Know why the right talent management strategy is KEY to lower costs and higher savings!

Tuesday: Return Driven Strategy

FROM THE DESK OF MILES EVERSON:

Welcome to today’s edition of “Return Driven Strategy!”

Today, we're diving deep into the world of the independent workforce, explored through the

perspective of Return Driven Strategy (RDS).

Every Tuesday, we publish articles to help you navigate the constantly evolving labor environment, regardless of whether you're a business leader, manager, or worker.

Today, we’ll talk about the importance of using the right talent management strategy and how this can help a firm lower costs while maximizing profits and savings.

Curious to know more?

Continue reading below.

UPCOMING EVENT ALERT:

For the past several months, warnings about an impending recession have flooded the mainstream financial media, leading regular folks and everyday investors to become wary of this adverse event.

Now, the panic has reached Wall Street, as seen in Warren Buffett’s unloading of USD 5 billion in stocks and Jamie Dimon’s public warnings about interest rates rising to as high as 7%.

Given these events, I asked my friend and colleague, Professor Joel Litman, about his thoughts and what worries him most.

His answer?

It’s time to brace ourselves for the Great Recession of 2024.

Joel says every signal he’s seen for the past several months points to a looming recession that will hit the U.S. financial markets next year. He adds that the adverse economic event will blindside millions of Americans.

In light of his warning, I invite you to join Professor Litman on Wednesday, December 6, 2023 at 8:00 p.m. ET. He will discuss the ONE step you can take with your money before the year ends and how you can reap MASSIVE potential profits as the 2024 recession unfolds.

If you want to move your money NOW before January 1, visit this link to register for the event.

I hope you can join!

miles-everson-signature.png
CEO, MBO Partners
Chairman of the Advisory Board, The I Institute


 


 

Know why the right talent management strategy is KEY to lower costs and higher savings!

In today’s dynamic labor landscape, every firm that engages with independent contractors faces the risk of worker misclassification. When this happens, an enterprise opens itself up to lawsuits, audits, and huge fines.

While it’s true that the independent workforce helps firms attain better performance and lower business costs, such success only comes from careful classification and effective talent management.

This is why knowing different worker classifications and engagement strategies matter in making use of independent labor.

Who Counts as Independent Contractors?

It’s important to know who counts as “self-employed” or independent.

While the terms “1099s”, or “independent contractors” seem interchangeable to many, they all do not legally mean the same thing. This is why companies take great care to avoid misclassification risks by working with professional firms that identify and engage with contractors.

The criteria for classifying independents is challenging since regulations differ at both the state and federal levels. However, common legal qualifications for a 1099 independent contractor include:

  • Work being provided through a contract

  • Supplying his own equipment

  • Being responsible for individual taxes

Another key consideration about hiring independent workers is that not all of them share the same preferences regarding their work status.

While some workers want to be classified as 1099 independent contractors, other independents prefer to be hired as a full-time or W-2 employee.

Who are Gray-Zone Workers?

In the middle of those categories is another segment of independent workforce called gray-zone workers.

These professionals consider themselves as independent, but lack one or two qualifications for most companies to officially deem them as 1099 independent contractors. For example, they may not have their own professional website or lack certain business insurance requirements.

Around 40% of self-employed talent fail to qualify as a 1099 contractor according to MBO Partners. Still, this is a significant percentage of the independent workforce that can be hired for the benefit of businesses.

In order to effectively and safely engage with gray-zone workers, different talent management strategies have been devised for companies, some of which we’ll detail down below.

Knowing the Right Fit: Common Engagement Strategies for Independent Talent

There are three common engagement methods for gray-zone workers: rogue, restrictive, and flexible. We’ve listed each strategy below with its pros and cons for the consideration of firms:

  1. Rogue Engagement

    Under this approach, independent talents are contracted by company managers at their discretion through their individual or decentralized practices.

    Although this engagement provides the most discretion for hiring managers, some of the drawbacks include increased risk of worker misclassification due to possible hiring of unqualified independent contractors and higher administrative costs.

  2. Restrictive Engagement

    All independent workers are engaged as W-2 employees on a standardized payroll program under this strategy.

    This type of engagement fully circumvents the risk of worker misclassification. However, being a W-2 or full time employee comes with long-term obligations and as a result, some talents may take their skills elsewhere because they consider the inflexible work arrangement to be detrimental to their interests.

    Additionally, W-2 engagement can cause a 20-50% markup in payroll, increasing business costs.

  3. Flexible Engagement

    In this type of engagement program, independent contractors are engaged via direct sourcing and are allowed to be classified as 1099, W-2, or gray-zone workers.

    Under flexible engagement, the company itself oversees talent management, making it more centralized.

    Because flexible engagement is more centralized, it mitigates the risk of misclassification by ensuring all engagements conform to state and federal requirements, realizing cost benefits from avoiding fines and penalties.

    Savings are also realized under flexible engagement due to reduced payroll markups.

    Finally, because a company with flexible engagement takes worker experiences and preferences into account, it can be perceived by other independents as more appealing, broadening the pool of talent the company can choose from.

For companies that rely on contingent labor in some areas of their operations, it’s important to know how each of these strategies can be used to achieve business goals.

Aside from avoiding legal exposure, picking the right engagement strategy is important because it enables a firm to save on financial costs.

To emphasize this, a Fortune 500 cloud computing company was able to save USD 1.4 million in costs when it employed a workforce engagement strategy that matched its needs and objectives.

In the past, the firm faced challenges in attracting and retaining highly-skilled tech talent. Company managers were inconsistent with their engagement of independent contractors, causing misclassification risks, escalating expenses, and higher attrition rates among the workforce.

Working with another professional firm, the cloud-computing company was able to implement a flexible engagement approach. A direct sourcing approach was also developed to engage independent talent while the company’s internal policies and onboarding processes were updated.

Due to this, the company was able to mitigate risks of worker misclassification. Business costs for independent talent were also more efficiently tracked and managed.

As can be seen from the example above, employing the right engagement strategy is important when working with independent contractors.

Talent Engagement Processes through the Lens of Return Driven Strategy (RDS)

According to Professor Joel Litman and Dr. Mark L. Frigo in the book, “Driven,” a high-performing enterprise should always know the current state of its business operations and shouldn’t wait for problems to arise before coming up with solutions.

According to the eighth tenet of RDS—map and redesign processes—making changes to business processes includes improving ways for a company to engage its workforce. Worker misclassification and inefficient engagement strategies carry heavy costs for firms. Thus, it is crucial to identify the problems arising from these risks and come up with ways to best address them.

In the case of the Fortune 500 cloud-computing firm, issues arising from inconsistent engagement of independent contractors were immediately identified. Because of the firm’s willingness to tackle the situation head on, it was able to redesign its workforce engagement strategy, generating significant savings from its operating costs.

While the independent workforce remains a highly valuable source of talent for any company, it’s still important for a firm to be aware of potential issues in its engagement strategies.

Since worker classification is a nuanced topic, it’s critical to follow federal and state rules and always have a written contract when hiring independent contractors in order to avoid legal exposure and other risks.

Aside from strictly adhering to federal and state regulations regarding worker classification, enterprises should know about the different engagement and talent management methods they can use when hiring independents.

By doing so, firms will be putting themselves in a position to realize higher gains and financial performance while minimizing costs.

If you’re looking to gain a better understanding of Return Driven Strategy and Career Driven Strategy, we highly recommend checking out “Driven” by Professor Litman and Dr. Frigo.

Click here to get your copy and learn how this framework can help you in your business strategies and ultimately, in ethically maximizing wealth for your firm.

Hope you found this week’s insights interesting and helpful.


 


 

Have you ever wondered why professionals get to know other people in their fields?

Learn more about the career-driven benefits of networking in next week’s article!

Miles Everson

CEO of MBO Partners and former Global Advisory and Consulting CEO at PwC, Everson has worked with many of the world's largest and most prominent organizations, specializing in executive management. He helps companies balance growth, reduce risk, maximize return, and excel in strategic business priorities.

He is a sought-after public speaker and contributor and has been a case study for success from Harvard Business School.

Everson is a Certified Public Accountant, a member of the American Institute of Certified Public Accountants and Minnesota Society of Certified Public Accountants. He graduated from St. Cloud State University with a B.S. in Accounting.

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