External workforce management: Checklists & best practices

 

 

What is the external workforce?

The external workforce is an umbrella term for all people who aren’t legally classified as permanent, payrolled employees. In other words: an external workforce means people you engage with on a temporary, on-demand, or flexible basis. 

Categories of external workers:

• Freelancers and gig workers, available through online talent marketplace or contracted directly on-demand or retainer-basis.
• Independent contractors can be hired part-time or full-time for fixed-term projects. 
• Contingent workers are professionals ready to join on a temporary or seasonal basis to cover gaps in the workforce. 
• Agencies and small business owners also count as the external workforce.

 

All of these people represent a growing segment of the workforce. In the European Union, self-employed people account for 14% of the total labor force. In the US, over 12.7 million work independently. 

On the business side, global organizations spent an astounding $4.4 trillion on contingent workforce last year, with the US alone footing a $1.1 trillion bill. 

Source: SIA Staffing Industry Analysis

The analysis includes work commissioned from 

• Independent contractors (IC) and self-employed business owners without employees 
• Statement of work (SOW) consultants, including those payrolled by consulting firms 
• Temporary workers assigned by a staffing agency (TAW) 
• Platform-based digital workers 
• Temporary employees sourced directly

Freelancers and independent contractors are now employed by everyone from government agencies to Big Tech firms, which is mostly a good thing. 

But the growing external workforce market also has a darker side to it. 

In 2019, NYT journalists found that Google surprisingly employs more independent contractors than full-time staffers despite publicly claiming that they comprise “less than 0.5% of our overall workforce.” They also pay them significantly less than FT people. 

So before we move further this needs to be said:

Do not attempt to “pass-off” contractors as full-time employees to save on payroll taxes. Independent contractor misclassification is a legal offense in many countries (not just the US) and can lead to hefty compliance fines. 

If you are not sure who you need on your team, check our primer on employee vs independent contractor classification. Apart from staying on the good side of compliance, knowing the difference between employees and contractors also helps you manage contingent workers better. 

 

Why you can't ignore the external workforce

People are collectively tired of rigid employment models.  

Per Gartner, 64% of workers would consider a new job only if it offered flexible hours. Also, about 10 million Americans now consider freelancing. Among them, 73% cite the ability to work remotely or flexibly as a driving factor. 

Since setting up as a freelancer has never been easier, talented people leave the traditional workforce in droves and set up independent operations.

Where does this leave employers? Deeply puzzled. 87% of executives surveyed by McKinsey, say they are dealing with skill gaps in the workforce. But less than 50% know how to address the problem. Or should I say — they don’t know how to adapt their operations to external resource management.

Companies that recognize this shift don’t struggle as much with talent shortages. They get the missing skills from a contingent worker pool. 

Data from SAP suggests that: 

• 65% of businesses see an external workforce as important to operating at full capacity and meeting market demand. 
• 68% also agree that external workers are important to developing or improving products and services.

Surveyed business leaders also name faster time-to-market, greater agility, and improved financial performance among other benefits of using external workers. 

The takeaway: Great people aren’t disappearing from the market — they just change their employment terms and choose to work independently. So when you exclude this cohort from your hiring pool, you’ll be short on good people. 

Getting started: external workforce management checklist

The freelance economy has been growing since the mid-2010s. Yet, a good number of companies are yet to profit from this trend. 

On the employers’ end, Deloitte notes the following issues: 

• Lack of an integrated workforce management strategy
• Ad hoc (and at times high-risk) managerial behavior
• Poor data management practices and lack of documentation 
• Inadequate technology for managing and collaborating with external workers 
  
  

All of the above are pressing constraints, but they aren’t deal-breaking barriers. 

Imposed transition to remote work pushed many companies toward digitizing processes and “discovering” cloud apps. These changes created a technical pillar for welcoming the digital external workforce. Now you have to make a consolidated effort to adapt your operating practices to external workers. 

We’ve got three checklists to help you make this transition significantly easier, covering HR, finance, and management tasks.

Checklist: How to hire and onboard external workers

Work with your HR department on setting up the optimal external talent pipeline. If you plan to extensively rely on independent contractors, you need to build a documented process to ensure faster and more consistent hiring decisions. 

• Map your talent needs. Identify a set of roles you want to fill in externally. Create skills-based profiles of ideal hires, instead of writing standard job descriptions. Then decide where these people can fit best. 
• Which roles are the most critical to cover?
• Which talent (internal v. external) can I get faster? 
• Which talent (internal v. external) can I get cheaper? 
• What primary skill-sets are in the highest demand?
• Which secondary skills ideal candidates should have?
• Do I need this talent long-term or short-term? 
• Which roles have temporary or fluctuating demand?
• Which roles are demand-driven? 
• Which roles require long-term engagement? 
• Who will oversee external workers?
• Do we need extra manager(s) to oversee external team(s)?
• Do current manager(s) need extra training in distributed team management? 

 

• Decide on hiring channels. Self-employed people are actively present online. From personal websites and LinkedIn to remote job websites, you have plenty of sourcing options to explore:   

• Staffing or talent agencies 
• Online freelance marketplaces and digital platforms
• Direct hires (networking, referrals, direct job applications)

 

• Make hiring budget estimates. External workers' costs can be harder to calculate because of the variety of service models and market rates. To get the preliminary numbers, complete these steps: 

• Research different pricing models, used by contractors and agencies. Hourly, fixed price, day rates, and retainers are most common. 
• Request price quotes from service providers and agencies to gauge average market rates. 
• Calculate potential savings, compared to hiring full-time employees for the same positions. 
• Estimate the maximum budget you can allocate for different roles. 

• Create a talent sourcing pipeline. With finalized role descriptions and an approved budget, you are ready to get into the field: 
  • Develop a reference team structure to ensure you are hiring external workers in the right order. 
  • Assign recruiters for different roles and send them hunting for talent. 
  • Develop a standard interview process for shortlisting candidates. 
  • Prepare legal contract work for independent contractors. 
  • Start building an external talent database containing notes on prospective hires, their rates, availability, etc.
• Develop an onboarding process. Onboarding ensures a faster track to productivity for external workers and fewer overheads for the HR team. 

• Decide on the preferred payment methods and payout structure. 
• Set up a digital counter-signing process for all legal documents. 
• Create a contractor welcome package, featuring must-know information about the company and project. 
• Set up a process for knowledge exchange between internal teams and external workers to speed up their orientation. 

 

Read more about onboarding freelancers. 

Checklist: How to pay external workers

External workers' payouts may seem like a complex issue (but it’s actually not). Ask your Finance team if your current accounting process fits shorter payouts (e.g. NET 0, 7, 15), plus if the needs better payment tools. 

• Tax compliance. Compared to payrolled employees, tax compliance is minimal for independent contractors (since they file taxes separately). You just need to complete several simple steps:
• Confirm a valid invoice format with tax authorities.
• Collect independent contractor forms (if applicable). 
• Request a VAT number from a freelancer (if applicable). 

 

• Decide on the payment structure. Talk to Finance on how you could best manage the payment process to minimize delays. 
• Check that you can accommodate different pricing models — fixed-price, retainers, hourly projects. 
• Decide on payout frequency, based on the common payment terms, used by contractors. 

 

• Select a payment processing tool. You have plenty of options – from direct bank transfers to online payment apps. When making your choice, pay attention to:

• Cross-border and currency conversion fees, charger by your bank or payment processor. 
• Available integrations with your bank and accounting software for extra convenience. 
• Bulk payments and payment scheduling feature for recurring contractor payments. 

 

Read more about paying freelancers and other external workers.

Checklist: How to manage and retain your external workforce

We’ve arrived at the fun stuff: day-to-day external workforce management. To retain your best people you need to make ‘em feel included and appreciated. Collaborate with HR and department heads on the next steps: 

• Provide adequate resources to managers, dealing with the external workforce. It’s new territory for your in-house people too. So ensure they have the tools, knowledge, and support they need to excel in this: 

• Online collaboration tools. Run an inventory of what you already have, plus consider some extras. 
• Recommended KPI and metrics. Explain how to best track the performance of independent workers and define their success in the role.  
• Extra training (if budgets allow) to help your managers grasp some best practices. 

 

• Standardize collaboration and management practices. Prepare extra documentation that independent contractors could refer to in their day-to-day work. 

• Standard operating procedures (SOPs) for different tasks and processes. This can be a section of your company wiki or a separate handbook for contractors. 

• Overview of company culture, history, and goals to provide extra context about the work you do. 

• Access to collaboration and business tools. Ask your IT team to prepare separate credentials ahead of time. 

• Reporting and communications schedules, explaining when and how you want to be updated on progress. 
• Performance management process. Explain how you’ll measure each contractor’s performance and explain the key metrics. 

 

• Design a contractor feedback loop. External workforce management optimization is a continuous process. So you need data from both sides (management + contractor) to better understand why issues happen. 

•  Present a chain of command for contacting different people 
• Develop a clear path for contractors to escalate issues 
• Host external workforce surveys on their experience
• Host surveys among managers to understand their issues 

Read more about managing freelance teams.

How to manage your external workforce: Essential tips

Drop “external” from workforce management. In high-performing organizations, 69% of managers say that they treat external workers the same as internal employees.

That’s the optimal path forward. Greater inclusion leads to higher engagement. Happy contractors stay with you longer and get progressively better in the work they do for you. (Plus, you save on the re-hiring costs). 

To get you onto the right track here are four extra best practices for external workforce management.

Address the main challenges of external workers: lack of direction

External workers have more exposure to different management styles and operating practices.  Still, your new hires don’t know how you prefer to get the job done. 

Employees have the advantage of progressively learning the right way to do things and meet the set expectations. Independent contractors, in turn, are often expected to come and make work happen fast. 

A 2022 Microsoft study of knowledge workers found:

For freelancers, the burden of knowing how work is done — and providing support for that work — is transferred largely from the client to the individual freelancer. 

This mostly happens because clients (and contractor managers) lack awareness of the independent’s work, while the freelancer doesn’t understand the “inner kitchen.” Hence, external workers often resort to “guesstimation” — and not every “guess” is right. 

You can deal with his information asymmetry and discrepancies in expectations with …. several plain Word documents. 

Cultivate a culture of writing down: 

• Instructions
• Best practices 
• Directions 
• Guidelines 
• Expectations 

 

Then turn all of the above team knowledge into a set of SOPs (Standard Operating Procedures) that every new hire — external or internal — can follow. Doing so reduces repetitive communication (as your team continues to grow) and improves the quality of delivered work through clear direction. 

Questions will still come up. So give your external workers a list of the right people to contact in each case. Once again, this can be a plain text doc or a spreadsheet with names.

Reduce management overheads with clear "ownership" structure

In some companies, external workforce management looks like a game of “hot potato.” Independent contracts get bounced between HRs, direct managers, and anyone in between all the time. 

Obviously, this leads to a ton of issues:

• Low contractor performance
• Frustrated new hires and high turnover 
• High workforce management costs 
  
  

Break this vicious cycle by creating a clear ownership structure for managing external workers. It can be either:

• HR-centered. Appoint an external workforce manager to be responsible for the full employee lifecycle – from sourcing to onboarding to managing (work allocation) and payments.
• Function-centered: Each team has a manager who’s dealing with the team’s external folks in collaboration with other units (HR, accounting). Depending on the workforce size it can be the department head/lead person — or a dedicated manager. 

Include contractors in the bigger picture to level up engagement

Compliance-wise, your external workforce operates “outside” of your organization. But contractors should not be kept out of all company events on a cultural level. That’s a recipe for high turnover. 

Remember: you are competing for contractors’ time and attention with their current clients — and other opportunities on the market. Loyalty is hard to cultivate when your approach to management assumes keeping your people in the dark about future work, structural changes, or major shifts within the company. 

So make an effort to include your contractors in the “bigger picture” by: 

• Proactively sharing future plans and goals to help your external workers understand what’s next for them and in what capacity their services will be needed. 
• Providing space to speak up. External workers often have more acute observations of routine work. Provide them with room to share their opinions, tips, and suggestions. 
• Investing in external workforce talent development. Provide your people knowledge (e.g. internal training resources) to get on board with your brand and level up to your in-house worker standards. 

 

Also, as an HR consultant Josh Bersin rightfully notes: 

“Each contingent worker touches your product, customers, and business processes in some way, with positive or negative effects.”

A better internal cohesion ensures consistency in your company's external presentation.

Assemble your contractor management toolbox

You’ve trained people in management. You’ve set better collaboration processes — now you need technology to pierce everything together. 

The good news: a lot of your current tech stack can (and should!) be used for independent contractors. At the basic level, you’ll need:

• Communication apps — email, Slack, Microsoft Teams, etc. 
• Collaboration platforms — a project management app + any other role-specific tools 

 

As a next step, you should add a knowledge management tool — a virtual space, where you store all onboarding documents, SOPs, company- and contractor-specific guides. 

Here are several collaborative knowledge management platforms: 

• Notion. Best for storing notes, guides, checklists, and templates. 
• HubSpot knowledge base software. Best for creating public FAQs, support libraries, and documentation sections. 
• Slab. Best for building wiki-styled databases and team playbooks. 

 

And to speed things up on the admin end, consider an external workforce management solution. 

You don’t need to go for an advanced and expensive vendor management platform (unless that’s what you need). If your main concerns are fast onboarding, contract management, and streamlined payouts go for a  lightweight option like Xolo.

Through one sleek interface you can:

• Sign on new contractors in 10 minutes (we do the background and compliance checks!) 
• Exchange legal contracts, set the scope of work, and indicate payment terms 
• Auto-generate invoices from contractors and schedule bulk payouts in multiple currencies

 

No licenses, no subscriptions. We charge a flat-rate fee based on your billing tier (which you can split with your freelance team). That way you don’t have to worry about extra charges when your collaborations go on hold.

A job by any other name is still a job. Or is it?

Every other “future of work” report hammers down one idea: the days of rigid roles and linear career paths are numbered. 

• 77% of executives think that contingent workers will significantly replace full-time employees within the next five years.
• Katy Tynan, Principal Analyst at Forrester, believes that we are going into the “no jobs future” where companies employ “a dynamic mix of full-time employees, internal and external talent marketplaces, on-demand and contingent labor, and bots”.

 

People now want portfolios of projects they did full-time and dabbled in as a freelancer. Employers can now assemble distributed and hybrid teams, featuring talents from all over the world. The roles within such teams don’t have to be static. They can evolve over time and assume both vertical and horizontal growth.

And if you want to get an upper hand in this brave new world of employment, you need to get your independent contractor management act right. With checklists, tips, and tools this post provides, it should no longer seem that hard!

About Elena

Elena Prokopets writes content for tech-led companies & software development businesses, marketing to them. Her empathy for the customer, expertise in SEO, and knack for storytelling help create content that ranks well and drives industry conversations.

Elena uses Xolo so she can focus on her solo B2B content writing business without stressing over the compliance and admin overhead.