CWS 3.0: October 2, 2013

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Why the VMS Pricing Structure Matters

By Ben Walker

As vendor management systems (VMS) continue to get more mature, flexible and complex each year, I pose a question to both the buyers and sellers of these important software tools. Is the way in which supplier-funded revenue models are currently structured holding the industry back from even greater achievement and innovation, and ultimately hurting the companies that use them?

First, I think the term vendor management system is a bit of a misnomer. Sure, a VMS does in fact help companies to better manage their services supply chain by giving more visibility into the usage, performance and cost of temporary agencies and professional services providers. But, the term VMS gives no indication that in doing so, the software also provides sophisticated talent management, spend management and cost accounting functions, as well as timekeeping and billing capabilities, all with the ability to tailor terminology, business rules and process flows to accommodate the unique requirements of disparate business units across a large enterprise.

So, what would you be willing to pay for enterprise-level software that can do all this, and potentially save your company millions of dollars each year? Nothing? Really? While some companies do in fact directly pay for the cost of the VMS software, the vast majority of solutions are supplier funded. Because the VMS is typically positioned as a “free” solution in the industry, many organizations simply won’t entertain the idea of paying even a portion of the cost.

To be clear, I’m not against the supplier-funded model. This model is appropriate to many companies that source a new VMS, especially in the U.S. There’s no question that it has fueled the adoption and growth in this space because organizations don’t need to budget for it. This helps organizations act much more quickly, which in turn benefits the VMS providers. The suppliers providing the workers and professional services have in fact been willing, albeit begrudgingly in the early days, to foot the bill. The model works on many levels.

However, when the cost of a software product is driven by a dynamic that’s unrelated to the value it provides to the buying organization (it’s typically capped at what the suppliers would be willing to pay for it), invariably there will be pricing pressure in some cases. This pressure has the potential to limit profitability to the point where it stifles R&D investment and the speed of maturation and innovation.

For organizations considering implementing a VMS and estimating what the supplier-funded administrative fee will be, consider whether the VMS provider’s pricing structure will enable it to provide your organization with all the support and innovation you deserve, and will ensure the long-term success of your program. If not, you might need to get creative with how the program is funded. As the saying goes, you get what you pay for.

Ben Walker is vice president of operations at Brightfield Strategies, which consults with Fortune 500 companies on contingent workforce strategy initiatives. He can be reached at bwalker@brightfieldstrategies.com.

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Eric "Otter" Stratton 10/12/2013 12:19 pm

There is a cost multiplier (lagging) on decline in resource quality that this is driving. Supplier funded model is a short term cash ploy that is not sustainable. Much talent is altogether rejecting firms who have embraced it. Shares of supply funded providers are benefiting from this false confidence and therein lies some opportunity for the savvy.


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Cynthia Moore 03/10/2013 9:01 am

I think the supplier funded model is a misnomer. The end user corporate clients pay for the tools either way as the supplier community accounts for all costs including that of a tool into their rate structure. So as a corporate client why not fund the tool yourself. As for the structure of the tool pricing I find it a bid ridiculous to pay for the tool based on the revenue that flows through the tool. The cost of the tool is the cost of the tool. It is software and why not charge for the software like other software company’s – the cost of the software and a annual maintenance cost. I believe that would likely fund the innovation needed. It also might limit VMS providers from developing features based on demands of a specific client just because they have more contingent workers than the others.


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Wayne Burgess 02/10/2013 6:12 pm

I believe the realization of innovation is more a question of who is providing the VMS solution not how the commercial arrangement is structured. The costs are definitely still born by the buyer and are embedded neatly on their income statement.

At the summit a few weeks ago I don't know how many clients were complaining about a lack of new thinking and innovation in the contingent workforce field. I can tell you that their are several companies with great innovation in predictive contingent workforce modelling, direct sourcing and many other areas. You just won't find it looking towards the usual suspects in the market. Let's not forget that before the iPhone was Blackberry and before that was Nokia.


Eleanor Baughman 02/10/2013 1:51 pm

That is one way to look at. But why would I pay another company that is going to be a gatekeeper, forbid me to speak with the hiring manager, constantly negotiate the price downward and refuse top candidates because they don't fit the profile the VMS person has decided on? Doesn't make sense to me. For those that have been in the field a long time, these companies added to our workload and left us guessing on what the true needs are. There is NO Relationship building, unless you count the VMS person. I don't want to do business with a system - I want to provide a service to an actual end client person. One saving grace, for those who provide do project or solutions work - an SOW doesn't have to go through the VMS. Therefore, you can get paid for what our people are worth. Try finding a Sr. Security Architect with specific set of technologies for a bill rate of $68.00/hour. This is a true requirement and the client became very upset when he wasn't seeing the level of candidates he was seeking. I think they ended up at twice the bill rate for the right candidate.


Gary Campbell 02/10/2013 1:50 pm

The term "supplier funded" continues to bewilder me. In my mind, the customer either values perceived transparency in a bill rate or truly thinks he/she is getting something from free. At the end of the day, the customer pays for the VMS whether they know it or not.


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