CWS 3.0: August 14, 2013

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VMS/MSP Pricing Models

By Christopher Minnick

Are buyers of contingent labor fed up with the “percent of spend under management” pricing model for MSP and VMS solutions? Here's a look at the state of affairs around pricing models.

The most widely used pricing model for vendor-neutral managed service provider(MSP)  and vendor management solutions (VMS) is to allocate a percentage of the total spend being put through the program (which is sometimes also referred to as a percentage of spend under management). Nearly 65 percent of all vendor-neutral MSP and VMS programs use this pricing model, which is actually less than it was just three years ago (21 percent less in fact). The percentage of spend under management method is simple enough to understand, but is it necessarily the best method because it is the most widely used? I would contend that it is not.

From a VMS perspective, a more traditional software license model — which is paid on a monthly, quarterly or annual basis — almost always results in the best price for companies using the software. For MSPs, meanwhile, gain-share or cost-plus pricing models are sound options. Gain share is when an MSP shares in the demonstrable return-on-investment from its good performance, while with a cost-plus model, the cost of its services are transparent to the client, helping the client to incentivize the MSP and manage its risk. These pricing models are not without their challenges, but they help reduce the uncertainty that comes with the fluctuating transaction volume used in the percentage of spend under management model.

Many MSP and VMS companies have taken to discounting the total estimated spend of a client by upwards of 50 percent in order to determine its price to the client. For example, if a client estimates it has approximately $50 million of in-scope contingent workforce spend, a supplier sets its price expecting that only $25 million will actually be incorporated into the program, and the supplier doesn’t expect to realize the full revenue potential of the account for anywhere from six months to up to a full two years in some cases. The risk and uncertainty of this pricing model likely increases the cost to the client and immediately puts a supplier in a defense mode to manage its resources, rather than investing heavily into a new client program.

As a result, we at Brightfield are developing new pricing models — for VMS only, payrolling services, global MSP services — that ensure the best price for our clients, while minimizing the uncertainty and risk to the suppliers. This is especially important in situations where companies are expanding their contingent workforce programs to countries outside the U.S., where supplier-funded, spend under management models are less prevalent and are looking to include worker classifications beyond temporary agency workers, such as project-based services where a percentage of spend under management pricing model (no matter how small) makes even less sense.  

Nothing stays the same forever. It’s time to rethink your contingent workforce program pricing models.

Christopher Minnick is executive vice president of Brightfield Strategies, which helps Fortune 500 companies with contingent workforce strategy initiatives. He can be reached at cminnick@brightfieldstrategies.com.

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Brian McGuire 27/08/2013 8:36 am

Chris,

It appears that you may have omitted an important consideration from your analysis. Will a program be supplier-funded or client-funded? The "more traditional software license model" that you mention is not easily adapted to a supplier-funded model nor does it work particularly well with the volume-rebate programs that have beocme so prevalent in the industry. Moreover, you may be under-appreciating the incentive that a spend-under-management model provides to get a program up and running quickly and to drive as much adoption and compliance as possible. Finally, have you considered the cost of implementation (that most clients prefer to amortize and pass along to suppliers)? Would you propose building this into the annual licensing fee or do you prefer to present the bill to the client at the onset of implementation?

. For MSPs, meanwhile, gain-share or cost-plus pricing models are sound options.


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