How Northrop Grumman Minimized Spending on Contract Labor

By centralizing labor contract management, Northrop Grumman saved millions.

At Northrop Grumman, a project to figure out how the heck it was spending multiple millions of dollars on contract IT labor has now spread to other parts of the company and, in turn, produced multiple millions of dollars in savings.

The idea of keeping closer tabs on contractors started in 2003, when Northrop Grumman realized it was spending an unspecified amount of money, estimated to be in the millions per year, on outside IT workers from dozens of vendors. As important as the dollars spent was the fact that 85 percent of those outsiders were working on key projects for Northrop Grumman's own customers—hundreds of IT professionals represented the company but weren't directly employed by it.

"The sensitivity around the role they played and sheer magnitude of the spend caught the attention of the CFO," says Bob Lewis, director of business operations for Northrop Grumman's Information Systems sector, one of eight "sectors" in the $34 billion company. With that "excellent sponsor," in pocket, Lewis and staff hired procurement management vendor IQNavigator to help determine where its money was going.


To read more see: IT Contractors Push for Longer Term Work.


Historically, Northrop Grumman had its contractors use paper timecards to track their hours. That data was manually entered into Northrop Grumman's financial systems. The payment process was slow, Lewis says, and difficult to forecast. Various Northrop Grumman sectors would be negotiating for labor with the same providers at the same time and not know it.

Starting in Northrop's IT sector, IQNavigator worked with Lewis' staff to collect data on contractors, contracts, pricing and projects in play, to get an overall view of costs. Then they were able to see, in one spot, which contractors were billing for how much. As other sectors signed up for the IQNavigator service, Northrop Grumman executives across the company came to understand exactly what they were spending—$200 million—and on how many contractors—1,900.

A dashboard also shows them such data points as how much each sector spends on outside personnel, how long those contractors work for Northrop Grumman and average billing rates. That information helps managers determine the best price they can get from various contractor vendors, for example, or decide whether it makes financial sense to offer a given contractor a full-time job.

IQNavigator account managers work on site with Northrop Grumman's own human resources managers. And with the recession forcing budget cuts, IQNavigator's role was expanded to include background checks and drug screening of job candidates. "That's work we used to do and couldn't afford to anymore," Lewis says.

How it Adds Up

Northrop Grumman, Los Angeles

Northrop Grumman is a $34 billion military contractor; 90 percent of its sales come from the U.S. federal government. It has 120,000 employees and offices in 25 countries.

How Northrop Saved: Rethought contract labor as a commodity to be managed via centralized purchasing policies and enforced compliance across the company. Has cut 10 percent to 15 percent off annual spending on contract labor by getting better prices and being more efficient in hiring and managing contractors. Of the savings, 8 percent to 12 percent came from negotiating better contractor pay rates, the rest to streamlined processes such as replacing paper time cards with an online system.

Tools Used: IQNavigator software as a service spend management product with dashboard to track billing rates by various metrics.

Time Frame: Started in one division in 2003, now in five divisions, with $200 million in annual spending managed through IQNavigator.

Start in one division or business unit.

Trying to compare data on contract labor in different fields—say, IT and legal contractors—can muddy the analysis.

Collect as many data points as possible.

Contractor names, skill sets, length of service, performance metrics, projects completed, pricing. The more data available the better your analysis will be when you start to do business intelligence to determine which contractor vendors to do business with and which to fire.

Senior Editor Kim S. Nash can be reached at knash@cio.com.

Do you Tweet? Follow me on Twitter @knash99. Follow everything from CIO Magazine @CIOMagazine.

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Copyright © 2009 IDG Communications, Inc.

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