Over the past decades, the contingent workforce management space has matured as organizations’ understanding of the complexity and support needed to manage this workforce effectively has grown. As support models have scaled, new initiatives have been added and tech stacks have ballooned, an important question that continues to come up is, “How should we be paying for this support?”
While once effective, the dominant funding models are starting to lose appeal as programs look for more progressive ways to account for — and pay — the fees associated with our technologies and MSPs. This article evaluates the traditional approach for funding contingent workforce programs — supplier funded — and how the market is changing.
Supplier-funded model. Supplier funding has been the go-to approach to fund program initiatives without taking on the burden of additional budget line items. This model stems from the early days of contingent workforce management, when, like many new areas in need of support, building a business case and asking to take on additional overhead involved difficult conversations. Unlike enterprise resource planning systems and platforms required by IT, technology and services for the contingent workforce didn’t have the same value proposition that they do today. In order to get money for the newest vendor management systems and managed service programs, program owners had to get creative. Because the contingent labor category was often one of the largest areas of spend, the solution was to tap into that spend and take the cost from the rate the staffing suppliers were already charging. In short, programs implemented a funding strategy that has no direct cost impact to their business and provides an ample supply of money to contribute to their VMS and MSP costs — genius!
But what really happens in a supplier-funded model? While on paper it may seem like the business is avoiding a cost and the supplier is taking the burden of our fees, in reality, savvy staffing suppliers have adjusted their service cost to account for it. The outcome is a model that often results in inflated rates and less direct understanding for the fees a program is accumulating. In other words, the enterprise must still pay the cost for the systems and services; however, those costs are paid indirectly through the increased rates being charged by the staffing supplier, so the actual costs of the systems and technology are not clear. While this funding model can be deceptive, it has proven to be one of the best ways to charge the cost of the program directly to the business areas consuming the service and utilizing the contingent workers obtained through the program/technology.
Supplier funding is not a bad approach, but after several decades of leveraging it, programs have advanced to a maturity level where they should take another look at this setup to see if there are more advantageous ways to fund our programs.
Here are some alternative funding models to consider:
Tiered license. The level of contingent workforce spend may still be the most important factor for how much to pay. After several years of spend tracking and some basic workforce planning processes, most organizations should be able to start the year with reliable estimates of their contingent workforce spend. Instead of leveraging a fee, consider a tiered license model that enables you to plan for your expected spend but also provides incentives if you exceed initial estimates. With a set cost established, your program can more directly budget for the total annual charge and maintain ongoing budget conversations about how to invest or decrease costs as needed annually.
Cost plus. Another popular approach to consider for small and midsize companies is a cost plus model that establishes the cost of a baseline of resources, support or technology configuration and determines what the appropriate additional acceptable vendor margin should be. This enables companies to be less dependent on the size and scale of their spend to get adequate support.
Blended model. Companies are also recognizing that a single fee structure may not be scalable across all initiatives such as statement of work and resource tracking, where the support may not always be equitable to the fee charged. Another consideration is blending these funding models. For example, you might use a supplier-funded model for staff augmentation support, a tiered license model for SOW and a fee-for-service model for supporting resource tracking.
However you look to establish your program’s cost, know that there are options available, and your vendors may even be motivated to move to them in order to find consistent revenue streams that are less dependent on maintaining contingent worker volume. As many programs go to market for new services this year, consider evaluating your vendors’ pricing in various models to see which one works best for your environment and business model.