Federal rules prompting race to the bottom in staffing industry
By Elizabeth Howell, Ottawa Business Journal
November 2, 2011

A three-year-old federal edict to select contract workers from staffing firms based solely on price is leading to layoffs, compressed wages and a lower-quality workforce within the sector, industry officials say.

In 2008, firms were told they would have to be among the lowest bidders to win a spot on Public Works’s standing offer for staffing services. Slashing the price of their services, companies say, meant they in turn had to reduce wages to employees.

Not only is this driving qualified workers away, but it also means the employees who do end up in federal departments are less efficient and need more training, driving up the overall cost anyway.

With worries that the government will demand even lower costs due to its ongoing strategic review, the Canadian Federation of Independent Business released a report in June proposing solutions to the procurement problem.

Players in the industry shared their views with OBJ, and their ideas about how to fix the staffing headaches.

‘Significant pain’

Staffing firms complain of lost business with budgets pared back

When the directive came down to hire from staffing firms on a best-cost basis, rather than a best-value basis, companies across Ottawa found themselves scrambling.

Smaller businesses publicly worried that larger ones, able to consolidate costs, could more easily bid for contracts. Firms of all sizes complained they needed to slash their rates, making it harder to hire qualified people.

“It caused significant pain for the industry, and it’s a tough one to fix because at face value, what they’re doing is getting the cheapest resources,” said Kevin Dee, chief executive of Eagle Professional Resources Inc.

Although the firms acknowledge competition is healthy and normal, pricing pressure exerted from a customer with such powerful market influence is driving everyone’s rates down because value does not factor into the equation, he said.

“It causes a downward pressure on everybody, so what’s happened is you have hypercompetition in the temp space and that really hurts the temporary employee themselves,” added Mr. Dee, OBJ’s CEO of the Year in 2006.

Jeremy Ingle, chief executive of SPI Consultants, first heard of the new rule in 2008 while sitting on Public Works’s temporary help services advisory committee, although the situation has become more serious with the government’s cost-cutting reviews in recent years.

“They’ve now said that the government must buy from the cheapest supplier. It’s called the right to first refusal, and what that’s done is forced everybody to quote the very cheapest possible price they can.”

He added, “We’ve got no option but to do that because if we don’t, we don’t get any business at all. And a lot of companies rely on the business that comes from the federal government.”

On the defensive

Firms say money must be spent to save money

There’s another side to the staffing dilemma as well. Some federal departments, fed up with the new restrictions on standing offers that provide cheap contractors instead of good ones, are said to be directly hiring term employees working for staffing firms.

Essentially, this means the person working for the staffing firm is now working directly for the government, which staffing firms say costs 15 to 20 per cent more due to union rules, vacation pay requirements and other items.

Not to mention, that person may not be as motivated to work as with a staffing firm, since their job is less likely to disappear overnight, said Michael Dagg, whose self-named consulting firm does access to information requests to obtain market research on how federal departments operate.

“When people are more self-employed, they get to control the hours of work, usually the place of work, and own the work tools,” he said, noting that makes staffing firm employees more efficient.

For its part, the CFIB is in regular meetings with Public Works and government procurement officials to find a solution that would not only be cost-effective for the feds, but also help small and medium-sized enterprises.

“Some degree of decentralization of the procurement process would help, allowing agencies to consider the firms who have good proposals,” said Dan Kelly, the Ottawa-based vice-president of legislative affairs at CFIB.

Instead of having contracts go through Public Works, he suggests different departments can come up with their own requirements for tenders and seek their own contracts based on their needs, saving a layer of red tape, some time and perhaps some money in the process.

Public Works did not respond to questions by press deadline.

The CFIB’s take

‘Byzantine’ rules should be changed to deal SMEs back in

The Canadian Federation for Independent Business released an in-depth look at government procurement in June 2011.

The report takes aim at the federal government’s “byzantine” rules and procedures and criticizes the way in which large contracts are handled; the CFIB says the emphasis on cost over value is shutting out smaller firms because of economies of scale.

The CFIB made several recommendations to address the situation:

  • During the bidding process, ask if SMEs can answer the requirements in the manner and timeframe required;
  • Enhance bidding flexibility to let SMEs bring innovative and (often) less costly solutions to the table;
  • Have bundled contracts reviewed by a specialized government organization;
  • Make the procurement process an integral part of any red tape reduction initiative;
  • Enhance communication between the bidder and the end user, as providing only a prescriptive list of requirements eliminates the ability of SMEs to suggest alternative ways of meeting the government’s needs;
  • Promote and strengthen Public Works’s new Buy and Sell website, which is intended to make procurement less complex;
  • Incorporate value and not just cost when evaluating bids;
  • Government must pay on time and with interest on late payments, if applicable;
  • Tackle the “end-of-fiscal-year spending spree.” Let budget surpluses carry over from one year to the next, or introduce an incentive-based system that rewards continued fiscal restraint;
  • Make small businesses more aware of Public Works’s Office of Small and Medium Enterprises, which is intended to help SMEs in their dealings with the government.

While (the Canadian Federation of Independent Business) and its members do not take issue with the government wanting to control costs, a distinction must be made between the initial cost of hiring a staffer and the overall long-term value brought by a qualified candidate. [...] The benefits gained from hiring a qualified candidate cannot be overstated. If the government continues a short-sighted unofficial/official policy of hiring the cheapest options, there will inevitably be consequences in productivity.
- Big Opportunities, Bigger Challenges: Examining SME Access to Federal Procurement (CFIB)