SOW Misclassification: Is it Costing You?

There is little doubt that the engagement of labor-based services via a Statement of Work (SOW) is a critical component of most organizations’ workforce management strategies. Even if it is not part of a comprehensive talent strategy, it’s quite possible that it's happening with significant volume, as it's simply an effective way to get work done. With clear benefits, this workforce segment has seen significant increase in recent years. In 2015, according to SIA’s Workforce Solution Buyer Survey, large organizations relied on SOW Consultants for, on average, 20% of their workforce. By 2016, that percentage grew to 30%, with more than half of the respondents expecting their usage of SOW to continue to increase over the next 10 years.

more than 10 years after the Great Recession, the US is making history with extremely low unemployment, the largest number of people employed and more job openings than ever recorded. These metrics indicate that sourcing talent has hit a critical level, and most markets are facing strong competition and wage inflation. Concurrently, organizations are trying to gain cost savings through outdated methods that were successful when talent pools were overflowing and unemployment skyrocketed to 10.0%.

The growth of SOW engagements, tight labor conditions, and strong focus on cost control, has resulted in the increased occurrence of misclassified workers engaged through SOWs. When organizations tighten controls around traditional staff augmentation programs, hiring managers’ need for talent does not disappear, and the market price for labor does not decline. To combat the issue, hiring managers are forced to find other avenues to gain access to talent. Oftentimes, that avenue is the engagement of labor through service providers via a SOW, which often does not have the same controls as a staff augmentation/MSP program.

A SOW is a legitimate and effective engagement mechanism, most often when work is deliverable or milestone based, and most importantly when the supplier is bearing the risk of the results. However, SOWs are increasingly being used to simply engage workers as a work-around to staff augmentation controls – and in many cases the SOW only contains named workers or job titles at hourly rates – the telltale sign of a staff augmentation engagement – albeit at higher rates than may have otherwise been negotiated for the same roles, simply because it is on a SOW! To complicate matters, many staff augmentation suppliers are now offering SOW-based services, creating even more grey area in how workers are classified.

Easily identify misclassification by answering 5 simple questions with our checklist below:

These are just a few examples of things to look for in the way an engagement is structured that can lead to quick identification of misclassified staff augmentation work, and the potential for significant savings.

By using these guidelines at a large Financial Services client, AGS was able to achieve the following positive results in compliance and cost savings:

Workers engaged via a labor-based SOW are a necessary and important segment of the workforce for many organizations, and is expected to continue to increase in upcoming years. With the competitive sourcing conditions in the US and ongoing cost savings goals in contingent workforce programs, it is no surprise that many organizations struggle with misclassification of staff augmentation workers on SOWs. Businesses must strive to create realistic expectations for cost management and savings in their contingent workforce program, to avoid driving additional costs to their organization by overuse of workers on SOWs.

AGS Services Procurement is responsible for driving procurement strategy and solutions to our clients to better manage and gain greater insight into their services spend. If you have any questions about our Procurement offerings, or the benefits that can delivered, please contact Jon Kesman, Global Head of Services Procurement at jkesman@allegisglobalsolutions.com.

*this blog is co-authored by Jon Kesman.