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Financial-services companies face a significant challenge: they need to reduce costs while ensuring they have the talent necessary to both run the business and continue to evolve in a highly dynamic marketplace. The “great resignation,” remote work, and enduring labor shortages have aggravated these challenges. At the same time, regulatory costs continue to rise, and upstarts from inside and outside the industry are taking a larger share of the revenue pie. With inflation persisting and recession looming, the road ahead isn’t getting any easier. Practically speaking, this means that cost reduction will continue to be the main lever available to meet shareholder expectations and improve metrics like return on tangible equity (ROTE).
Labor is typically one of the highest costs for financial institutions, which have already gone through waves of reorganizations over the past decade to reduce such costs. Meanwhile, shareholders often pressure management to reduce head count. As a result, it has become commonplace for many institutions to increase the number of third-party contractors they use—both for special projects and to carry out basic business functions. In fact, in many organizations, a growing number of contractors have longer tenures than the average full-time payroll employee. The uptake of contractor roles presents an important—and often overlooked—cost-savings opportunity for many financial-services organizations. The challenge is not to use less talent, but to engage this sector in a more direct, strategic, and effective way.
Let’s consider the underlying cost structure of hiring contractors and of the intermediaries that profit from this model. In a typical arrangement, the contractor takes home as wages a relatively small share of the cost paid by the financial institution. It’s not atypical for the contractor to receive between $55 and $65 of every $100 spent. Most of the rest goes to the staffing agencies. The software and platform providers used to procure and pay these individuals usually take between 2 and 3% of each transaction.
What services are the staffing agencies providing for those fee levels? For the most part, the answer is recruiting and onboarding, plus any needed background checks and worker classification based on local law. These are largely one-time costs and are easily recouped after a short period of time. When contractors work for many years at a particular institution, these fees, even if they decline with increased tenure, represent pure profit.
Companies have a real opportunity to reduce these costs—if they are willing to think about talent procurement in a new way.
The platform approach
As in other sectors of the economy, platforms are changing the game in terms of accessing and procuring talent. The talent offered on platforms such as Aquent, UpWork, and Working Not Working, which eliminate the intermediary role that staffing agencies play, range from IT professionals and project managers to marketing and call center staff, and everything in between. In addition to enjoying greater flexibility and a better work–life balance, people hired through these platforms are often able to earn higher pay than they could through conventional employment. Technology companies and fintechs, for their part, have been aggressive in their use of these talent platforms, which allow businesses to scale their workforces up and down depending on their immediate needs. This approach, in turn, allows for a smaller permanent employee base and minimizes the use of expensive long-term contractors and staffing firms. The savings are huge, as is the increase in flexibility.
In many organizations, a growing number of contractors have longer tenures than the average full-time payroll employee.
Let’s take an example. A company working through a staffing agency that charges a 40% markup would pay $140,000 for a $100,000 contractor. By contrast, a company engaging with the same employee via a platform would pay a fee of only 8 to 10%. Multiply that by hundreds or even thousands of contractors, and the savings add up. The principle is relatively straightforward: when a firm engages with a contractor via a staffing agency, it is essentially promising a certain number of hours or employing them on a full-time basis—whether they are fully engaged every minute or not. On a platform, by contrast, it’s more likely that firms are paying for actual hours worked, or they are getting more flexible, project-based terms. Further savings can be realized by using a portion of the talent, and only when needed.
Recently, a number of larger institutions have taken the gig platform model a step further and moved to create their own talent platforms and sourcing teams. Companies like GE and Shell have used a talent management platform to identify experts and to give internal workers the chance to broaden their experiences across the company on a self-selecting basis. The software firm Oracle operates an internal talent marketplace analogous to a gig platform, allowing workers—for instance, new hires or those nearing retirement—to choose to work on projects rather than in a traditional full-time model. In addition to the significant savings achieved, investing directly in an internal talent exchange can deliver other benefits:
- Because a company’s brand is typically a stronger talent draw than that of staffing firms and third-party platforms, an internal platform can build a motivated human capital base.
- Most of the contractors a company wants to keep will move from staffing firms to the talent-exchange model if properly motivated.
- A talent exchange can help companies develop a new pool of loyal, proven talent to draw upon on a consistent basis.
- Better talent, smartly deployed, drives improved business outcomes, and the greater use of gig workers improves the ability of the business to flex to meet changes in demand.
Of course, financial-services companies don’t have to build their own platforms from scratch. MBO Partners, a pioneer of the talent-exchange model, builds customizable “white label” platforms for use by corporate clients for both onshore and offshore talent. They draw on a network of tens of thousands of gig economy workers in the US and, increasingly, other markets around the world, particularly Eastern Europe and India, to help organizations populate their “virtual benches” and to draw them down as needed.
Overcoming the barriers
So, why isn’t everyone embracing this model or using it as extensively as they should? In my conversations with financial-services leaders, I’ve encountered six potential barriers. Fortunately, there are strategies for overcoming each of them.
To overcome a potential lack of alignment with firmwide cost-reduction programs, companies can create separate work streams and goals regarding gig economy savings within the overall cost-reduction program, and appoint a senior business executive to sponsor these efforts and coordinate closely with human resources.
To battle managers’ fear of or lack of familiarity with the new model, companies can conduct pilot sessions and educational programs; take pains to reassure employees that the model isn’t a threat to existing staff but rather a lever for increased productivity and profitability; and provide incentives to managers to work in this new way.
To overcome embedded procurement models that drive talent to sourcing firms, companies can add gig staffing as an additional channel and incentivize procurement teams to direct sourcing requests to gig channels where appropriate.
To compensate for a lack of infrastructure to manage gig economy talent, companies can partner with platform providers to handle technology, as well as worker classification and compliance, and to bolster HR recruiting support for building the talent bench.
To clear up a lack of clarity regarding where to start using the model, companies should learn from peers’ experience to assess the roles most suited to the gig structure, and carefully select the managers who will pilot the program.
Finally, to cope with resistance from contractors to move to a talent-exchange model, companies can set time limits on existing contractor relationships, offer to increase pay to contractors when they shift, and make the talent-exchange model the default mode for new roles.
These and other strategies have proven successful in the marketplace in many industries and successful institutions. The question is whether financial services will overcome the barriers and reap the benefits of new sources of talent and the innovative ways of working that are inherent in the gig economy.
- John Garvey is PwC’s global financial-services leader. He is a principal with PwC US, based in New York.