Life After Ensemble Chimes Global
VMS Evolves and Continues to Grow
By Craig Johnson
It stunned the staffing industry. Ensemble Chimes Global Inc., then one of the largest vendor management system providers, declared bankruptcy in January 2008, crippling operations of staffing firms and clients. Companies scrambled to find ways to pay and manage their temporary workers.
The VMS and managed service provider filed for bankruptcy protection a day after its parent company, Los Angeles-based Axium International Inc., did the same. The parent company was itself a major payroll services provider for Hollywood productions.
Problems had been brewing under the surface. According to court filings, Axium’s owners transferred $31 million to the IRS on Sept. 4, 2007, to settle claims of unpaid taxes, putting the company under financial duress. Axium’s lender then swept $22.5 million from Axium’s accounts on Jan. 7, 2008, effectively sinking the company.
A later lawsuit by the bankruptcy trustee against Axium’s owners, John Visconti and Ronald Garber, says they “wrote tens of thousands of dollars of checks from corporate checking accounts made out to ‘cash’ and spent the funds on personal and luxury items without any apparent business purposes;” took hundreds of thousands in cash advances and/or loans from the company, which were never repaid; and used Axium funds to lease luxury cars and private jets for personal use.
The bankruptcy sent shock waves through the staffing industry. What would happen to money owed to the staffing firms? How would workers get paid?
Numerous staffing firms — through bankruptcy court proceedings — received requests to return funds for services paid for a period of time before the ECG bankruptcy. Almost $8 million in such preference claims against staffing vendors was collected, according to the bankruptcy trustee.
The bankruptcy case continues today in Southern California, although the trustee’s lawsuit against Axium’s owners was settled for $12 million.
Despite the ongoing proceedings, the ECG bankruptcy is no longer a center of conversation in the staffing industry. In fact, it’s rarely even mentioned. On the other hand, thanks to the bankruptcy, changes were made that altered the way the staffing industry does business. Post-ECG, the VMS industry has continued to evolve, growing in popularity especially among big users of contingent labor.
There’s a movement for more staffing buyers to have separate MSP and VMS systems — ECG had provided both. Financial due diligence of VMS systems remains and buyer interest in VMS continues to rise. Among large companies that buy staffing, 72 percent have a VMS in place today and 16 percent said they planned to seriously explore the idea within two years, according to recent research by Staffing Industry Analysts.
Jon Ionno, executive director, professional services groups, at Allegis Group, says no customer has brought up the ECG bankruptcy as of late. However, the incident put the VMS and MSP market in a different light for a while after it occurred.
Chimes (part of Ensemble Chimes Global) was a successful company prior to its acquisition by Axium, says Ionno, who was with Chimes prior to going to AGS. “Really, more than anything, [the bankruptcy] scared the industry somewhat and made people take a step back and say ‘hey, what do we want to see from our provider so this does not happen again?’”
Strictly looking at VMS and MSP, companies were maturing in terms of business and technology sophistication even before the bankruptcy of ECG, Ionno says. There was also more information coming out, buyers were becoming much more educated and the level of due diligence was increasing.
“I think the bankruptcy microwaved that process,” Ionno says. “Companies had to mature a lot more quickly … The due diligence became tougher because of that, and buyers want to see more financial reliability behind those organizations.”
Financial due diligence of VMS suppliers is no longer the first concern for staffing buyers, although it remains among the top three concerns, he says. Interest in how a technology fits has become more important.
Separation of VMS and MSP
There’s also been a movement toward keeping separate VMS and MSP providers, Ionno says. A rough estimate is that 60 percent to 70 percent of companies he has seen want a separation.
Jai Shekhawat, CEO of VMS-provider Fieldglass Inc., also pointed to the movement for separation of VMS and MSP.
“There’s a realization that the MSP business should be executed by a staffing provider and the VMS business should be dedicated to building great technology,” Shekhawat says. It’s a model that Fieldglass has followed.
Today, the scope of VMS is expanding. The discussion now involves statement-of-work projects and offshoring. Global programs are also in play.
Shekhawat says he lived through the Ensemble Chimes Global days in early 2008 and migrated 15 former ECG customers to the Fieldglass VMS, including American Airlines and UnitedHealthcare. He has also seen staffing buyers become more interested in VMS in the past three-and-a-half years.
Of Fieldglass’ 140 customers, “two-thirds have adopted the solution in the last three to three-and-a-half years, out of 11 years of our existence,” Shekhawat says. Part of the reason is a clarification of the space with the market accepting that a VMS requires a specialist technology vendor, not a general provider of enterprise resource planning software, he says.
MSPs have also begun a move toward global expansion since 2009, says Kip Wright, vice president and managing director of ManpowerGroup Solutions TAPFIN, a provider of MSP solutions.
“We have absolutely seen in the last several years a real push to take MSP programs global,” Wright says. “You’re seeing a number of very large contingent workforce users that are putting out RFPs that require a global footprint.”
The programs are truly global and not just multi-country, he says.
On the VMS side, there are two or three tools making a global push, Wright says. However, MSPs are more capable in being able to support multiple countries than the technology is today, he says.
Tom Tisdale, senior vice president of strategic initiatives at Peopleclick Authoria, a provider of workforce software including a VMS, says there have been significant changes to mitigate financial risk since the ECG bankruptcy filing. One of those is a rise in “trifecta” relationships.
“You’re starting to see trifecta relationship where the MSP is a provider managing the transactions not owning the transactions,” Tisdale says. “You’re slowly seeing that model roll out.”
There is still consolidated invoicing — staffing buyers pay the MSP, which then pays the staffing firms, he says. However, the liability remains between the buyer and the staffing firm — similar to a person using Visa card, where Visa provides the systems for transactions to take place, but the agreement is between the borrower and the bank that grants the card.
“The MSP model has moved from owning and managing the financial transaction to processing the transaction,” Tisdale says. In the old days, a staffing buyer paid Ensemble Chimes Global; then it was up to ECG to pay the staffing firms at its discretion.
A trifecta model can also help promote contact between staffing firms and staffing buyers in a controlled fashion, he says.
“As a supplier, one of the big angst of the MSP/VMS model is they lose their relationship with their customer and their ability to add value,” Tisdale says. “With these new trifecta MSP models, it promotes the relationship between the two.”
Tisdale also confirmed the move toward a separate VMS and MSP.
“Customers have realized technology becomes the fabric of the company,” Tisdale says. “They will want to be able to change service suppliers if necessary with minimal disruption.”
When VMS first came out, staffing firms were leery of it. And since the ECG bankruptcy, concerns remain, such as isolation of hiring managers from staffing firms and staffing deals that may yield a return of only break-even or less.
“Not all VMS is bad VMS, but we have to look very carefully at how future clients use VMS,” says Scott Wintrip, president of StaffingU and the Wintrip Consulting Group, which provides consulting, coaching and education to the staffing industry. “VMS is not being used by all clients in a responsible way.”
Wintrip says VMS can be like a street drug — staffing firms can be lured in by the promise of business but let down by the amount of effort required for the results they see.
“The sum total is to ask: ‘Is it worth it?’” Wintrip says. See the sidebar on page 31 for tips on answering that question.
Problems notwithstanding, there is a relationship between VMS providers and staffing firms.
Joel Capperella, vice president at Yoh, a staffing firm providing technical talent that also provides VMS, points to improvement in the relationship between staffing firms and VMS. While some systems are better than others, Capperella says forward-thinking VMS providers are asking staffing firms what they need.
At Fieldglass, the number of suppliers in the tool is growing, Shekhawat says. Fieldglass now has more than 10,000 suppliers in its system. “The supply side knows this is here to stay,” he says.
As for MSPs, being a good partner to a VMS really gives the MSP an edge, Shekhawat says. “These are two roles that are inextricably part of the same solution.”
The ECG bankruptcy has faded into the past. Given that the VMS is now an integral part of the contingent ecosystem for large buyers, where is it headed? There has been investment activity and acquisitions around the VMS.
According to Staffing Industry Analysts, recent investments in VMS systems include:
- An investment of more than $200 million by Madison Dearborn Partners LLC to buy a majority stake in Fieldglass.
- The acquisition of MPS Group Inc., including its Beeline VMS, by Adecco SA.
- Private equity firm GTCR Golder Rauner LLC’s investment in IQNavigator in 2008.
- The acquisition of Peopleclick by Bedford Funding for $100 million in late 2009.
Allegis’ Ionno cites interest by private equity and questions which direction those could ultimately take the industry.
Ionno questions what is the lifecycle of those investments now and who will the next buyers be? Today, the tools are teetering between procurement departments and human resources departments and trying to serve a combination of both. Could that change with new VMS ownership?
Other questions, he says, include how tightly would VMS integrate with a procurement system such as an Oracle or SAP? How would applicant tracking be integrated?
Analytics capabilities should also improve, Ionno says.
“It’s not on its decline whatsoever as an industry,” Ionno says. “You’re getting to the point where you’re getting very mature tools out there, and the analytics are going to continue to mature.”
Yoh’s Capperella says it’s likely acquisitions in the VMS space will continue where they make sense. VMS tools will also integrate more closely with other software such as applicant tracking systems. There may also be a day when a VMS operates in the cloud without it being managed by a third party or by the customer. The cloud system could be similar to an Elance or oDesk where a buyer goes to an online Web portal to post a job and the job is then bid on by firms or individuals.
There are those like Peopleclick Authoria’s Tisdale who believe that the private equity interest in VMS validates the opportunity.
Right now, the VMS tools are good at managing the business process and transaction and the evolution will involve turning the data they collect into business intelligence and rich analytics for staffing buyers, Tisdale says.
Also, in addition to managing the category of contingent workforce, the VMS needs to work to help align the contingent workforce with their business directives, he says.
“We need to move from supply management to workforce planning,” Tisdale says. Staffing buyers want to look at their workforce — permanent employees, temporary labor, external talent pools — and look at such things as succession plans, flight risk analysis, who is a high-performing contractor or worker and how can a buyer leverage that asset?
Shekhawat also sees the VMS’ role expanding.“I think it’s headed toward more and more categories of services beyond contingent labor,” he says. Examples of services where VMS may grow include marketing, media or legal. Clients will conclude these spend categories need to be managed with the same discipline as contingent labor. VMS will also continue to be accepted in countries outside the United States, although different geographies will have different attributes, Shekhawat says.
As for MSPs, TAPFIN’s Wright says the future of the MSP will allow companies to look at their workforces in an entirely different way. A simple transaction is something that a client may be able to handle himself or herself, Wright says. MSPs will be able to leverage their experience, expertise, research, knowledge of other programs and investments across multiple customers to create strategic research, tools and programs to add value.
The VMS market has only grown since the ECG bankruptcy filing. The amount of U.S. temporary staffing spend going through a VMS was estimated at $26.5 billion in 2009, up from $23.0 billion in 2008 despite a decrease in demand for temporary staffing overall.
The ECG bankruptcy proceedings will wrap up eventually. Bankruptcy trustee Howard Ehrenberg is working to settle claims against ECG’s auditors, and he estimates the ECG case will take one more year to resolve.
Regardless, the VMS industry is here to stay.
Craig Johnson is managing editor of SI Review. He can be reached at email@example.com.
Selling Through a VMS
When a staffing firm weighs a deal to supply staff through a tool, what should it consider?
Scott Wintrip, president of StaffingU and the Wintrip Consulting Group, recommends a four-step process aimed at making an intelligent decision on whether a staffing buyer is using a VMS in a responsible way. The steps include weighing:
“We don’t just look at these four points individually, we look at them in conjunction with one another,” Wintrip says.
Profit. Wintrip says staffing firms need to answer questions about profitability and the labor intensity that will be involved serving a VMS deal. The amount of labor intensity in servicing a deal may result in a break-even situation or, worse, a contract that costs money.
Process. This step entails what processes a staffing firm will be required to follow such as submission process, documentation and back-office process. “Is there a step-by-step defined process that is executable,” Wintrip says. As mentioned before, a deal with low labor intensity might be good, but a deal with high labor intensity might not.
Access. This is about access to the “economic buyer,” which refers to the person from whose budget the contingent worker will be paid from. “It’s the person with the need, who this [contingent worker] is going to report to,” Wintrip says. Often, access to the economic buyer is not allowed in a VMS. “What happens is the only means of communication in a lot of these cases is the VMS system itself,” he says. In this case, staffing firms might not get the feedback needed to be highly effective. “Essentially, you’re submitting people into a black hole,” he says.
No access to an economic buyer could be considered a deal-breaker, Wintrip says. Staffing firms should work with that customer to make sure he or she understands why lack of access to the decision maker doesn’t work. Wintrip tells the story of a large banking institution that at one time did not allow for direct contact between the economic buyer and the staffing firm. After that communication was opened up, though, the hiring managers saw significant improvement in people being placed.
Using a story to help illustrate how lack of communication hinders a relationship could help change a staffing buyer’s mind, Wintrip says.
Accountability. There needs to be a clear definition of who is responsible for what and that people live up to those expectations, Wintrip says. There needs to be a process to get feedback from management, and this, too, could be a deal-breaker. The parties must also agree to promptly alert each other over anything that could impact the working relationship — such as a key people leaving or a company merger.
Overall, staffing firms need to make an assessment on the deal and, if necessary, make recommendations and share stories of change that worked out for other staffing buyers who use VMS in the proper way.