An unmanaged contingent program often is referred to as the “Wild West” — an apt description of a lawless environment. There are hundreds — sometimes even thousands — of suppliers, each with a unique contract, service delivery model and pricing scheme. Each sending unique invoices and timecards that require manual processing, collectively costing enterprise companies thousands of man hours and boundless frustration.
Then in the ’90s came the managed service programs and vendor management systems, which yielded tremendous soft savings in the form of increased efficiencies: automating previously manual processes and speeding up time to fill. This increased program efficiency was often complemented with significant hard-dollar savings through margin compression, more accurate and aggressive discounts and right skilling.
By 2010, programs that didn’t have an MSP or a VMS were considered dinosaurs. The MSP/VMS industry flourished under a supplier-funded model — the company assesses a small fee on the supplier’s volume. There was a spirited debate among industry insiders as to whether these programs should be considered “free” or not. No matter where you land on this is debate, one thing is clear to me: The supplier funding structure will be the death of the managed service program as we know it. I’ll go out on a limb here: In 10 years, if we were to look back to see what was the root cause of the industry woes, we will see it will have been the supplier-funded model. A simple look at the model’s pros and cons will bear this out.
Pro
- Enables companies to deploy a global program with little to no out-of-pocket expense.
- Even though these deployments can be considered ERP applications, because these programs often do not require significant outlays for great initial benefit, they could be implemented without the necessary C-level attention that would be given to an ERP deployment.
- With some exceptions, supplier funding also meant that program sponsors would not have to hunt for company allocation every year. I always hated having to chase corporate allocations because I felt that every single year I had to fight the internal politics of an international organization to justify why the solution made sense.
- The businesses that use the program the most benefited the most — and end up paying the most for it.
Con
- By focusing on a percentage of spend as opposed to the true cost of delivery, the actual expense of managing a program was an unknown and buyers would remain skeptical of how their behavior affects the supplier profitability.
- This disconnect would drive the cost — and therefore profitability — of MSP/VMS providers ever lower. Buyers would incorrectly focus on the supplier fee in an environment wholly separate from true cost of the supplier to manage. Feeling this, MSPs’ margins would continue to be squeezed as buyers mature and their negotiated costs and demands get more specific/costly to deliver. These compressed margins would force many providers to deploy less costly “junior” staff to the program office/client site.
- The funding model is disconnected from the supplier’s true cost to deliver and therefore harder to predict when renegotiating in good faith.
People do not appreciate what does not come with a cost. “Free” may be nice, but in the end, such things tend to be devalued regardless of their circumstances. This devaluation by many organizations hides the true value of the MSP from the C-level scrutiny usually given to such strategic programs. This can limit the strategic opportunities MSPs need to innovate and move the industry forward.
Every situation is unique and while sometimes a supplier-funded solution is better than the multitude of other funding options available to today’s program manager, by asking the right questions you can arrive at a solution that can last.