The New Spend-Labor Split Paradigm

Is management of spend the same as management of labor?

No, spend is spend and labor is labor “…and never the twain shall meet.” 1   Right?

Absolument, correct-a-mundo, yessirree bob, that is spot on right… except when the earth is round and East does meet West and management of spend and labor are the same.

Welcome to the new spend-labor split paradigm, where the traditional way of treating spend and labor the same is not wrong, but neither is it always right. As all good quandaries go, it depends. Let’s start by explaining that the premise of this spend-labor relationship question is based in the scope of Services, as in SOW-based Services (those services acquired with and governed by a statement of work contract). This is a new paradigm that the emergence of SOW spend management within the contingent labor program context is forcing us to confront.

Paradigm is just a fancy word for model


The Spend-Labor Split Paradigm within Services

Relevancy of The Services Continuum

  • Represents material progression along several key attributes
    • From Labor focused activities to outcome and service focused engagements
    • From limited vendor accountability to full vendor accountability
    • From staff augmentation assignments (i.e. standard Purchase Orders) to deliverables-based SOWs (i.e. unique scope, specific deliverables, acceptance criteria, vendor accountability, etc)
    • From labor or skillset management focus to a spend management focus
  • Sourcing Objectives
    • Labor Focus: Obtain specifically skilled labor resource(s) for temporary use
    • Outcome Focus: Engage service provider with specific outcome expectations in mind
  • T&M SOWs are a typical transition point along the continuum
    • T&M SOWs can be labor or outcome focused
    • They can also be both, but this circumstance sub optimizes other attributes
    • T&M SOWs serve an evolutionary function – use may be temporary or exception-based for labor-oriented spend types – not typically optimal for long-term use.



Strong Correlation (i.e. Spend and Labor treated / behave the same)

»      Occurs at Staff Augmentation and Labor Focus end of Services Continuum

  • Service Engagement Purpose:
    • Obtain a temporary resource with a specific skill set
      • Contract professional; light industrial; staff augmentation
    • Key Relationship Factor:
      • An impact on Spend drives a parallel impact on Labor (the resource) – and vice versa
        • If you reduce Spend (budget), then # of resources similarly reduced;
        • If you terminate the labor resource, then the spend component is also terminated.


Full Disaggregation (i.e. Spend and Labor are split)

  • Occurs at Service-Based SOW and Outcome Focus end of Services Continuum
  • Service Engagement Purpose:
    • Engage service provider to obtain a specific, expected outcome
      • Project delivery; Service Delivery; Other defined service or outcome
    • Spend associated with Outcome focus because vendor payment is primary lever for delivery of Outcome
  • Key Relationship Factors:
    • Spend relationship with other components of SOW (i.e. scope, delivery quality, timing, fee structure) now takes precedence over relationship with Labor
    • Responsibility for Labor (i.e. skill, experience and volume of resources) shifts to vendor.


Emerging Disaggregation (i.e. the T&M SOW can go either way or both ways)

  • Engagement focus begins shift from Labor to Outcome, however
    • Not an immediate split
    • Gradual and circumstantial
  • Service Engagement Purpose:
    • Depends on intent of SOW, company need; varies between Labor, Outcome
  • Key Relationship Factors
    • The Spend-Labor relationship for T&M SOWs follow the underlying intent of the SOW itself
      • If Labor focus, then some correlation exists
      • If Outcome focus, then less correlation


Summary Analysis

  • Labor and Spend strategies are rightfully intertwined when acquiring and managing staff augmentation and other Labor focused services
  • The “split” between Labor and Spend is necessitated by a material and intentional change in strategic management of the underlying engagement type
    • From Labor quality as a primary focus to acceptance and timing of the expected Outcome
    • From labor workforce alternatives to greater leverage and accountability of external service providers
  • Labor strategies and Spend management strategies evolve and differ along the services continuum
    • There is no one-size-fits all strategy (i.e. Labor and Spend relationship) that can be optimally applied across a broad portfolio of services spend types
    • Evolution of category and vendor management strategies is what tends to push companies along the services continuum
    • Increasingly complex legal and commercial terms are required to govern service and outcome based engagements
  • Knowing where you are along the Services Continuum and having a strategy to address the spend-labor relationship at the respective category level is the key objective of studying or adapting this model.


1From Rudyard Kipling. “Oh, East is East, and West is West, and never the twain shall meet…” Read entire poem entitled The Ballad of East and West

2Labor in this model refers to skill set, experience, volume of resource need, NOT tracking of external workers. Worker tracking is a separate component of the overall external workforce or Labor strategy that is presumed to be an underlying need throughout the Services Continuum and not uniquely impacted by changes in spend or labor type.

Michael MatherlyComment