Unlocking Hidden Cost Savings Through Third-Party Payrolling: Does Your MSP Go All Out for You?

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As companies rely more on non-employees to fill mission critical-roles, procurement leaders are realizing that their business objectives are not always aligned with those of their managed service provider (MSP). One scenario where this can be the case is the MSP’s rate of third-party payroll utilization — the percentage of spend for contingent workers who are W2 payrolled by a third party but sourced directly by the client. This article explains how an effective MSP maximizes third-party payroll utilization to drive cost savings and value for an organization.

Increasing third-party payroll utilization offers many benefits to companies, from driving down costs to streamlining worker sourcing processes and even reducing risks. Not all MSPs, however, are structured to support this approach. For example, when the sourcing of open orders is left to staffing firms or staffing-aligned MSPs, procurement organizations typically face markups that can range from 35%–50% for staffing agency-supplied workers.

Rather than accept these markups as unavoidable, procurement should embrace the opportunities available through a more proactive approach. By sourcing talent directly and payrolling them through an MSP, procurement can drastically reduce time to fill, as the talent discovery period is reduced. Contingent workforce managers also report higher worker satisfaction, because they know the talent they’re hiring can — and often does — perform the required work at an exceptional level.

The most alluring benefit, however, is potential cost savings. By avoiding the markups associated with the average staffing agency, procurement can capture savings as high as 20% or more, according to one MSP we spoke with. What’s more, a third-party payrolling approach through an MSP helps the business offload compliance risk, from ensuring workers are properly paid and classified to providing background checks and drug testing.

The First Step

Procurement should not only take advantage of this approach to track third-party payroll utilization as a key metric for savings, but also leverage it to actively increase the adoption of this channel. This is where the organization must determine whether its MSP is in line with its business interests.

To get started, here are a few questions to ask yourself:

  • Does your MSP report the payroll utilization metric? You’ll want to make sure you and your provider are on the same page. Plus, you’ll want to check how the payroll utilization metric is trending, to get a sense of whether there’s work to be done. It’s common to increase payroll utilization from a range of 10% up to 40% or more. This represents savings in the millions.
  • Is your MSP transparent? It is important to understand your MSP’s business model and ensure it views third-party payrolling as a useful tool in your contingent workforce program rather than a threat to its profit margins. This kind of strategy must be implemented with a vendor-neutral MSP, meaning the provider has no ownership interest or affilitation with a staffing company. While a non-neutral MSP relationship could work for filling administrative and clerical positions in a quick and efficient manner, securing cost savings and risk avoidance benefits from increased third-party payroll utilization requires the MSP to operate with a fully staffing-neutral business model.
  • Does your MSP have a robust and well-managed internal payrolling capability and technology to track time, billing and expenses? Your provider will obviously need one if you want to take this approach to talent management. You should also ask whether payrolling is fully integrated with a vendor management system (VMS), as well as how quickly it can be implemented and whether there are additional costs that must be considered.
  • Does your MSP have data that show how other clients have benefited from its payrolling approach? While just about all MSP vendors will offer third-party payrolling as an option, the best predictor of program success is whether your MSP has previously delivered savings that drive higher utiliization

Ultimately, it comes down to evaluating whether your MSP is positioned to truly deliver on this promise or if you’re working merely with a transactional vendor that offers more of a traditional staffing practice.

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Voices (3)

  1. Mark Stewart:

    Using a Contractor Consolidation program that delivers a cost-plus pricing model can ensure cost savings using direct sourcing initiatives. Fee transparency makes it a no-brainer when assessing cost savings and they can work inside existing MSP frameworks even though it’s cheaper when they don’t.

    Otherwise, you are just playing the guessing game when leveraging third parties in regards to their rate structure because they want to take you for the cost of acquisition, bloated sales costs and overinflated management/oversight fees.

    Consolidators also have the added benefit of sometimes having a cost lower than an organizations internal cost structure when volume is in play.

  2. Christine Morton:

    Remember that just because you’re using a payrolling provider doesn’t mean it’s cheaper overall. Nominated (pre-identified) workers who are payrolled often come at a cost premium from the pay rate side, which can negate any savings on the markup side. Direct Hire programmes can introduce competition and bring more holistic savings.

  3. Brian Hoffmeyer:

    I agree that using self-sourcing via a payroll provider can drive significant savings (as well as improved quality and lower time-to-fil) but this article misses out on the fact that you need a technology that allows you to create, curate, and access these private and public talent pools. This goes beyond the requisitioning tools that are a part of most VMSs. The Beeline VMS is well equipped to provide that functionality.

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