In the more than eight years that I have been in this industry, managed service providers (MSPs) have been squeezed out of one third of their per deal revenue.
Recently, I consulted with a large bank in the United Kingdom that was replacing its MSP for the third time in seven years. A procurement team member pondered why the bank falls out of favor with its providers every few years. Similarly, when working with a large MSP company, I often heard people joke about how they have gone through four different applicant tracking system/vendor management system (ATS/VMS) vendors in the last half dozen years.
The cause of this fickleness is perhaps obvious to some and elusive to others. Vendors, in these cases, were beaten up so much on price that achieving quality performance was negated. This is a common story in the industry, raising the question, isn’t it more costly for an organization to go through the tender and reimplementation process every few years? Wouldn’t it be better to build a long lasting relationship with your provider wherein you both strive to achieve the same goals?
Surely there are procurement and HR professionals who want just that – to go from tactical to strategic with their program; to have quality metrics be more important than cost savings metrics; to have the business beg for more. For those of you who aspire to greatness and want to take your program to the next level, I propose a new style of MSP contract: “risk and reward.” We have seen occasional, modest fee-at-risk contracts, but we have yet to see this operate at volume. My proposal would be to introduce a carrot-and-stick contract, creating a spectrum of fees based not only on volume of spend (the current standard) but also on quality metrics that align with your strategic program goals.
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To make this work, you need to make the contract palatable for both sides. You need to keep the fee range small enough so that vendors can somewhat accurately predict their revenue, while large enough to entice them to put their best people on your program. You need to ensure measurements are comprehensive enough that you are achieving your strategic goals, but simple enough that metrics can be calculated. While there may be more work up front to agree to the terms, and more effort required to manage the contract, the results can be enormous in terms of long term cost savings and overall program quality.
I have seen this work in practice with skilled industrial labor providers for a large oil company. The business had crucial goals like hands-on-tool time percentage and safety objectives that had nothing to do with bill rate cost savings. A visionary category manager incorporated these metrics into performance-based contracts, helping to align the supplier goals to business goals. This quickly became the template for all of their suppliers and earned this category manager a swift promotion. Indeed, it was a win-win-win situation. The business was happy, the suppliers were happy, and of course, he was happy.
So, if you want to go from a tactical program (with limited scope, basic processes, non-optimal adoption, a reactive and disengaged supplier marketplace, and constant turnover of your MSP providers) to a strategic program (with demand management, value creation, global governance, best-in-class processes, full adoption, multiple categories, enterprise-wide scope and a proactive/engaged supplier marketplace), consider incentivizing your MSP to help you achieve these goals while punishing them if they don’t. Make them want to do more for you; I promise you will see the ROI in the long run.
Steve Knapp is a senior associate with Brightfield Strategies, which helps Fortune 500 companies with contingent workforce strategy initiatives such as contract review and development, program design, VMS/MSP sourcing and selection and global program compliance.