One of the hottest areas of the workforce today is contingent labor. But staffing firms that helped place them got their start more than 70 years ago during World War II. For example, Yoh, a managed services provider (MSP), supplied engineers and drafters to help the war effort, recalls Matt Rivera, director of customer solutions.
The industry really revved up in the late 1990s when software firms scrambled to find IT personnel to prevent the threatening Y2K disaster, according to Mark LeClair, senior vice president for Volt Consulting Group. “There was a talent feeding frenzy,” he recalls. In addition, new technology was appearing and the requisite talent was scarce. “Java was emerging. Companies were migrating from their old legacy systems to the new technology. They had a lot of money to spend on talent that was not inherent in their organization,” LeClair explains.
MSPs also benefited after 2002 when the tech bubble busted. “Companies lost a lot of money in the bust. Now they had to find talent that they could afford,” LeClair continues.
Hiring managers went to their procurement departments who called various staffing agencies to troll for this type of talent. “Every manager could hire on his own,” explains Kip Wright, the executive who manages TAPFIN Process Solutions, Manpower Group Solutions’ MSP offering.
Current changes driving the need for employers to use an MSP
The problem was, no one had visibility into this growing segment of the workforce since everything was decentralized. “A large portion of your workforce was going unmanaged,” says Lisa Fitzgerald, senior director of the Contingent Workforce practice at Kelly OCG.
This was one of many challenges for companies hiring contingent labor. Hiring an MSP solved the following issues:
- Provided visibility into rates that the MSP could now benchmark
- Improved quality because performance became measurable
- Aided legal compliance, reducing risk
- Saved money. “In many cases, “contract labor was cheaper than outsourcing,” says Wright of TAPFIN.
- Centralized the process so the buyer only has to deal with one outsourcer instead of dozens
- Provided IT tools the buyers wouldn’t have been able to get on their own
For example, centralizing talent management allowed companies to understand their contingent workforce. Rivera of Yoh says it was not uncommon to find a programmer making $100 an hour from one staffing firm and another with the same skills making $150 because he worked for a different staffing employer. “Hiring managers were paying whatever they wanted. Once the MSP was in place, the MSP could monitor rates; this knowledge gave companies the ability to better control their costs and their staffing supply chain,” continues the Yoh executive.
Rivera says when Yoh starts an MSP implementation, his staff asks the company, “How much is your contingent spend?” He says they usually round up to a “crisp round number.” Then the Yoh team asks, “’Where are the contingent workers working?’ The answer typically is, ‘We think…. We think…. We really don’t know.’ Then we get into the engagement, the spend doubles and they find out they have many contingent workers they didn’t even know about.”
How an MSP works
When a company handles contingent labor on its own, it gets a bill from the staffing agency that actually employs the contingent worker. If a company is using 100 different staffing agencies, it will receive 100 different invoices every week.
An MSP acts as the consolidator using technology called a vendor management system (VMS). All job requisitions go through its VMS, which contain the standardized rates and rules. Each week the VMS consolidates the payrolls for each of its vendors and sends the outsourcing buyer one bill. The buyer pays the bill. The MSP then pays each vendor accordingly. Finally, the vendor of record writes the actual paychecks to each contingent employee, who is really an employee of the staffing vendor. “This is a much more efficient system for the outsourcing buyer,” says Joan Davison, president and COO of Staff Management | SMX.
MSPs also enforce standardization. For example, if the outsourcing buyer’s HR policy is that every new employee must pass a drug test, someone has to audit the vendors of record to ensure their compliance. Previously the buyer had to check out each vendor. Now auditing is the MSP’s responsibility. “Are the vendors showing new employees the on boarding videos? Does the employee have a valid ID? Companies with government contracts have diversity initiatives. Now the MSP enforces the guidelines and complies with the initiatives,” Davison continues.
How MSPs get paid
Originally, companies paid a fee to the MSP. Today, however, the most common model is outsourcing buyers pay nothing. Dave Barthel, executive director, Human Capital Solution for Allegis Group Services, explains “ninety percent of the programs are vendor-funded.” That means the MSP charges each vendor a small transaction fee, typically two percent of the invoice.
For example, if a contingent worker bills at $100 an hour, the worker’s paycheck shows $80 an hour. The vendor of record gets $18 an hour and the MSP gets $2. “The beauty of this system is it’s cost neutral. That’s why most large companies have MSPs in place,” says Barthel.
Next: Part 4: Advice for newbies and mature outsourcing buyers.