When an organization goes looking for a technology solution, often the first questions are about cost and return on investment (ROI).
How much is the license? Is support or implementation extra? Which department will own the budget? When will we see the value?
If your procurement or HR team is searching for a vendor management system (VMS), we have some surprising news.
Unlike many other SaaS solutions, a robust VMS almost always comes without licensing or renewal fees to the organization. This is because most vendor management systems aren’t funded by the companies who use them to manage their contingent labor.
Companies who are transitioning from spreadsheets or other manual systems to a VMS may find this unfamiliar, but the vendor-funded model is the industry standard.
In fact, roughly 75% of VMS contracts apply this model, whereas only 20% are based on an annual software licence and 5% are based on contingent headcount or engagements (usually for companies who are only managing worker IDs and not tracking time worked).
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What is the Vendor-Funded Model for VMS Technology?
Under a vendor-funded pricing model, VMS providers don’t charge the buyer a software licensing or transaction fee. Instead, the technology is funded through a participation fee paid by staffing vendors, who pay a percentage of spend for the labor they provide on your behalf.
In return, the staffing agencies gain substantial benefits, including
- Efficiency – A VMS is far more efficient than spreadsheets or manual systems.
- Cost savings – A VMS eliminates paper invoices and reduces the administrative burden on suppliers.
- Faster payment – Automation of billing and invoicing accelerates the payment process.
- Transparency and fairness – When all requisitions from the client or buyer are visible in a single system, the supplier can be confident that selection and engagement decisions are based on defined business rules and rationale.
- Access to data – A VMS enables suppliers to track, measure, and report on their efforts on the client’s behalf.
Want to become a client of choice? Find out how to get the most out of your strategic sourcing partners.
Does Vendor Funding Differ Based on the Deployment Model of My Contingent Workforce Program?
The short answer is no.
The vendor-funded model for a VMS applies whether you manage your program in-house, through an MSP, or under a hybrid or shared managed services (SMS) model.
In-House Program Model
An in-house program is one managed by individuals or teams within your organization. The responsibility for your contingent workforce may be assigned to a dedicated program manager, to your procurement team, to HR, or some combination of those functions. But one way or another, your organization absorbs the salary of the individuals or teams who manage your contingent labor.
Under this model, your company selects the vendor management system you want to use, and the staffing suppliers in your program cover the cost of that VMS by deducting a percentage from each labor hour they invoice and diverting it to the VMS provider.
Managed Service Provider (MSP) Model
Many companies outsource their entire contingent workforce program to a managed services provider, or MSP. MSPs handle all aspects of your contingent labor needs—distributing requisitions to staffing suppliers, managing background checks and other compliance tasks, billing and invoicing, etc.
Your MSP typically also selects the vendor management system and factors its technology fee into the contracted cost for its services.
Shared Managed Services (SMS) Model
Some companies elect to manage some aspects of their contingent labor program internally, and engage a VMS provider to augment that in-house team and undertake select aspects of their program, such as billing and invoicing.
This is what’s called “shared managed services” or SMS model for contingent workforce management.
Under an SMS model, your organization would select its VMS technology of choice and your in-house team and SMS program manager would implement the vendor-funded model, deducting the technology fee and services fee from invoices to the supplier.
How to Budget for Contingent Workforce Program Management
While your organization may incur no direct costs for its VMS technology, there are other important considerations as you develop a budget for your contingent workforce program.
For those who outsource the management of your contingent workforce program in whole or in part to an MSP or shared managed services provider, you’ll need to understand how those services are priced. Most can be added within a vendor-funded model as additional percentages of spend, but some vendors may charge transaction fees, monthly fixed fees, and/or implementation fees, depending on the scope.
For example, some MSPs bill back for the cost of background checks, but others include that in their overall service fees. And if you engage your VMS provider to provide additional, shared managed services, you may be able to get a rebate to help fund your internal contingent program management resources.
As with all business contracts, it’s important to make sure everything is documented and that your organization clearly understands the terms.
When considering how to manage its contingent workforce, organizations must compare total program costs. Consider how each model will scale as your contingent labor force grows, and how much burden it places (or relieves) from your procurement, HR, and compliance teams.
Advantages of the Vendor-Funded Model
For companies who use staffing services, even if on a relatively small scale, the advantages of the vendor-funded model for your VMS are significant:
- Access to software that streamlines the way they procure and manage contingent labor
- Strategic partnership with a VMS provider who can optimize the technology and advise your program managers
- No initial technology investment
- No ongoing support costs
- Faster adoption and shorter time to ROI.
- In fact, organizations that implement VMS technology under a vendor-funded model typically gain 8-12% in cost savings in the first year alone.
The vendor-funded model allows companies to automate and streamline all aspects of their contingent workforce program without a significant up-front investment in technology. As a result, the cost savings generated are realized by the business more quickly.