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 firstname.lastname@example.org.