Four must-have requirements for aspiring MSPs
By Leslie Stevens-Huffman
If the thought of $70 billion to $80 billion ﬂowing through managed service providers on an annual basis has you itching to jump into the driver’s seat, you’d better re-examine your strengths and your strategy before you step on the gas.
Contrary to popular belief, an MSP isn’t a panacea to drive staffing volume, as clients expect third-party management ﬁrms to award business opportunities to top performing suppliers.
In fact, executives who launch an MSP to protect their staffing business will be exposed, warns Harold Mills, CEO of ZeroChaos.
“An MSP isn’t staffing, it’s business process outsourcing,” Mills says. “Doing what’s best for the customer may not be best for you as a supplier.”
Moreover, the proliferation of aspiring MSPs has increased the barriers to entrance and boosted clients’ expectations. Finding your groove in this rapidly maturing sector takes patience, outsourcing acumen and fairly deep pockets.
Nevertheless, becoming an MSP can transform a transaction-oriented staffing ﬁrm with the right attitude and attributes into a world-class strategic workforce partner. For passionate owners who are not easily dissuaded, here’s a road map to managed services success.
The Right Motives
Becoming an MSP can’t be an afterthought for staffing owners; it needs to be a passionate priority. Clients expect program managers to embrace their company’s goals and prioritize their interests.
“You have to be completely neutral and transparent in managing the supply chain, or you risk damaging your credibility,” notes Kip Wright, senior vice president and general manager for Tapﬁn. “MSPs need to be trusted advisors who have the autonomy to make independent business decisions.”
Plus, managing distinct business lines with competing objectives can be challenging even for seasoned executives. Owners may end up cannibalizing their staffing business to develop an MSP, if they’re not careful.
Now that established clients have maximized hard dollar savings, they expect program managers to drive efficiencies and reduce soft dollar costs primarily through supply chain consolidation. The maturation of the MSP model may hinder the market building eﬀorts of unproven staffing ﬁrms that want to service large companies going forward.
That’s not to say that multidimensional ﬁrms can’t make inroads into an organization’s staffing stash over time. But clients expect program managers to base supply chain decisions on data, not affiliations. Unless your ﬁrm consistently wins head-to-head recruiting battles and provides topnotch contingents at competitive prices, your ﬁrm won’t receive the lion’s share of new requisitions in a particular category.
“If your MSP target market happens to align with your ﬁrm’s delivery strengths, then it may be possible to garner additional business over time,” says Teresa Creech, president, Managed Services Provider and Contingent Workforce Solutions for Randstad Sourceright. “But that’s not a primary reason to become an MSP.”
Customers’ expectations have increased dramatically since the MSP’s emergence in the U.S. some 10 years ago. Today, clients expect more than requisition management, they want their MSPs to be strategic business partners that can mitigate independent contractor risk by day and spearhead global program expansion by night.
“Clients expect an outside ﬁrm to be better at managing their contingent workforce than an in-house team,” says Mills. “MSPs need to be thought leaders and visionaries with intimate knowledge of the staffing process and an understanding of holistic workforce management.”
In addition to analyzing staffing data, identifying and rectifying service gaps, and restructuring the supply chain, clients expect program managers to serve as change agents, who have the political savvy to muster enterprise-wide support for their contingent workforce strategy, and the chutzpah to challenge the status quo.
And when they’re not fulﬁlling a strategic role, MSPs are responsible for managing and auditing staffing suppliers as well as ensuring compliance with global labor regulations, contract terms and SLAs. That is, when they’re not serving as project managers charged with implementing new program features or participating in a global workforce planning summit.
“MSPs have to be tactical and strategic at the same time and understand that outsourcing is a long-term strategic relationship,” Wright says. “Customers’ expectations are dramatically higher from a value perspective when compared to staffing.”
Abundant Tools and Resources
You’ll need a Web-enabled staffing tool to become an MSP and the technical ability to interface with a variety of existing systems, as nearly 73 percent of respondents in a recent Staffing Industry Analysts survey said they have a VMS in place.
While it’s cheaper to partner with a solutions provider than to develop a VMS from the ground up, don’t make a hasty decision, because it’s unlikely that a small MSP would have the cachet to elicit client-speciﬁc software changes from a major technology vendor.
You’ll also need 24/7 technical support for your VMS and a program or partner to process, track and communicate the status of SOW and 1099 consultants. Add robust reporting capabilities with a Web interface along with secure data storage, retrieval and back-up capabilities that can pass scrutiny of CIOs at Fortune 500 companies to your list.
Additionally, you’ll need scorecard templates, contracts and access to attorneys, accountants and risk management professionals, who are familiar with the staffing industry and its perils, to sign suppliers.
Finally, you’ll need a program management team waiting in the wings and an experienced leader to orchestrate the implementation process. And don’t overlook the need for a strong back-office system and adequate cash ﬂow since MSPs serve as the pay agent for the entire supply chain.
“MSPs need a hefty support structure to deal with the wide variety of issues that arise on a daily basis,” says Creech. “Increasingly, clients are looking for global capabilities so keep that in mind.”
How much capital do you need to launch an MSP? Estimates range from as little as $2 million to as much as $25 million depending on the complexity of your model, your stable of resources and how long it takes you to consummate a deal.
Companies generally contract with an MSP for four to ﬁve years, so even if you’ve identiﬁed several prospects, it may be a while before you have a chance to bid.
Figure on 12 months for the strategic selling cycle and another three to six months for implementation. Of course, you’ll need enough cash to develop the program and ﬂoat payroll for about 24 months while you wait for revenue and fees to start ﬂowing through the system.
“You’ll be lucky to sign one or two contracts a year,” Wright cautions. “It’s not like you’re working on hundreds of deals. You’ll be working on a dozen deals at any time.”
Given the burgeoning requirements, ﬁrms that are proﬁcient at staffing might be better oﬀ servicing other MSPs than jumping into the driver’s seat. After all, if business process outsourcing doesn’t align with your organizational strengths and vision, there’s no shame in sticking with the basics.
“Owners need to clearly assess their strengths before launching an MSP,” Creech says. “Don’t try to be something that you’re not.”
Ben Noteboom, CEO of Randstad Holdings, raised eyebrows during the company’s year-end earnings call when he declared that MSP is not a proﬁtable model. While he later qualiﬁed his comments, the fact remains that it’s difficult to gauge the true proﬁtability of MSPs.
Here’s what we know. Fees in the U.S. are usually 2 percent to 3 percent of managed revenue. But how staffing ﬁrms account for revenue ﬂowing through an MSP and the service fees they command diﬀers and impacts gross proﬁt percentages.
Owners need to put that aside and focus on forecasted operating costs and collected fees to predict an MSP’s true proﬁtability, according to Mills. He says owners can realistically expect EBITDA margins of 25 percent to 40 percent. But the need for ongoing investments in technology, staﬀ and infrastructure means it could be several years before an MSP shows a proﬁt.
Creech, meanwhile, says the path to proﬁtability shortens as markets mature, because the adoption rates increase and it becomes easier to bring in suppliers. But fee percentages tend to fall when markets mature, Mills says, citing the U.K.’s going rate of 1 percent as an example.
“If you think about 2 percent of $100 million, that’s a lot of money,” says Mills. “And it certainly doesn’t cost that much to operate an outsourced management program, so there’s no way that MSP isn’t a proﬁtable model.”
Leslie Stevens-Huffman is a freelance writer with 20 years’ experience in the staffing industry. She can be reached at email@example.com.