, deliverables and responsibilities of a specific project or engagement. It is commonly used in project management, contracts and procurement processes to provide a clear understanding of what is expected from all parties involved. The two main options for an SOW arrangement are managed services (end-to-end solution) or staff augmentation (hiring individual professionals or teams with specific skills to supplement the existing workforce).
Types of SOWs
There are three types of SOWs:
- Fixed Price SOW: this type of SOW defines the exact requirements needed to complete a project as well as the agreed budget and timelines. The contractor commits to delivering the defined outcomes within the agreed parameters. This is when engaging SOW-based workers is usually preferable over hiring contingent workers. A Fixed Price SOW is typically used to shift the risk of time or budget overruns to the contractor.
- Time & Materials (T&M) SOW: in a T&M SOW, the client pays for the actual time worked by the contractor’s personnel, along with the cost of materials. This type of SOW is generally used for projects with uncertain scope. The client might then consider entering into an SOW engagement rather than hiring contingent workers as an SOW provides the flexibility to adjust the use of resources to fit the project requirements.
- Performance-based SOW: in this type of SOW, the contractor is paid for time spent and the costs of resources used. ThisThe SOW focuses on the desired outcomes of the project, but the contractor chooses the methods and processes required to meet the performance objectives. In this situation, an SOW arrangement might prove useful, as SOW-based workers offer specific expertise without the client having to bear full responsibility for resource management
Choosing between SOW-based workers and contingent hires
There are a variety of reasons why hiring managers choose to either opt for an SOW engagement or a contingent worker arrangement. Besides having rational reasons, their decision is typically motivated by the organisation’s strategy concerning headcount versus costs. Organisations with a focus on FTEs that include contingent workers in their headcount are likely to use SOW arrangements in their hiring strategy so that their external resources do not drive up their staff complement.
Depending on the nature of the project and the organisation’s requirements, hiring contingent workers can serve to substitute or add to certain aspects of an SOW. There are three advantages to hiring contingent workers:
- Flexibility: contingent workers allow organisations to quickly scale their workforce up or down based on specific project requirements. This offers flexibility in terms of capacity and expertise.
- Cost savings: hiring contingent workers can lead to cost savings for organisations as they pay for services delivered only without having to assume long-term commitments.
- Specialist expertise: contingent workers often bring specific skills and expertise that are required for a project. This allows organisations to leverage high-quality resources without having to invest in hiring permanent staff.
Trends in outsourcing SOW management
The management of SOW arrangements and contingent workforce processes is increasingly being outsourced to specialist service providers. The trend is towards technology integration. Organisations are increasingly harnessing technology solutions, such as Vendor Management Systems (VMSs) to streamline their SOW management and contingent hiring processes. These platforms offer efficient sourcing as well as improved visibility, control and reporting options. They also allow for thorough data analysis. By applying advanced data analytics to SOW-related information, organisations can gain valuable insights into project performance, cost saving and compliance aspects.
Why opt for a Managed Services Provider (MSP)?
Organisations are partnering more and more with MSPs to handle their end-to-end SOW management and contingent hiring processes. MSPs offer expertise, process efficiency and vendor management services.
Organisations stand to benefit from outsourcing their SOW management to the same MSP that manages its contingent workforce processes. There are six reasons why engaging a single MSP would be advisable:
- Expertise and efficiency: MSPs have specialist knowledge of, and experience in, managing both SOW arrangements and contingent workforce processes. They know all about best practices, relevant rules and regulations, fees and rates, fee negotiations and the vendor selection process. This knowledge allows them to offer their clients robust advice on the most appropriate channel for a specific project. An integrated approach enables an MSP to take a holistic view of workforce management. Using a single expert MSP can lead to efficiency gains, which will result in better outcomes.
- Savings and cost control: a single MSP will allow an organisation to save costs by streamlining the procurement process, creating negotiating leverage and optimising the potential of external resources. The MSP will ensure compliance and risk management, which is likely to lead to further cost savings on legal issues and fines.
- Vendor management: managing multiple vendors for SOW and contingent workforce engagements can be time-consuming. An MSP serves as the point of contact and takes charge in vendor management issues, including contract negotiations, performance assessments and – where needed – dispute resolution. This lightens the load for the organisation and improves vendor relationships.
- Operational efficiency: outsourcing SOW management to an MSP gives organisations the freedom to focus on their core business and strategic initiatives. This allows them to benefit from the MSP’s operational efficiency, which ensures streamlined processes, automated reporting and compliance with contractual obligations, resulting in better project management and a faster time-to-market.
- Scalability and flexibility: an MSP can offer the scalability and flexibility an organisation needs to come up with a rapid response to its changing needs. The MSP can help to identify the right mix of SOW-based and contingent workers, depending on the project requirements and the availability of other resources. This will optimise the organisation’s resource planning and allow it to quickly scale up or down where needed.
- No unwanted substitution: the substitution effect, also referred to as the water-bed effect, occurs when an organisation limits or freezes its hiring of contingent workers and instead sees an increase in its SOW engagements. That can lead to a shift from one type of external hiring to another without actually achieving cost savings or efficiency improvements. Using a single MSP for managing both SOW engagements and contingent hiring makes it easier to prevent the substitution effect.
Developments in SOW management
An effective and holistic approach to managing SOW-based and contingent workers is key for organisations that are looking for flexibility, expertise and cost optimisation. Combining the different types of SOW arrangements with options for hiring contingent workers enables organisations to take a more dynamic and strategic approach to their workforce planning. The emergence of technologies and specialist service providers shows that SOW management is an evolving domain that is constantly changing to meet the needs of today’s organisations.
Author: Marc Viëtor
