Pennywise: When the Drive to Cut Costs Becomes Counterproductive

This afternoon I'd like to welcome Gregory Boquist, MinotConsulting for SourceRight Solutions to Spend Matters. Please join me in welcoming Gregory to Spend Matters.

Rise of the MSP
Over the past decade, large American corporations using contingent labor have increasingly consolidated their purchasing by implementing managed services programs (MSPs) that administer the functions associated with utilizing temporary workers. By leveraging economies of scale, MSPs promoted uniform pay rates, rationalized supply chains, and increased the visibility in large-volume transactional business.

As MSPs grew in size and number, increasingly sophisticated applications were developed both inside and outside the staffing industry to manage their regular activities. Out of these applications evolved vendor management systems (VMS) which initially formalized the requisition process but eventually assumed the capability to manage many other MSP procedures.

Cost Savings at What Cost?
In this environment, staffing companies offering MSPs vied with each other based largely on price under the assumption that large, effectively wholesale, programs would be profitable with sufficient recruited business volume. The adoption of VMS vendor-neutral models eroded the ability of staffing agencies to garner large portions of recruited business, thereby thinning already slim margins.

Spending was becoming consolidated, but by users of contingent labor implementing VMS-based programs -- not by staffing companies enlarging market share. By providing consulting, implementation, and other services at no additional cost, staffing companies created the expectation that these value-added benefits were bundled into the overall MSP service fee -- but this was not always the case. Staffing companies were encountering higher-than-expected costs, yet were unable to directly bill for them.

MSPs passed on their cost constraints to sub-vendors and branch offices which, in response, focused on servicing more profitable retail work outside the program. MSPs were finding it difficult to fulfill requisitions at wholesale prices when recruiters had higher-margin retail alternatives. The problem was no longer confined to MSP providers; now users of contingent labor were having difficulties fulfilling requisitions with qualified candidates because of recruiting disincentives and below-market rates. Unsustainable MSP operations were impacting candidate quality and supply chain reliability.

A View from the Other Side
Mary Hassler is a Commodity Manager for Strategic Procurement at Siemens Services, LLC. She has experienced firsthand the impact that MSPs and VMS have had on the evolving relationship between the staffing industry and corporate procurement. Mary sees difficult times ahead unless providers and users of MSPs change their business models and their expectations. She's concerned that staffing agencies have lowered their MSP margins to the point where operations are no longer profitable (or sustainable).

Mary suggests that "you want your [staffing] partner to have a sustainable business model or you put your own program at risk. If you can't put the car on the road because the tire falls apart, what have you done to your own product?" She believes that the key problem MSPs face today is the sustainability of the business model.

Mary believes that some staffing companies have not adequately differentiated between fixed and variable costs. "They're all variable [costs] ... For example, right now unemployment insurance is going up everywhere so if you haven't got enough in your profit margin to cover your statutory taxes you can end up in a situation where you have to go back and change the pricing structure."

Part of the solution, according to Mary, lies in performing due diligence during the initial planning phases of the MSP. "I think [staffing companies] need to do their due diligence because when they don't, they're really not anticipating the changes that can occur ... market conditions go up and down; so if you aren't prepared ... you can get yourself into a lot of trouble."

Users of contingent labor can do their part to help the situation from worsening. Mary suggests that clients "should be transparent in explaining their requirements ... and the recruiting costs of the labor they're about to purchase." Managing expectations is also a factor. Clients need to be realistic about the ability of MSPs to deliver ever-increasing cost savings over time. "To expect year-over-year cost savings ... It's unsustainable. Expanding coverage is the only way to do it [increase cost savings]."

What Mary would like to see is a more rational methodology for MSP cost accounting. "As a purchaser of labor I would prefer to have each item broken out; to have everything very transparent in the markup structure. But the down side of that is that these are moving targets ... they can all change based on the market conditions."

Mary concludes that "in the end, we share this product and the quality of the product, so we should make it to the point where we can buy a quality product, not that we've got it below where we can't a) find a quality product or b) maintain the product."

Negotiating a Way Forward
In order to effect a meaningful change in the cost structures of MSPs, providers will have to educate their clients regarding both the total costs of their services as well as the full value of their benefits. This will require some considerable analyses of MSP data to derive the total costs associated with certain functions as well as their impact on such key factors as candidate quality and worker retention. Another key task for MSP providers will be to methodically utilize pre-engagement discoveries to evaluate the scope of the opportunity and any unique challenges (and their associated costs) a program may face. Finally, MSP providers will need to apply their findings to educate users as to the true costs and benefits of their products and services.

In conjunction, users of MSP must be transparent in making their requirements and challenges known to MSP providers to facilitate realistic pricing. This process will likely result in an unbundling of MSP services and the adoption of a cost-plus model that more accurately reflects the variable costs experienced in real-market conditions. This combination of analysis, education, and transparency could form the foundation for the transition to a more sustainable MSP model and a more rigorous supply chain for contingent labor.

All quotes are from an Interview with Mary Hassler, August 13, 2009.

Spend Matters would like to thank Gregory Boquist for sharing his thoughts.

Jason Busch

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