​In yesterday’s post, I explained why it’s become a competitive imperative for companies to get smarter about sourcing contingent labor. Today I’ll explain how.

There hasn’t been a lot of transparency around pricing in the past, which has made applying sourcing rigor difficult. But, that is changing. There are ways to get this information, and companies need to then take that information and adapt some of their internal HR processes to be able to compare price and quality and make smarter, more strategic decisions about contingent labor.

Getting accurate pricing

One of the reasons we don’t have transparency is that up until now companies have mainly dealt with contingent labor through temp agencies and placement services, which have mostly dictated prices. The delta between agency bill rate and worker pay rate can be considerable, and it’s tough to know what the real going rate should be, how it is trending and how much above or below market you are paying.

Furthermore, this is not like negotiating for a commodity, where you go in with a clearly defined specification and you’re essentially negotiating with suppliers around margin or efficiencies they think they can achieve. In this category, you’re not negotiating around price. You’re negotiating skills, experience and competency. If an agency has somebody who is highly skilled and experienced and bills at $75 an hour, you might be able to get the price down to $60 or $65 but you won’t be getting that person, or their equivalent. Most people don’t realize that.

So how can you get accurate information about what you should pay for different levels of skills and experience? IQNavigator’s IQNdex, Payscale.com, salary.com and Glassdoor all have this kind of information as an add-on to their core business models. Vendor Management Systems and Managed Service Providers like Fieldglass and Pro Unlimited make their data available, but they’re also fee-based supplier networks for contingent labor, so they’re incented to put out higher numbers because they make a percentage on the billing rate. It’s a bit of the fox guarding the henhouse, so you have to factor that in when you’re looking at their numbers.

Independent labor market data subscription services like PeopleTicker (full disclosure: I’m an advisor to the company) can be a great resource for getting at the real pay rates for different geographies, without the agency markups.

Some of the limitations of these resources are that they may not have a lot of data points for niche specialties or people who are at the very top of their fields, and the rates may be blended across many geographies and not be applicable to your specific market.

Adapting internal processes

What you ultimately have to do is develop your own internal methodology , because you have to be able to evaluate not just worker-versus-worker or agency-versus-agency, but what you’d pay for a full-time employee versus what you’d pay for contingent labor in the same position. There’s a presumption that temp labor is cheaper, but that’s not always the case. You need to have a point of comparison to identify the premium you’re paying for temp labor, whether that’s more or less than you’d pay for an FTE, and which setup makes the most sense for your situation.

The best way to do this is to look at the going rates for full time employees. There are a lot of places to get that kind of intelligence and this is something HR is already good at. Then take your job descriptions and modify them for contractors. There are certain responsibilities that shouldn’t be handled by contractors. For example, they shouldn’t be managing people or signing contracts. Redact employee responsibilities out of the position descriptions and adjust the pay rate accordingly.

Then, put a number on all the statutory expenses and benefits associated with employees. Most companies know what that is; they know if they are paying someone $50,000 a year in salary, it’s costing them $75,000. Once you have that figured out you can do a comparison of whether it’s economically sound to hire contingent labor or a full-time employee, and roughly what you should pay for each. The key here is it is not just the cost comparison; flexibility and seasonality may be important considerations for your company as well.

Adding sourcing rigor

This of course presumes that you have good job descriptions. Most companies don’t. They bring a lot of rigor to job descriptions for FTEs, but very little to those for contingent labor. Fuzzy position descriptions typically result in fuzzy candidates and/or paying for skills beyond what is needed. Everybody wants a “ninja” or “rockstar,” so they write a position description that asks for the sun, the moon and the stars. The likelihood of all those skill sets existing in a single person in the area you’re looking for is remote, but what it does is give contingent labor providers the opportunity to upsell you. You can’t manage a category like that.

You need to bring the same rigor to writing job descriptions that you would to writing specifications for sourcing any other commodity, so that you have alignment and consistency to make accurate comparisons. Take the time to clean up your job descriptions so they’re standardized against the market and prioritized against what you need—back out everything that is not essential. With good job descriptions, you can better use these outside data sources to get closer to what you want. For example, you can see pricing for the same skill sets at an entry, mid and high level.

All of this can help you become a smarter buyer, but even with the best data you can’t just buy off the rate card. Two people with identical credentials will be still be very different. They could have an alphabet of letters after their name and still be lousy at what they do. The final step still needs to be an interview process to meet the people and really understand what you’re buying, because chances are they could be around for a long time.

Because we’re dealing with people here, managing this category will always require a different approach you’d take with a commodity, and it isn’t something that can ever be fully automated. However, the growth in this market offers companies new opportunities to gain a competitive advantage by having access to skills and expertise they might not have been able to previously. Those who adapt will have a leg up on the competition and the rest will remain mediocre, so forward-looking companies will find investments in improving well worth the effort.

Jack Miles is the former Secretary for the Department of Management Services for the state of Florida and served as the Chief Procurement Officer of several Fortune 100 firms. He serves on Coupa Software’s Visionary Council. This article previously appeared on SIG Inside Sourcing Newsletter.