IES Blog

Direct Sourcing in the Contingent Workforce: Benefits, Risks, and Best Practices

Posted on March 25th, 2024 Read time: 8 minutes

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Direct sourcing has come to the forefront for businesses over the last few years. Demand for skilled, qualified talent simply outpaces supply, making it significantly more difficult to fill open roles. And when traditional recruiting methods prove ineffective, businesses must adjust. Perhaps unsurprisingly then, a 2023 Staffing Industry Analysts report revealed that 80% of large corporations had either already established or were planning to establish a direct sourcing program within the next two years.  


What Is Direct Sourcing?  

In the simplest terms, direct sourcing is the use of internal resources to recruit talent for job openings within an organization.  

However, direct sourcing has been experiencing an evolution, with companies reevaluating their approach to this recruitment channel. This evolution has been marked by the increased use of technology and a greater emphasis on employer branding. After all, a good reputation among current employees makes it that much easier to both retain and attract talent — and top talent, at that.  

The evolution is also marked by a growing reliance on contingent workers. In a 2023 report, 65% of company leaders said they planned to increase their use of contingent workers in the next two years — and 80% were already using these kinds of workers. Contingent workers are now seen as an integral part of operations. Many companies have gone so far as to weave them into the very fabric of their organizations, treating contingent workers as they would any other employee. 

Naturally, this has led to a more holistic approach to the recruitment and management of a nonpermanent workforce. No longer are organizations relying solely on staffing suppliers, choosing instead to direct source contingent labor. It’s a strategy that not only improves the efficiency of recruitment, but also offers a competitive advantage 


Direct Sourcing Benefits When Recruiting and Engaging Contingent Workers 

Perhaps there’s an unexpected resignation or a new project that requires specialized skills. Whatever the situation, the results are the same: Companies are caught unaware, and it isn’t until the last minute that the leadership team begins thinking about the availability of talent. Hasty decisions soon follow, and the team is saddled with a bad hire. Even if that hire is only temporary, it can disrupt operations.  

The same doesn’t often happen when direct sourcing contingent labor, as the approach leads to a private talent pool of known quantities, where your company is all but guaranteed to find the right fit for an open role — and that’s just the beginning. A number of other direct sourcing benefits will also arise, including:  


Reduced staffing costs. 

Direct sourcing contingent labor often lowers the costs of associated management programs. Companies can see reductions in staffing margins of anywhere from 30% to 50%, largely due to the elimination of intermediaries like staffing agencies. Plus, you eliminate much of the overhead costs, leveraging the company brand and technology to recruit talent.  


Improved time to hire. 

Want to know how to reduce time to hire? Direct sourcing in the contingent workforce is often the answer, and if using a managed direct sourcing (or MDS) program, you can experience placement rates of up to 70%. 


Lower compliance risk. 

The proper classification of workers is a functionality you’ll find in many of today’s direct sourcing platforms, limiting the risk of compliance violations — not to mention protecting your business from the reputational damage that can often come from the misclassification of workers.  


Ease of reengagement. 

With the goal of direct sourcing and building talent pools being to create a roster of known quantities, your recruitment efforts will inevitably fall short without a means of talent reengagement. Fortunately, many of the same direct sourcing platforms that lower your compliance risk can also automate communication, onboarding, payments, and so on, making reengagement that much easier. 


Higher talent quality

Direct sourcing enables the development of curated talent pools of pre-vetted, skilled workers with a higher talent quality that can quickly and easily be reengaged as needed. This can decrease time to hire and increase efficiency, leading to more cost-effective hiring practices.  


Smoother onboarding. 

With a curated talent pool — especially when that pool contains previously utilized contingent workers — you’ll be bringing people on board who are already familiar with the company culture and employee expectations. Chances are good that they’ll more easily and seamlessly integrate into a role, which, again, results in a more cost-effective hiring and onboarding process.  


Challenges Associated With Direct Sourcing Contingent Labor 

Many companies run into difficulties with their direct sourcing and contingent worker programs, mostly due to legal and compliance issues. Even the smallest mistake when classifying workers can leave a company facing hefty fines, owed back pay, and more than a few reputational dips. 

Another challenge that often arises is with co-employment, as many companies don’t always understand exactly how they can — and, more importantly, cannot — work with a nonpermanent workforce. When two or more entities are engaged in a worker’s employment, which is common with a contingent workforce, lines can blur around which entity exercises control.  

To effectively manage and integrate contingent workers into your existing workforce, focus on these areas: 


1. Compliance strategy.  

Implementing a comprehensive compliance strategy will be essential. This includes understanding and adhering to labor laws in each jurisdiction, especially when managing a global workforce. Misclassification and noncompliance with labor laws can lead to substantial fines and legal disputes. 


2. Employer of record services.  

Utilizing an employer of record is beneficial when engaging contingent workers. EORs take care of all the legal obligations regarding wages, taxes, and benefits, thereby ensuring a safe and compliant talent acquisition process. This can be particularly useful when managing an international workforce, as the regulations can vary greatly from one country to the next. 


3. Centralized management. 

Building a scalable and comprehensive direct sourcing and contingent workforce program is vital for compliance. It should include mechanisms to ensure compliance across all aspects of engaging contingent workers — from sourcing and managing to paying and reengaging them as part of a talent pool. 


4. Technology integration. 

Leveraging technology platforms to streamline the direct sourcing process can automate talent curation, simplify talent reengagement, and more. But technology also relieves your team of the mundane, repetitive tasks associated with onboarding, engagement, and the like. This allows employees to focus on more value-added activities, which is never a bad thing for operations.  


5. Alignment with business needs. 

Like any recruitment effort, it will be critical to customize your direct sourcing strategies so that they align with your unique business needs and goals. Ask yourself: What type of talent will this program provide? How does this talent fit into my existing talent strategy?  

By focusing on these areas, you can minimize any legal and compliance issues while effectively augmenting your existing workforce with contingent workers — and do it in a manner that aligns with business objectives. Direct sourcing can be a useful, cost-saving tool if you know how to implement it strategically. 


Debunking the Main Myths Associated With Direct Sourcing 

Direct sourcing is often shrouded in myths that can deter businesses from leveraging its full potential.  

One prevalent myth is the perceived concern about an increased co-employment risk when using the company’s employer brand for direct sourcing for contingent roles. This couldn’t be further from the truth. Co-employment is when two companies could be seen as meeting the qualification of an employer to an employee. Determining co-employment is largely tied to the company that controls the workplace, supplies the tools and equipment, manages the workers, etc. In many cases, this is a given in contingent relationships. However, which company is seen to source or recruit the talent (through leveraging the company’s brand or logo in the recruitment process) doesn’t have any bearing on whether co-employment exists.   

Another common myth is that direct sourcing, specifically direct sourcing contingent talent, significantly increases the company’s administrative burden, leaving relevant stakeholders hesitant to take on direct sourcing initiatives due to concern of lack of time or resources to dedicate to implementing and managing the strategy. This myth may very well be a reality in some cases; however, with the evolution of direct sourcing solutions over the years, companies now have myriad technology and solution providers to help alleviate this burden.  

One of the most important elements to discredit this myth is the engagement of an MDS solution provider, which is a firm that manages the entire direct sourcing vendor ecosystem and direct sourcing lifecycle. This allows companies to oversee their programs from a high level, with the MDS partner doing the heavy lifting of managing the execution. 


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Best Practices for Effective Direct Sourcing 

With direct sourcing becoming so important for bringing in talent, it isn’t an initiative best left to chance — nor does it always follow the same processes as more traditional recruitment models. If you’re considering making the move into direct sourcing contingent labor, there are a number of best practices to be aware of: 


1. Refine your employer brand. 

Employer branding will play a major role in marketing your company to potential hires — both contingent and permanent. A compelling employer brand should first be authentic, showcasing your company’s culture, values, and people. It should also align closely with your vision for the organization and your business goals. No candidate should be confused about who you are as a business.  


2. Develop a sourcing strategy. 

As with any other recruitment effort, the success of direct sourcing contingent workers will rely on your strategy. Identify the needs of your operations and look for any gaps in skills and knowledge or talent pool planning to prepare for known seasons of increased workloads or talent needs to meet the demands of the business. If you have jobs that will need to be filled, what are the requirements, anticipated timelines, etc.? The goal here is to really understand what your strategic talent and business needs are so you can plan accordingly to fill your talent pools in advance with candidates who possess the right skills, experience, background, and so on.  


3. Invest in the right technology. 

A good direct sourcing program will entail many components, but one of the most critical elements is to use an end-to-end direct sourcing platform. It provides you with the means to capture data to make more informed decisions, streamline processes, effectively manage candidates within talent pools, automate important engagement activities, and keep everything organized. 


4. Explore grassroots curation.

It’s often helpful to begin direct sourcing campaigns at a grassroots level, leveraging employees’ networks and social media to expand your talent pools and immediately add potential candidates to your talent pipeline. It’s also an opportunity to get your employer brand in front of passive job seekers who may not be looking for a new job but are open to making a move should the right set of circumstances present themselves.  


5. Leverage existing networks. 

Direct sourcing can take many forms, and it should if you want the program to be a success. Utilize existing connections like employee referrals, former employees, retirees, and “silver-medal candidates” (i.e., candidates from previous recruitment rounds). Each of these sources can be more efficient and fruitful than sourcing from external job boards. 


6. Launch a pilot program. 

Oftentimes, it’s best to test the waters before making a long-term commitment to an initiative, so put together a pilot program to validate your direct sourcing strategy and garner valuable insights into where adjustments might be necessary. Pilot programs also help minimize risks and ensure you have the right resources to see a larger rollout through.  


7. Prepare for challenges. 

 Rarely, if ever, do things go as planned, making it more important than ever to anticipate and address potential roadblocks early on to ensure smooth implementation of your direct sourcing initiatives. Familiarize teams with data privacy regulations, establish clear rules of engagement with contractors, and map out the entire candidate journey to keep all stakeholders in alignment and in communication to ensure a strong candidate experience.   


8. Embrace continuous improvement. 

The pilot program may have gone swimmingly, but that doesn’t mean your direct sourcing strategy won’t run into a few hiccups. Regularly review the program’s progress and performance to identify areas in need of adjustment or enhancement. This will help ensure optimal results are consistently achieved. Use metrics like time to fill, spend by source, and cost per referral to gauge the progress and effectiveness of your direct sourcing strategy. 


Start Your Direct Sourcing Program Today to Engage More Contingent Talent 

Direct sourcing is the recruitment model of the future, even more so when it comes to the contingent workforce. You know your company best, and you know what it requires in terms of talent — whether that talent is temporary, permanent, project-based, or something in between. Direct sourcing provides you with the control necessary to ensure you always have the skills, knowledge, and experience needed to reach your business goals.  

If you’d like to learn more about direct sourcing contingent labor, including how to build a program for your company, IES can help you with a managed direct sourcing solution. Contact us at 858-300-2757 or email to learn more!


 Written by: Sara Jensen, SVP, Growth & Strategy at IES

Sara Jensen is the senior vice president of growth & strategy at Innovative Employee Solutions (IES), a leading provider of remote and contingent workforce solutions specializing in U.S. and global Employer of Record, Agent of Record, and Independent Contractor compliance services in 150+ countries. Founded in 1974, IES is a woman-owned business, certified by the WBENC, and partners with companies to provide compliant employment solutions that empower people’s lives. 

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