Over the past two decades, the general approach to funding a contingent labor program has been for the staffing suppliers that support the program to pay for the cost of the dedicated technology and the associated operational team. (This approach is typically calculated based on a percent-of-spend model). This go-to-market strategy successfully provided an easy entry for decision-makers to establish and support programs without needing to write a check. As we have progressed as an industry to become more automated and strategic, it is time for us to reconsider the common funding strategies to increase the opportunity for stronger adoption from the ecosystem and to improve the overall user experience through strategic investments. To do this, we have to analyze how and why we are making these investments.
Let’s examine how a typical staff augmentation program was funded in the early 2000s. Because they knew decentralized programs had little to no cost controls in place, VMS and MSP organizations were confident they could get the suppliers in the program to pay the associated fees for the service and technology. They were able to create rate structures which organized bill rates, pay rates and general profitability control of the suppliers through markup visibility. Here is an example of what a decentralized program may have looked like with two simple data points compared to a centralized program:
It is easy to see how the MSP and VMS organizations were able to get the suppliers to pay their fees through a percent-of-spend model. We can argue the services provided and rendered from the MSP validate an ongoing fee to support the continued operational delivery model. For the VMS technology, this becomes a more difficult discussion about the total cost of ownership. The challenge is that, over the years, we have achieved a high level of maturity specifically with regard to cost control. It is not uncommon for programs to optimize their cost savings opportunities and struggle to gain more cost savings as programs are in existence for several years. The technology implementation is front loaded with more costs than when they get to a steady state. Why does this matter? Let’s look at the same type of spend within a program and see what the total cost of the technology looks like over a 10-year period:
In this fictious scenario, we can begin to understand how there are inherent challenges in this model. For the VMS organizations, it is not uncommon for their clients to conduct RFPs every three to five years. In the event the VMS loses a client after a three-year agreement is terminated, they can very easily be in a position to lose money because of the front-end investments they made to the program. Buyer organizations can find themselves in a costly position if they maintain a long-term agreement with their VMS provider. As each year goes by, the percentage-of-spend model can become expensive beyond what is reasonable.
What is the solution? I think buyer organization leaders are beginning to understand the value of their contingent workforce programs. When these leaders see the contingent workforce program as a strategic talent lever, it makes sense to invest in technology and operational support. For the sake of argument, the fair and just thing to do is to treat the VMS like all the other technologies they purchase for their organization. These options typically are based on a license-based model with, in some cases, implementation and customization costs billed out separately.
For buyers who are looking for a long-term return on investment, a change from percentage-of-spend models to a license model becomes more easily defensible. It also gives the buyer organization a sense of their true cost of ownership because the suppliers are not baking the fees into their pricing model. We don’t ever intend to set the pricing models here at SIA, but it is clear that change is afoot as technologies continue to drive high expectations for contingent labor programs.