Five Common Questions for First Generation MSP

Pinnacle Group Blog

Managed services, or the management of a portfolio of staffing suppliers and all related workflows on behalf of a large buyer by a managed service provider (MSP), have evolved significantly over the past three decades. From the early days when the process was manual to today’s technologically robust and services-rich environment, no two programs are ever identical.

However, we do tend to hear common sets of questions from buyers based on their stage of maturity, their focus on domestic vs. international spend, and the types of labor they are seeking to manage. In today’s blog, we will focus specifically on five of the most common MSP questions asked by first-generation, domestic (US) programs primarily focused on IT/professional skill sets.

Why wouldn’t I just do this myself?

Short Answer: You can, but do you really want to?

Managed service providers have invested in specific recruiting and other technologies that are unique to contingent labor and have also developed core competencies in the highly transactional, fast-moving market for human capital. MSPs know the market for talent, have deep expertise in dealing with staffing suppliers, have detailed knowledge of HR and compliance-related risks, and know how to evaluate, train, and offer attractive career paths to talented on-site staffing specialists and program managers. For any program that is large enough to consider a managed service provider, the value provided by the MSP should significantly outweigh the relatively small program fees.

How would you pay my suppliers on my behalf?

Short Answer: Usually within 5 days of receipt of funds, and with all funds sequestered.

Managed service providers typically pay suppliers on behalf of their clients. One method, commonly referred to as prime/sub, refers to a contractual arrangement in which the MSP is the prime contractor and the staffing suppliers are formally subcontracted to the MSP. A second method, commonly referred to as third party administrator (TPA), refers to a program in which the client maintains direct contracts with its staffing suppliers while MSPs still perform all the same supplier management and workflow process responsibilities. The difference is that the suppliers are either paid directly by the client, or the MSP enters into a separate pay agent agreement with them. State-specific tax laws often impact the decision of which model to utilize. However, even in TPA models, most client companies have become comfortable with having the MSP pay their suppliers on their behalf. In all cases where the MSP is paying suppliers, funds earmarked for staffing suppliers should be sequestered and never co-mingled with general operating funds. Industry best practices also include five-day turnaround times from receipt of funds to disbursement.

What is difference between MSP and VMS?*

Short answer: The VMS is purely software application (typically SaaS), whereas the MSP is a group of contingent labor professionals – both onsite and offsite – who operate the VMS and all related workflows on behalf of the client. It’s analogous to a car and driver relationship.

Vendor management software (VMS) is typically delivered as a service (SaaS) – meaning the buyer does not install the software on its internal systems or buy software licenses to operate it (although, this is changing). The VMS can be configured along multiple dimensions to suit a particular client’s requirements, which typically requires 90 days assuming no custom integrations. The managed service provider then operates the VMS on behalf of the client as the expert, third party manager. In effect, the VMS is the enterprise resource planning (ERP) platform for the client’s contingent labor. Stronger, more capable MSPs become true strategic partners to their clients and advise on the full range of contingent labor issues. Less capable MSPs focus primarily on workflow management and VMS operation.

* While some MSPs market a proprietary VMS, for purposes of this blog we are focusing on the respective functions, not the providers.

How do you generate savings?

Short answer: The most common approach is reductions in supplier bill rates (or markups) and/or increased supplier discounts, typically combined with supplier rationalization to take advantage of volume-based buying.

Savings are often one of the most significant drivers behind the decision to utilize a managed service provider in lieu of managing the program with in-house personnel. MSPs are closer to the market, regularly interact with suppliers, and have made the investments in contingent labor technology and pricing tools. In combination, these skills and capabilities should enable your MSP to provide savings well in excess of their professional fees – particularly in generation 1 programs where suppliers and rate cards have not been significantly rationalized. Additional savings can be generated via improved supplier mapping, rate card disaggregation, supplier tiering strategies, talent communities, payrolling, and various other strategies that may not be fully utilized. Indirectly, savings can also come from more efficient management of the hiring process, improved fill ratios, industry best practices, reduced contractor attrition, improved compliance, etc. These types of indirect benefits are not as easily quantified and thus often not considered true savings in the same way as bill rate reductions.  

Can we still contract with our supplier and pick our own suppliers?

Short answer: Yes, but let’s discuss that.

It’s natural in a generation 1 program to want to maintain control over certain functions. Supplier selection and direct contracting are two of the most common functions that clients ask about. The reality is that while you can do it, you shouldn’t. If you’ve picked a capable managed service provider, the MSP should be able to fully handle supplier contracting (on either a prime/sub or TPA basis) and should be able to provide expert advice on both your existing suppliers as well as suppliers you may not be considering. The best programs end up being collaborative, with MSP handling all the analysis and execution, while clients limit their role to sign-off and overall program performance metrics. A strong MSP will also support any specific supplier requests from the client as long as the overall business goals are being met. They will simply incorporate the supplier into the program, manage them on the same basis as every other supplier, and let performance dictate their future recommendations to the client.

Partner for Success

At Pinnacle Group, every one of our managed services programs is a customized solution, meaning that whatever it is that your business needs, we can fit our solution to those needs. Many managed services programs are once-size-fits-all solutions that come with built-in suppliers and no flexibility. Instead, when you partner with us, we can bring in an entire group of suppliers ourselves, work with the suppliers your business prefers, or a combination of all of these. Speak to a solutions expert today

Check back as our next blogs focus on more mature and international programs, as well as programs with services procurement and different types of skills.