SoW vs. the supply of labour – clear lines and grey areas

Discussing the nuances and intricacies of statement of work and services procurement.

Episode highlights

New ways of getting work delivered triggered by legislative changes
Defining a genuine statement of work
Opportunities and risks for recruitment agencies in statement of work
Checks and balances to ensure consistency between contract and delivery

Posted by: ZivioReading time: 78 minutes

With Carla Roberts, Director of Legal Services, WTT Legal

00:00:00 - Compliance skills, recruitment and the potential for statement of work models
00:09:00 - The importance of terminology
00:11:00 - New ways of getting work delivered triggered by legislative changes
00:16:40 - Defining a genuine statement of work
00:23:00 - The benefits of genuinely outsourced statement of work
00:33:00 - Opportunities and risks for recruitment agencies in statement of work
00:42:00 - Small consultancies, status determinations and transitioning to new models
00:50:00 - The Mid-to-large sized consultancy perspective
00:56:00 - Checks and balances to ensure consistency between contract and delivery
01:05:00 - Expectations for the future


Jonny Dunning:   
0:00         So we are in progress. And I’m very pleased to welcome Carla Roberts, who is the director of legal services at WTT legal to join me on the podcast today. How you doing? Carla, thank you very much for joining me. 

Carla Roberts:     0:12         I’m fine. Thank you for having me, Jonny. 

Jonny Dunning:   0:16         Excellent stuff. Now, you and I have something in common, which is we both love talking about the nuances and intricacies of statement of work and services procurement. And so we thought it was only right that we get together to have this conversation and hopefully, provide some interesting points for other people to listen to and consider, and maybe even get involved in the debate. And so the title of our conversation today is looking at Statement of Work versus the supply of labor, and assessing where the clear lines are, and also delving into some of the gray areas, which is, from a legal point of view, this is obviously a huge area of expertise yourself. So I’m really excited to get into that I’m very much looking forward to this conversation. And but I always like to know how people kind of ended up where they are with your expertise and what you do? How did you get into all this?

Carla Roberts:     1:12         Well, how much time do you have? It’s a long story.

Jonny Dunning:   1:16         Plenty of time. 

Carla Roberts:     1:17         I’m going to age myself now. Well, you can tell from the accent that I’m not from the UK. So I qualified as a lawyer in California. But because of being involved with a British guy, I ended up moving over here in 1995. 

Jonny Dunning:   1:38         That was one thing. Was the accent anything to do with it?

Carla Roberts:     1:41         Oh, absolutely. Hugh Grant was very popular at the time. So obviously, I was keen to transfer my qualification over to a UK qualification. So I took the transfer tests, which was qualified lawyer transfer test, and qualified in the UK in 2001, 20 years ago now. My first role after qualifying was Head of Compliance for Capita Insurance Services, I worked in an insurance call center, making sure that the sales guys were complying with their scripts. And back in those days, it was FSA compliance. I was invited for an interview for a Head of Legal for a recruitment company in 2007, Match tech, which is now known as [inaudible 00:02:37]. And the timing was just right for a complete change for me in terms of sector, I had never worked in recruitment before. But the compliance skills were very transferable. So it was a perfect fit. And that began my career in recruitment law. So that was 2008. I worked at [inaudible 00:02:58] for eight years, and then took on a role with Alexander Mann solutions, who I think you know quite well, they’re an RPO, MSP provider, quite prominent in the market. And with senior legal counsel with them, concentrating on Statement of Work, just contractual issues with their clients, variation agreements, etc. So that led me into the Statement of Work model. And three years ago, I met my partner Rhys Thomas, and decided to create what’s called an alternative business unit, which is approved by the SRA. It’s a type of law firm, which allows non-legal directors. So reason I started the law firm in 2018. And our focus since that time, has been on Statement of Work, as we saw the market evolving and recruitment, moving away from personal service companies. And, of course, the changes in the off payroll legislation that already occurred in the public sector at that point. And we anticipated similar fallout would occur in the private sector, which had, at a little bit later than we expected, because the off payroll legislation was delayed a year and was only implemented, as you know, when April. So that’s it in a nutshell, that’s how I ended up focusing on Statement of Work. It was, I think, just an area of law that I just kind of evolved into, and saw the potential there in terms of the market changing to adapt and embrace that model, because as you know, that is the model that has been used. It’s the only models really in places like Germany and the USA where you’re either freelancer, delivering your services understatement or your traditional temp.

Jonny Dunning:   5:08         Yeah, it’s really interesting. And thanks for that. It’s great to understand the journey that you’ve come on. And I guess, when you’re working, for example, for Alexander, man, you talked about, like variation, change request variation variations and things like contract variations. And were you more focused on the SoW contract at that point? I mean, obviously, clearly, as a lawyer, the SoW contract and agreement is fundamentally at the heart of everything that you’re doing. But what you’re doing now, it feels like that has much wider implications, obviously all ties back to the contract. But has that evolved over time in terms of how you’re addressing SoW from a wider perspective?

Carla Roberts:     5:55         Yeah, absolutely. AMS as part of their legal team. Our remit was just to look at the master services agreements. And of course, we looked not only at the legal issues in that agreement, but also the commercials which are set out in the SoW. But my role now is to advise consultancies, agencies and clients, not only on the contractual provisions, but the working practices, which are just as important.

Jonny Dunning:   6:24         Yeah, I totally agree is absolutely of equal, at least of equal importance. Because it’s the truth of what’s actually happening. So, when you talk about working with agencies and consultancies, what do you mean by consultancies? What does a typical consultancy look like for you?

Carla Roberts:     6:46         Well, there are two types of consultancies. I think we’ll probably go into more detail later on this morning about the differences and certainly about their compliance obligations. But there is either a small consultancy, which can be, one to five contractors. And of course, the definition of small consultancy or small company is defined under the Companies Act, which has less than 10.1 million turnovers less than 50 employees, and or less than 5.1 million of gross assets. So, that’s your small consultancy is generally a pool of contractors or one contractor, but we’ll talk about the risks of that a little bit later. As opposed to your traditional consultancy firms, the larger organizations who have for years been delivering their services on an outsourced basis.

Jonny Dunning:   7:43         Right. Cool. So that was sometimes I think there’s... So it’s interesting in the world of services, procurement in SoW. It kind of, it sorts of straddles procurement and recruitment to a certain extent and more so more recruitment firms, Workforce Solutions companies are starting to merge into this services procurement world. And I always like to clarify definitions, because sometimes when people are referring to a consultancy, they might be referring to a recruitment consultancy, but obviously, in the way you’re describing it, the definition of an agency would be a recruitment business. And the definition of consultancies is an actual consulting firm that provides services to end organizations.

Carla Roberts:     8:26         Yeah, the terminology is quite confusing. And in fact, a lot of large end clients now are refusing to use the word consultancy, because it’s been associated with PSAs delivering their services, and they’ve engaged in traditional consultancy contracts. So, the terminology is definitely being changed to, for example, the client can be designated as the customer or the higher or the end client. The consultancy is often called the service provider or it can be called the client and we’ll get into that a little bit later as to when they are the client and the contractor or actually the subcontractor providing the services will be the subcontractor as opposed to the contractor. So, there’s a lot of gray areas with terminology and it’s very confusing at the moment.

Jonny Dunning:   9:23         It is, yeah, and I think it can be particularly confusing for recruitment organizations that are trying to make inroads into this area, they see opportunities, whether that’s around actually providing project and consulting services themselves and kind of moving up the value chain or whether it’s them helping their end clients manage SoW engagements and SoW spend but if we look at recruitment businesses to start with, they’re in a great position to serve service this market because there’s the juxtaposition between contingent workforce outsource services deliver under a statement of work. It’s working, getting done in different ways. And recruitment organization’s Workforce Solutions, providers call them what you like they’ve traditionally been very good at helping companies manage the way that they get work done through different channels be upon their contract. And now obviously, they’re starting to look at these outsource services. So in terms of how they look at that, one of the things that we previously discussed is just how the operating model is changing. And so if we look at, for example, how temp labor is changing, what are you seeing in the area? What’s your opinion on the changes that we’re seeing there?

Carla Roberts:     10:44       Well, there’s no doubt that are payroll which came into effect on the sixth of April has been the catalyst for a lot of changes shifted the way work is delivered to clients and savvy recruitment firms are starting to adapt to the change. And we’ve had a lot of inquiries about statement of work. Arguably, change is always necessary, because markets and demands change. However, sometimes it takes something really seismic to shake up the way things have already been done. And generally, that seismic event is a change in legislation or compliance. In the recruitment sector, the operating market, or the operating model of temporary labor, which is involved, calculating the days were, the margin added, payments made to contractors, working on TNM, time and materials, has been hugely affected by the requirements under off payroll. And consequently, clients are seeking to have a new conversation with recruiters. And clearly this is the opportunity for smart recruitment companies to consider their risk profiles by leading the way and embracing this new model and creating new proposals for their clients. But that’s going to involve a different way of doing things. And it’s going to involve quite a bit of more risk, which we will get into in a bit.

Jonny Dunning:   12:10       Yeah, I think the point about IR35. So in Germany, it’s the equivalent, the AEG legislation in the US, I guess, 1099 versus W two. Yeah, I totally agree with you, in the sense that it’s a seismic shift when you get a full on regulatory change that the whole market has to adapt to now. Okay, IR35 only affects the UK. But there are, I believe that we will see similar changes in other countries in Europe, stronger changes in the US. And I think it’s just going to be something that happens everywhere, because the way that the world gets work done, has shifted. And so, it’s obviously, the changes that are occurring, are fantastic for people that are specialists in this area, like yourselves, like us from a tech point of view. And because it causes the need for real change, where companies have to address things. And it’s like, if you look at services, procurement in general, services procurement isn’t a new thing. People have been buying services under a statement of work for a long, long period of time. But it’s been something that hasn’t been very well managed at all. And certainly not from a technical perspective, is quite specific, it needs a certain way of handling it. And it hasn’t been the top of the agenda contingent workforce, because it’s highly regulated. And for whatever reason, the technology in the area is more highly adopted is much more mature. And services procurement has been left behind. Whereas it’s this massive spend. So I think it does take catalysts to make organizations and people really change their focus. The legislative change has certainly been one catalyst. I think things like Brexit in the UK is another catalyst because it affects the talent shortages. But also just the way the world has changed in the last, 18 months, two years, putting a lot of companies on almost like a war footing when they’re just not sure what’s going to happen. Costs are under pressure, businesses under pressure. That’s where people have looked at things like services procurement, and said, “We need to know what’s happening with this?” So there’s all sorts of reasons why the pressure has ramped up to make this more of a focus. But I think, yeah, when it comes down to it, legislative change is so definite, and everybody has to get in line with it, it’s got to be the biggest, driver, really biggest.

Carla Roberts:     14:35       Not optional, is it? And of course, COVID has had a huge impact, because it’s pushed a lot of people into remote working and working autonomously. So I think that has had an effect on the way clients look or consider the way that their projects can be delivered.

Jonny Dunning:   14:53       Yeah, I totally agree with that. And I think it naturally... There’s a natural reason why certain work is best to be done against deliverables. And when you look at people working remotely, it’s not just about their outside out of the office, is the fact they might be working weird hours, because they might be collecting their kids or managing other commitments or whatever it might be. But actually, does it really matter? And I think it’s just force people to take a different mentality to it, where they’re just looking at it saying, well, what’s most important is that the work gets done on time or the right quality, which is what a statement of work is all about. And having said that, I mean, with IR35, and COVID, and Brexit and all these sort of things, the contractor market, and the temp market is still thriving. The recruitment market, the recruitment industry is still thriving, huge talent shortages on a perm side and everywhere. So I think it’s really, it’s horses for courses. And there’ll be the right scenario where outsourcing a project under a statement of work is makes absolutely the best sense. But there will still be plenty of circumstances where putting the work out to a contractor or attempt makes absolutely the best sense or hiring someone for your [inaudible 00:16:03] makes absolutely the best sense. So, it’s not the be all and end all of everything. But it is much more important. It’s not got much more of a spotlight on it. And it needs to be done properly. And so when we talk about doing it properly, and how would you define a genuine statement of work?

Carla Roberts:     16:27       Well, before we talk about that, maybe we could talk about the fact that it isn’t a new frontier, as you alluded to before and the fact that its emergence in the UK, recently is due to the existence of this unique PSC model, which has been around for 20 plus years, and HMRC is determination to get rid of it. As a PSC contractors who deem themselves outside IR35, which means of course, not being under the supervision, direction and control of the hire. There’s no mutuality of obligation between the parties, they’re taking financial risk, they have the right to substitute, we’re entitled to be paid gross. Clearly, contractors and clients like have not always been compliant. And there has been some tax avoidance by some, and there have been some contractors who should have been employees. So anyway, HMRC have been bringing in more and more legislation to combat and eventually eliminate this model. I mean, that’s my view. But I mean, they brought in, so much legislation over the last 10 years, you can remember the agency worker’s legislation, the intermediate legislation, the offshore, the onshore legislation, there’s just been a huge amount, trying to get control over the situation. But it wasn’t until 2017, when they rolled out of payroll to the public sector when a start to have a significant impact on the way contractors were engaged. And, of course, the final blog was in April 2021. And in case anybody hasn’t heard of off payroll, the effect of the rules is that the assessment of the contractor status for tax purposes has now shifted from the contractor to the client. So it is a complete game changer. As the client now has skin in the game. The new rules mean that the client must make the status determination of the role before the contractors engaged. And if they haven’t used reasonable care in making that determination, they’ll be liable if they’ve got it wrong. And reasonable care means that they obviously have to pass that status determination down the supply chain, they can’t make blanket determinations. And if they don’t use reasonable care and then become responsible for any tax fees, that could be a significant tax bill. If, however, they have used reasonable care pass the SDS down the chain then the fee payer which is usually the recruitment agency becomes responsible for any tax too So this leads us on into what is a compliant SoW and why is this been talked about in light of off payroll? Well, to be frank, it’s simply involves delivering the services as you discussed themselves on outcome based milestones with generally fixed price payments, and payment isn’t made until those deliverables have been achieved. And those deliverables are based upon acceptance criteria, which has been agreed between the parties. So obviously, this is a significant shift from the traditional way of recruiters delivering services which was based upon simply the provision of labor, bums on seats and just taking the margin from the hourly daily paid to the contract. I’m not saying they didn’t do anything else, they obviously sourced the candidate, they pay rolled the candidate, and they did compliance checks. But in the old days, there weren’t even vicariously liable for the acts submissions of their workers, although most client contracts now are insisting that they are. So yeah, it’s an absolute fundamental shift from the way people are being engaged. In fact, it’s not people, it’s been a shift from the provision of a person to the provision of a service.

Jonny Dunning:   20:34       Yeah, I like that description. I always use the Statement of Work is, “I will pay you X to deliver Y.” And it’s ultimately a client engaging a supplier to deliver a service, whereas contracting temps, time materials is paying for an individual’s time. But the reference you made to the fact that HMRC are taking significant action around this is certainly borne out by the DWP case that came up recently, where there are public sector organizations. So it’s a bit embarrassing in that sense. And they’ve just been fined at 87 million or something like that by HMRC, for failing to carry out an effective process and make effective status terminations. So they’re clearly not messing around with it. I’m pretty confident the same is very much gonna apply to the private sector.

Carla Roberts:     21:39       Yeah, they have indicated they will take a soft touch approach to allow businesses to get their compliance process in place. But that’s only for a year. And I certainly want to rely on that I was an end client and with [inaudible 00:21:55].

Jonny Dunning:   21:58       So with regards to what they classed as a soft touch approach, isn’t that just that if you get it wrong, you’ll be charged for all of the backpacks that should have been due? That’s still potentially a massive bill, whereas the soft touches, you won’t necessarily get fined at this point. And it will just be...

Carla Roberts:     22:21       I believe that, that’s the approach that they said they will take.

Jonny Dunning:   22:26       Yeah, I mean, but even so that’s still potentially a massive liability for some of these organizations.

Carla Roberts:     22:32       Yeah, absolutely. And consider how much tax that could amount to, I mean, it, it could be the end of some organizations and let alone the financial risk. It’s the reputational risk that is really crucial to consider in these circumstances.

Jonny Dunning:   22:53       Yeah and let’s face it, people have been kind of getting away with it for a long time, where they’re basically engaged in contracting scenarios that aren’t really contracting as it’s been described, but I guess, HMRC, have just never been able to enforce it properly, because going after contractors is an almost impossible task. Whereas flipping that around to go after the customer, is a lot less people to go after. And they’re a lot bigger and they have a duty to be fully organized and get all this stuff under control. So to discuss what a real...? What SoW is in principle, and I think there are various reasons why organizations like using a SoW. And I think one of them is that you have clarity on outcomes, you have clarity on what you’re going to get for your money. And in certain sense, it’s more predictable as to how much it’s going to cost you to get work done. But that does mean they need to be organized in terms of their objectives, their strategy and what they’re actually trying to do, and how that filters down to different departments within the business and what their objectives are? Because then you can really define what you need to do, break it down into projects and outsource it on deliverables. And so I think that’s one reason. But then again, if you look at TNM, it’s just convenient, because you don’t have to think about that. It’s sometimes it’s very hard to work that out. And you can just have people their bums on seats that are getting on with it and doing a good job. But then that might end up costing more because they’re just sitting there and what’s the actual deadline? What’s the actual outcome? And so the thing is a practical and pragmatic reason why in the right circumstances, getting a piece of work done, outsourcing it to a supplier and get it done under a statement of work makes complete sense for an organization. And what other reasons do you think there are that is particularly attractive to organizations to use that model?

Carla Roberts:     24:52       Well, first of all, genuine statements of work are entirely out of scope of our payroll. So there’s no SDS, there is no IR35 reviews etc. And this is because the client or the customer is outsourcing the entire service to an outsource provider, i.e. the recruitment company or a consultancy firm to deliver the services and genuine contracted out service is exempt from off payroll, I use the word genuine because that is the key criteria. And we’ll come on to that a bit, by the way, SoW’s as you know, are also referred to as outsource services, project based services, contracted out services, consultancy services. So this is all basically the same model. What this does mean, however, is that the risk of off payroll will shift from the client to the outsourced provider so that the service provider becomes the client for the purposes of off payroll, unless the outsourced providers small. In which case, the old rules apply, and the contractors engaged with that outsource provider must do their own assessment. So that’s the big motivator, I think, is the fact that it’s out of scope of off payroll. As you alluded to before, it provides the client with more certainty on project price or output, shifts most of financial risks on to the outsource provider, payments not made until the milestones are met. So there’s incentives for the outsource provider to get the work done. They can be more cost effective when scoped properly and managed and contracted properly. However, for it to work as a genuine outsourced arrangement, the client needs to totally relinquish control to the outsourced provider. And I think this is difficult for some clients. They need to be able to accept anyone to deliver the services subject to the personnel having the correct qualification and skills, but they shouldn’t be involved in embedding or interviewing those people in any way. And finally, there’s headcount restraints, these type of arrangements usually go through the pyramid or business units, not HR. So they tend to be more efficient and quicker. I mean, quite often, there’s request for proposal that’s issued, there are bids involved, but it’s a project as opposed to the provision of labor. So I would say those are the main benefits to the client.

Jonny Dunning:   27:34       Yeah, you bring up some great points there. I think the headcount side of is really worth one that’s worthwhile considering because particularly if you’re a PLC, in terms of reporting against headcount, that’s a crucial part of your reporting. But if the cost of getting that work done is somewhere else, it’s much easier to do it, to justify where you’d have restrictions against increasing headcount. That is also why, in my opinion, there’s a huge kind of latent problem in the existing services procurement supply chain, where within, for example, large organizations in their services procurement spend, in the tailspin of that there’s hidden time materials work. And we’ve seen that come up a lot. And I know a lot of organizations are concerned about that, where basically to get around headcount freezes, buying managers or getting the work done under a statement of work. But actually, it’s just body shopping. It’s hidden TNM, it’s disguised, contracting effectively. So I think that’s an interesting one, is that something that you think is a real problem that exists in the market?

Carla Roberts:     28:49       Yeah, I think that we will continue to see a bit of that as people get their heads around the new model. So it’s part of the transition, but it definitely carries [Russ].

Jonny Dunning:   29:00       Yeah, I like the fact that you also brought up the fact that the people that are doing the work, that’s the responsibility of the service provider, like you said that the organization that are getting the work done, relinquish control, they’re saying, “You need to do X, and I’ll pay you Y.” And I’m not going to pay you until I’m satisfied with the work that you’ve done. So it shouldn’t matter who’s doing it, obviously, the supplier, have a duty to make sure that the people that are doing work, are qualified to do it. But that would all be part of their bid. And probably their master services, agreement, all that sort of things, make sure they’re doing a good job if they want to get paid. Another thing that I thought was really interesting was just mentioning the definitions around outsourced services, contracted out statement. I mean, I’ve heard people use phrases like SoW contractors versus an outsource service provision, and to simplify it in my own head. I always just bring it back to the SoW. To say, is this contracted under a SoW. If that’s the case, it is what it is. And yeah, that’s kind of the central point of safety of saying, ultimately, the way this work is procured, contracted and delivered. If it’s, genuine services, procurement, that will be done through a statement of work, rather than any other type of contract vehicle. So I think that’s the thing, although sometimes people, I think don’t like the phrase SoW, Statement of Works sometimes, because it’s just referring to the contract. It simplifies the conversation around what is this, if it’s under a statement of work is under a statement of work? That’s how I see it, it’s quite black and white, would you agree with that?

Carla Roberts:     30:43       Yeah, I don’t think it really matters, what terminology you use. It’s what that document includes whether or not it talks about a fixed price payment, acceptance criteria, deliverables, and milestones. And of course, there’s other aspects that could be included, like special terms, anything that’s going to deviate from the master services agreement, client dependencies, caveats, etc. So it’s what that document includes that is crucial and put any title you want on the top of that. Statement of Work is what is accepted throughout the industry to define that. So I think that is becoming more and more commonly used.

Jonny Dunning:   31:30       Yeah. And you also mentioned about small service providers were in that situation, the responsibility for inside, outside IR35 falls back to the contractor on the old rules. And so I don’t know, I’m pretty sure I’m putting on the spot here. But I don’t know if you notice off the top of your head. I’m trying to remember whether that’s something that because I thought it was something that HMRC said was going to be initially, it wouldn’t apply to small companies. But my expectation was that in the future, it would, and you’d have a level.

Carla Roberts:     32:06       I think there has been further clarification from HMRC on that issue. And it is felt that small companies don’t have the resource or the internal compliance, to deal with SDS’s and all the legislation and requirements associated with our payroll. So they have indicated that there’s no plans to roll it up small companies.

Jonny Dunning:   32:33       Interesting. So going back to how recruitment businesses or agencies can potentially get involved in this, when you look at from an agency perspective, what do you see as the main kind of benefits and risks as to how this lines up for them?

Carla Roberts:     32:51       Well, for years, agencies demonstrate their value by sourcing engaging workers and removing that risk of inferred employment from the client. The danger to recruitment companies now is that clients may decide again, to engage directly with workers who are prepared to sign up on a statement of work, as companies are now better equipped to perform the screening themselves or to buy the screening services from an outsourced provider. So in this scenario, clients would once again be able to engage contractors without the services of a recruitment profession, the recruitment sector, there are some SoW platforms for consultancy, [inaudible 00:33:33] bid on work. But this may not be the case, if recruiters take the lead and re-engineer their operating model and create a talent pool basically, of contract workers and propose this new way of working to employers. But the big issue here is that they will need to project manage this themselves. So they’re going to have to have that capability themselves to project manage the service. But to be frank, taking more risk means more reward. And these type of contracts tend to be much more lucrative for those recruitment companies are willing to go for it. So I think the pioneers of this model will definitely reap the benefits as they’re going to stand out in the crowd. And I mean, we know that all the larger or most of the larger recruitment providers have been doing this for years, I think also will increase the confidence of their clients using flexible resources, and it will drive a revolution in the perception of the value that recruitment companies provide.

Jonny Dunning:   34:53       Yeah, I mean, recruitment companies in general, as an industry can sometimes be kind of a bit maligned, sometimes lumped in a category with other kind of agency type models, like, for example, a state agency. But I’ve always said this good recruitment organization provide an incredibly valuable service for organizations. And they’re very, very good at solving problems. And obviously, the problems that they solve are typically related around getting work done workforce management and finding the right talent and capabilities to get stuff done. So I think there’s a real clear need within end organizations, for people to take the problem away from them to a certain extent, because they’ve got other stuff to worry about. And in the same way, as a lot of contingent workforce programs are outsourced, a lot of recruitment is outsourced. They don’t necessarily do it in house, some companies do, and some companies always will. And I think there is, as you say, the opportunity is there for forward thinking, recruitment and workforce organizations to be able to adapt their offering and provide additional services to their customers that are going to be really valuable. And there’s definitely some companies that are doing a good job of this already, we’re already working with some really good providers that are working on this kind of project to consulting services basis, where they’ve got really sophisticated in house capabilities to project manage the work and make sure that they’re providing this service as a genuine kind of, consulting or project services provider. And we’re also seeing organizations, recruitment agencies or Workforce Solutions, the larger Workforce Solutions providers, providing broader services around services procurement, and SoW as a whole, where they’re not necessarily delivering the services, but they’re helping the client manage the way they procure it, and make sure the way it’s delivered is consistent with the way it’s contracted. And so I think, is a really interesting opportunity, you mentioned the opportunities for smaller agencies versus the bigger guys, do you think there’s room for the smaller agencies to compete in this market? Or is it just going to be the big guys that can go big bang with it really sophisticated big teams internally and all that sort of stuff?

Carla Roberts:     37:14       I think it’s going to be challenging for smaller agencies to compete with larger agencies. But if they’ve got a niche sector that they provide in an established client base in that sector, I think that they can certainly continue to provide services to their clients under this model or shift to providing this SoW model to their clients. So it really comes back to the relationships that exists and making most of it. But of course they’re going to have to look at their entire business profile, they’re going to have to ring fence this business, away from the recruitment business, because obviously, it does involve more risk, they will probably need to set up a separate limited company to deliver the services. And they need to make sure their service charges are in line with the fact that they’re taking significantly more risk, they probably need to take out finance because they won’t get paid until the milestones are met. And in the meantime, of course, they need to pay their subcontractors. And of course, it’s true that some contract rules don’t really lend themselves to defined outcomes, support roles, for example. But such rules could transform to objective base rewards, mechanisms, and still yield benefits to all those who are ready to share in the risks. So I mean, the big risk, of course, that to be exempt from off payroll has to be a genuine delivery of services, not the provision of labor.

Jonny Dunning:   38:59       So when you mentioned things like support services, for example, what about if an organization is just completely outsourcing to a service center? Obviously, that is a different proposition, because you’re just outsourcing us a full function almost, that’s different to operating on a kind of a piecemeal basis. What’s your view on that as something that’s an interesting area that’s starting to come up for us where people are addressing the service of procurement spending? And that’s certainly a category where there were slightly different but in some ways, it’s not because you’re outsourcing a service to service provider and what are the deliverables or KPIs that they’re meeting certain criteria and certain standards? Do you have you come across that at all? What’s your view on this? 

Carla Roberts:     39:52       Yes, and we’ve also come across the issue that some types of services just cannot... They can’t be adapted from time and materials to fixed price, especially in the investigative part of the SoW. So the initial phases of the project, quite often they need to be paid on TNM. So there’s no reason that you can’t have a genuine SoW paid on time and materials. But there still has to be the structure where there are milestones, there’s KPIs, there are deliverables. And I think that is the fundamental issue is whether or not you’re waiting for payment or that some payment is withheld at the end of the project, so that the outsource provider can demonstrate they are taking that financial risk.

Jonny Dunning:   40:50       Yeah, and this is, I think, hopefully, people are going to find this really useful, I certainly going to get them thinking because, there’s a fair amount of complexity involved in this. Obviously, for people like myself, from a tech point of view, I’m totally immersed in this world, from a legal point of view, you’re totally immersed in it as well. And so we tend to see things quite clearly and have a quite a clear view. And I think a lot of people haven’t got that clarity at the moment. And when you start getting into the questions around how you’re going to be engaging? How the engagements are structured? How they’re delivered? And there’s a fair amount of nuance and detail involved in that, that people need to be aware of. Some questions that have come up in our conversations before are around things like if you had a contractor, who was previously working as a PSC, can they switch to providing services to the same client through their limited company under a statement of work? And that’s where it starts getting to the gray areas. And things for example, also things like, is a small consultancy at what point...? Does a small consultancy, is it actually a disguised PSC rather than a consultancy?

Carla Roberts:     42:11       Yeah. Well, there’s no doubt that some contractors are forming small consultancies and either delivering the services themselves on a project basis to clients or engaging subcontractors to deliver those services. Some other contractors are putting together to form small consultancies, the risk that the smaller consultancies will be a disguised PSC rather than a consultancy. So in other words, is it John Smith PSC? Or is it John Smith limited if delivering the services, is something that these guys really need to consider. You can’t just shoehorn an existing PSC time and materials assignment into a SoW. It can’t be done. Basically what these guys need to do or considering delivering their services under SoW is completely renegotiate the terms with clients engage under a master services agreement, engage on a proper SoW’s we’ve discussed with milestones etc. And I think as long as they do that, that will be fine. As long as the working practices reflect what’s in the contract, then, there’s no cause for concern. I think some sectors such as IT and engineering, are more conducive to transitioning than others. And we’ve talked about the support roles before, I think, you can be a little creative with the support roles, but it can be done, as you say, if you outsource the entire thing. And there are clear KPIs and are clear milestones. There’s no reason why any type of work can’t be performed under SoW. But it’s clear that project based work tends to be the IT, engineering type of businesses. But there’s no doubt that contractors willing to accept this risk, will capture the market share of business. I mean, so many contractors have refused to go inside IR35, working under umbrella companies or on a PA, YE basis. They’ve always been contractors. They like the flexibility of contracting. They’re risk takers. anyway, a lot of them. And I think they will adapt to this, these guys with the specialist skills altogether and form small consultancies and they deliver it properly, then it could be very lucrative.

Jonny Dunning:   44:45       It just shows again, how legislative change shapes the market, it could be a new era and the way that people work together and the way that work gets done, and I always think when we’re talking about currently some work being done by PSCs on a TNM basis, could you shift that to statement of work? Well, yeah, if you basically, if you stop doing that work on a TNM basis and say, “What is the actual work that we’re doing?” If the client can clearly define that work and package it up as a project with deliverables and milestones or multiple projects, then absolutely, they’re looking to get that work done in a different way. And they’re going to have a different contracting vehicle. And they’re going to have a different risk profile. And it’s going to have a different cost assumption based on it for them to actually get that work done. So, in a lot of conversations I’ve had around this topic, the whole thing of it’s about the work, not the worker, has come up, which is I think, the fundamentally at the beginning of the process, if you’re looking at something from a tax avoidance point of view, that’s the wrong place to start, if you’re looking at it from a, what’s the most effective way to get this piece of work done, all things considered, then that is the right place to start. And that allows people to set out on the right footing. And I mean, we see this within our platform, because the statement of work, procurement contracting, and delivery workflow is effectively consistent, there’s always nuances to want to it. But if you’re guiding people through a structured workflow, that is designed to support only the delivery of services procured, contracted, and delivered under a statement of work, then the likelihood is that pretty they’re gonna have to do it properly, they’re gonna have to start properly, define it properly, contract properly, and make sure its delivery is consistent with the way it’s contracted. But that crucial point at the beginning, is the effort around defining the work and setting that out, because I do think that is a little bit of a cultural change for organizations as well. So agencies are adapting to this, service providers, contractors are going to adapt to this change in the way that the work is delivered. But companies need to do it as well. And that’s where they need to look to how they’re defining the work. And that ties in directly to how they’re structuring their contracts.

Carla Roberts:     47:07       I think the big challenge for the smaller contractors will be convincing clients because a lot of clients have been spooked by this legislation. And as we’ve discussed before, Jonny, we know that some of them are doing SDSs on SoW’s. So outsource providers, and they shouldn’t be doing that. It is either a genuine SoW or it isn’t, you start doing SDS’s, you are really blurring the lines. So I think these smaller consultancies, probably are the ones that are having the most challenge in terms of transitioning to this model. But my experiences, the smaller consultancies that I advised. They’re growing, they’re taking on employees, they’re taking on subcontractors, they’re taking on contractors based abroad, because of course, they’re entirely out of scope off payroll. And as long as the company grows, and anybody can deliver that service from the company, so it’s not just John Smith every single time that I think that risk of whether it’s a PSE or a SoW will be mitigated considerably.

Jonny Dunning:   48:24       Yeah. And so when you saying that some of the smaller consultancies are struggling to, or the contracts are struggling to get their clients to look at doing the work in a different way. I think there are various factors that are going to mean that the people who are nervous about doing it are going to have to address it. And I think those factors are just really practical. There’s a massive talent shortage problem anyway and then if you’re taking an existing contract base that are doing existing work, never mind your talent shortages, that you can’t fulfill what you need to get done. And you’re gonna lose some contractors, because some of them aren’t going to want to go under an umbrella company or PAYE direct or be permanently employed. So I think those effects will be felt further down the line. And it’s just, from a pragmatic point of view, they’ve got to get the work done. And they need to be able to use all available work delivery channels, as I kind of refer to them. If it’s right to do plan, do the plan, if it’s right to use a contractor, use a contractor, if it’s right to outsource the piece of work to be delivered understatement of work, do that and make sure you can do it properly. So I think clients will have to come around to that. Otherwise, they’re just gonna lose out even more against this massive problem of talent shortages, which in the UK is again exacerbated even further by things like Brexit. So I think it’s clear drivers.

Carla Roberts:     49:53       Yeah, absolutely. And I think it comes down to education and knowledge and understanding the model and what constitutes a genuine SoW.

Jonny Dunning:   50:03       So we’ve talked about how the challenges that exist for the smaller consultancies. What about if you move up the food chain as it were to the kind of larger, mid-size, mid to large kind of consultancies? What do you think? How do you see this sitting for them in terms of upward pressure of smaller consultancies coming into the market opportunities to growth as this model, it becomes more readily accepted and more widely in demand? But then there’s the risks around making sure they’re doing it correctly? How do you see it’s sitting for those type of organizations?

Carla Roberts:     50:37       Well, traditional consultancies have been delivering their services under SoW for years, not always entirely compliantly. But this has been the model they’ve been operating under. They generally have a pool of independent contractors using them to provide specialist expertise on an ad hoc project basis. But the problem for them now is under off payroll, they become the client for the purposes of assessing the status of their subcontractors. HMRC recently issued some guidance on this and said that obviously, they need to take care and make sure they are providing a genuine SoW service. consultancies engaging on that basis have to now review their contracts and ensure that those working practices reflect those clauses. And the large consultancies that we have been advising are also instructing us or other IR35 reviewers to ensure that working practices questionnaires are conducted on all their subcontractors and that the contracts are updated to reflect their new obligations under off payroll. So I think the key changes to the medium and large size consultancies are that they are now the client for the purposes of off payroll, they have to use reasonable care. If there’s a fee payer in the supply chain, the tax was school set with them. As I said before, HMRC have issued additional guidance relating to contracted out services and they should refer to that clients seem more comfortable with established consultancies, then those smaller ones that are morphing into this model. But as we discussed, I think, with time that will change. But we’ve also noticed that clients are asking for more indemnities and warranties and contracts are much more onerous. So I think that these medium to large size consultancies need to make sure they either have the in house expertise or that they’ve received advice from external lawyers or compliance professionals to look at these indemnities, water them down, carve out situations where they’re not responsible for the client’s negligence, they need to limit their own liability. And that’s an area of risk, that’s often overlooked. And they need to make sure they’re not on the hook for everything. So this is where it’s so important to have their contracts reviewed, and initial showstoppers identified. But at the same time, they’re expected to take risks. So we do expect consultancies, to be providing warranties, to be providing indemnities, but just make sure they’re reasonable. They need to look at their margins to ensure that the additional risk is reflected in the price that they’re given their clients. And finally, I think they need to make sure they have appropriate insurance in place. Because traditional insurance and this really is more for recruitment companies, but traditional insurance for contractors won’t cover them. They need to have SoW services where they’re providing the actual service, not labor.

Jonny Dunning:   54:08       Yeah. And I think it’s great points you make that, and particularly something that resonates for me and looking at what’s happening in the market is absolutely making sure that the risks are reflected in the way that the work is priced. Risks are shifting around in terms of the way that work gets done. If you look at a traditional client going through an agency and hiring some temps versus a client going to a service provider to buy an outsourced service, the risk is moving around. And there’s to a certain extent, as well, some people just think it’s always more expensive to do that. But is it? That’s the question I’d always ask because actually for the end client, is it really more expensive? I think it’d be pretty difficult for them to measure what they’re doing at the moment because if they’re not working to clear objectives and clear milestones, then you’ve just got people who are doing work over a period of time. And it’s just [inaudible 00:55:05]. It’s just not managed in the same way. It’s not recognized in the same way. So, yeah, I think that the point about the risk shifting round is really interesting. Another one is I find particularly interesting is ensuring that delivery is consistent with the way it’s contracted. And the certain amounts of that can be managed, for example, within a system, like, for example, the way that we manage that delivery process, there’s clear audit trail on all milestone approval, the way that milestones are constructed, is pulled straight out of the contract, when it’s agreed as a kind of scope of work that’s pulled into the contract in the first place agreed by everybody. And any changes, any variations to the contract, whether it’s a new milestone and amended date and amended price, amended deliverable, whatever it might be, is all tracked, is all agreed and it’s all fully auditable. So there’s a lot of visibility on how the work is getting done and on what’s actually being done? So the certain amount, you can kind of systemize in terms of checking that there’s a certain amount that it’s going to depend on the contract, and how that’s structured? But it still requires a commitment from the service provider and the customer, to start out with the right intentions and make sure that on the ground is being delivered in the right way. Do you see any other kind of checks and balances that can be used to help ensure that that’s there’s a consistency?

Carla Roberts:     56:39       Well, I think due diligence on the supply chain, is really, really important, know who’s in your supply chain, make sure that this applies specifically to umbrella companies, that they are based in the UK, that they are making proper tax payments to HMRC, make sure that they are viable, that they’re a viable financial organization. So I think due diligence has become more important than ever. Because everybody in the supply chain is reliant upon each other and the obligations are being floated right down to the bottom. So I think that’s absolutely crucial. You need to make sure that contractual documentation is appropriate. We talked about MSA is change control documentations. SoW’s whether those are template documents, or bespoke. And the more robust the SoW, the more likely it’s going to be a genuine outsource agreement, as opposed to the provision of labor. So I think the devils in the detail, when you’re talking about SoW, because if there’s any ambiguity, that is going to be a risk area. So the more detail, the less likelihood there’s going to be an issue. We talked about ensuring that the working practices reflect what’s in the contract, that’s absolutely essential. You just talked about transparency and visibility throughout the supply chain that assists with compliance. And platforms such as what you’re providing is absolutely fantastic for that. We talked about the fact they have to accept anyone to do the work as long as it’s about the skills and qualifications. They shouldn’t be meddling at all in these service providers, selection of subcontractors, obviously, they’ve got to write, if they’re not happy with particular subcontract, it has to have the moment but they shouldn’t be involved in selecting those individuals. And finally, client shouldn’t be involved in IR35 assessments, if they’re genuinely delivering a SoW or operating under the SoW model, that will definitely muddy the water.

Jonny Dunning:   59:02       I totally agree with that. And that’s coming from my layman’s perspective, rather than a legal expert like yourself. But that never made sense to me. If you’re outsourcing it, then it’s not a question of doing this data simulation. I felt like maybe it’s it comes up less now. But I felt like some really big companies. We’re looking at this initially as a kind of way of going Belton braces, double bagging the risk around it.

Carla Roberts:     59:34       Bit of [inaudible 00:59:35], I think.

Jonny Dunning:   59:36       Yeah. I think it feels misleading. Because if they’re outsourcing a service, outsourcing a piece of work to be for somebody else to do it. Like you said earlier, they should be relinquishing control. If the service provider doesn’t do a good job, they’re not going to get paid because as part of that they’ve got acceptance criteria, and clear deliverables and clear standards that need to be met. So, unfortunately, I think when people do if people do try to go down that route, and from a risk perspective, they feel that’s a better way to do it. Like you said, I just think it just completely muddy the water.

Carla Roberts:     1:00:15    I think it’s a matter of education, once they get their heads around this model and relax. I think it everybody’s been spooked by off payroll. And there are a lot of companies that just aren’t getting the appropriate advice. So once they understand the model and the way it operates, I think they will they will be able to relinquish that control.

Jonny Dunning:   1:00:39    Yeah, so I think, if we look at from an end client organization, there’s massive opportunity here in the sense that it’s an a very effective way to get work done when that work is most effectively carried out under a statement of work delivery model. And so they need to be able to utilize that channel, off payroll legislation. And similar legislation around that world makes that more important than it ever has been before, to be able to utilize that channel where you can’t use other channels effectively. Or it’s not that they’re not the right way to get their work done. And I always say, I think it’s a very pragmatic way to get work done. And in the right circumstances it is, because what you’re getting? You’re paying your money; how much you’re paying. And it’s much easier to plan to a certain extent. And so as an opportunity for them to utilize this channel. I think there is obviously at the risk of them doing it wrong, which is exactly what you’re talking about in terms of education, making sure they’re taking the right advice, making sure that they’ve got the right expertise and putting the right processing, they’re working with the right partners. But there is, as I say, I do believe there’s this additional risk of what are they been doing for the last 10, 20 years. And how much control do they have over how they’re managing their SoW process generally? And so I think there’s a huge opportunity in this market in general, for organizations and tech providers, and not necessarily regulators, but the whole system to be clearly define the right way to do things, which is kind of the way that procurement have been doing it for years, because you’ll make sure you’re doing proper supplier onboarding, you make sure you have a proper RFP, bidding and selection process where that’s appropriate. And you’ll make sure you go through a proper contracting scenario, where you might have had an MSA agreed, as part of your onboarding, you’re tying the SoW to the MSA is the right type of contract, a genuine well written SoW document. And then you’re taking what’s been promised to be delivered through the delivery phase, dealing with any changes, making sure milestones are approved, an audit trail on it. And then, at the appropriate point, invoices being paid related to work that’s being done and being approved. And that’s like the central workflow, for us as a tech provider, that’s kind of that central to everything, it doesn’t really ever change. Obviously, there’s nuances around the way that people configure the way they use systems and how their individual process works? But as we were discussing earlier, with regards to terminology, is kind of a safe point that people can come back to say, “If you genuinely want to get a piece of work done under a statement of work, you’re going to have to consider all of these things,” because they’re part of the workflow. And then there’s all the detail in there around how that contract is structured, how the NSA is structured, how the supplier is assessed, and all that sort of thing? But some organizations, I guess could, if they were mature in that area that could look at it as a lot of work. But they’re gonna have to address it. And the rewards are clearly there for when they are in a position to make use of that where it’s appropriate. 

Carla Roberts:     1:03:54    Absolutely. 

Jonny Dunning:   1:03:57    So I think it’s quite exciting in terms of how the markets going to unfold over the next couple of years, really. I think I would envisage over the next six months that we’re continuing kind of education process. And they’ll be a continuing kind of growth in awareness within organizations because I still feel like the IR35 just the knee jerk reaction, is still kind of shaking out of it, where people have maybe made not blanket determinations, but blanket decisions, that they’re not going to engage any PSCs, for example, and I think where they’ve said it’s PAYE or see you later, that is going to have downstream implications, which I think we’re still gonna see being filtered out. I think we’re obviously going to see more things like the DWP type scenario where organizations whether they’re private or public sector are starting to fall foul this in a fairly big way. What do you think we’ll see over the next kind of six months? And if you compare that to the next six months versus where we are in two years’ time, what are your kind of top level expectations for what that might look like?

Carla Roberts:     1:05:09    Well, I agree with your prediction, I think it has been a knee jerk reaction. A lot of clients, although they had plenty of time to prepare, they had an additional year, weren’t prepared when the legislation came into effect in April. And they were like sheep, they were just following what they saw other companies doing and making these blanket assessments. Well, as a result of that they’ve experienced, some have experienced a substantial loss of talent. And I’ve seen some now softening their stance, and reversing their decisions, because they need the project still need to get done. So I think the dust will settle, I think your prediction of six months is pretty accurate. And I think in six months’ time, this will be flavor of the month. And I think the flavor of the month to continue indefinitely, because I think the hybrid model that we’ve had operating here in the UK, of the inside outside, PSC is a thing of the past.

Jonny Dunning:   1:06:11    Interesting, I certainly think one thing that will very quickly become a thing of the past is where organizations or agencies are trying to rebadge a PSC contract as a SoW in a very shoddy way. I think that is...

Carla Roberts:     1:06:29    [Inaudible 01:06:29] with risk.

Jonny Dunning:   1:06:32    It’s fraught with risk, it’s just the wrong way to do it in so many ways, in every way. And I think that, organizations are going to come become savvy to that pretty quickly. And so I think that’s going to very quickly get filtered out. But that was certainly something that was concerning to see that in the market initially, where a lot of people who didn’t necessarily have the depth of understanding or process or rigor in place, we’re starting to talk about, “How we can help you? We can just change that to as SoW.” As we can see from this conversation there’s great depth to it. So, I think that’s going to change very quickly, because people are just going to become more savvy to the opportunity and also to the risk side of it. And it’s going to be really interesting and really exciting. And there’s opportunities all around for experts in his area. There’s also opportunities for contractors to hit some contractors, you might have gone through this off payroll process and just thought, “My worlds just totally changed. And there’s nothing I think,” well, maybe you can band together with some other people to form a company now. Maybe that’ll form the next chapter in your, how you operate in terms of being entrepreneurial, bit of a risk taker, trusting in your expertise, and valuing your expertise in a certain way? There’s different opportunities there. There’s opportunities for organizations to get things done in a different way. And there’s an opportunity for the way that work gets done, certainly in the UK but with this we’re looking at here to become far more clearly defined, have different kind of buckets that things fall into. Whereas I think that, although there are still some gray areas, I think when you look at this in a mature situation, maybe two years down the line, I think it will be much clearer whether something is it’s a perm engagement, it’s a temp contractor engagement, or it’s an SJW engagement? I don’t know if that kind of rings true for you.

Carla Roberts:     1:08:30    Yeah, absolutely. I think we’re going to come into line with the way other countries have done it for years. The outcome of all this is going to either be a traditional temp or a Statement of Work.

Jonny Dunning:   1:08:46    Yeah. And just bearing in mind the fact that, you obviously originally from the US, they’ve got the kind of 1099 versus W two scenario out there, in terms of the way that that’s regulated. I’ve seen some changes the way that that’s regulated in places like California. Do you see that as being something that becomes more strictly regulated across the whole of the US? Obviously, tends to work on a more regional basis over there. But do you think that’s something that there will be a tightening of the way that that’s managed?

Carla Roberts:     1:09:18    Well, states varying in their approaches and that’s getting into politics now.

Jonny Dunning:   1:09:25    I’ll stay clear upon politics. 

Carla Roberts:     1:09:26    Absolutely. 

Jonny Dunning:   1:09:28    But I think, I definitely can see that starting to, I’m expecting more European countries to follow suit, in their own way of trying to get on top of this, because the way the work is done has just changed so rapidly over the last few years. And as you say, with COVID, just changing the whole world. It’s just push things on probably 10 years over that two-year period. It’s just accelerated everything. But listen, I really appreciate your time. It’s so fascinating to talk about this and it’s great to kind of draw out that depth of technical knowledge. And it’s really interesting. And it’s certainly from my point of view, whenever I talk to you, I feel much clearer about some of the areas that otherwise feel a bit murky and gray areas and partly because there’s a lot of people in the market that still don’t fully understand it. And so you hear different opinions. So it’s great to hear some clarity on it. And yeah, I really appreciate you taking the time to chat. 

Carla Roberts:     1:10:31    It’s been my pleasure, Jonny. 

Jonny Dunning:   1:10:33    Excellent stuff. Well, we’ll wrap it up there. And but no doubt I hopefully we can revisit the conversation a bit further down the line, see if some of our predictions have come true. See how everything’s shaking out. But listen, thanks again for joining me, and I’ll hopefully catch up with you again soon.

Carla Roberts:     1:10:48    Great. 


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