Taking Back Temp Staffing from MSP & VMS
Steve Capper – Flexible Funding - July 21, 2017
The Vendor Management System (VMS) / Managed Service Provider (MSP) model of staffing has taken a great foothold across the nation in the past few years and continues to grow. Much of this activity has taken customers from, or hurt the profit margins of, independently-owned small and mid sized staffing agencies. Brand new VARIATIONS in access to staffing customers through VMS/MSP models have now emerged that can help with some of these problems. And some of these intersect with the world of payroll funding.
In the past, before VMS/MSP’s existed, you sent a temp to your customer and they paid the bill. In a basic VMS/MSP arrangement a third party secures a contract, specifies a pay rate and bill rate with a staffing customer and supplies temporary workers–directly and/or through sub vendors like yourself. The VMS also supplies web based infrastructure to manage data flows between all three parties. The customer pays the bill to the MSP/VMS and they turn around and pay the staffing agency… and the VMS/MSP takes a cut of the action.
New variations and marketplace alliances can give you preference over other staffing companies with customers that hire temps through an MSP/VMS middleman. Would you be interested in taking back control and/or relationships you lost when you were forced to became a third party contractor to a customer rather than being direct with the customer? Preference and account control can be had by becoming an MSP/VMS yourself with the help of alliances discussed here, or working with a payroll funding company that also runs a VMS/MSP operation.
After reading thorough these variations, be sure to read the caveats in the final paragraphs–there is an elephant in the room
The first variation of reclaiming market share from the MSP/VMS industry is to become one yourself. There are staffing industry consultants that have partnered with the software companies to provide you with web based VMS systems. You do not have to go out and build them yourself. The consultants can provide you with agreements to use with the customers and with the sub contracting agencies you may hire to do the work. The VMS software company will take a cut and the consultant will charge for advice on contracts, pricing, etc,, but you would retain the customer that you would otherwise lose to a third party VMS/MSP.
Staffing MSP/VMS Volume with Ancillary Income
The second model or variation is similar to the first. Suppose you are a nurse staffing agency that wants to do business with a hospital and also want to be their primary healthcare agency. You can arrange for the hospital to have web based VMS infrastructure through which you will be the primary supplier of nursing. (You do not have to build the system or invest in building a system.) You would contract with, manage and make a profit on all of the other healthcare staffing agencies that deal with the hospital, functioning as the MSP/VMS. But this model goes even further; the VMS system may be used by the hospital to purchase or contract in other product/service categories–not just staffing. They might use it for their food service vendors for example. And if they do, you will make a percentage profit– paid to you by theVMS web infrastructure company– on all of that business also. The infrastructure is not inexpensive, but again you will retain business that you may otherwise lose.
VMS With a Subcontractor Network Provided
A third model also gives you the basic web infrastructure so that you can act as and provide the services of an MSP/VMS. And there added bells and whistles in this variation that are specific to staffing only. Suppose you get contracts with a company or companies to provide labor in multiple states. It could be difficult to recruit, qualify, and manage the applicants and contractors in many states, or it could be a problem to take on the larger multi-state business just because the projects ramp up quickly. Recognizing the problem, the company that provides you with the VMS web systems also has a prescreened and pre qualified national network of staffing agencies and contractors ready to help you fill all the labor requirements. Once again, you are able to operate as the MSP/VMS and take on or save accounts that would have been lost otherwise.
Volume with MSP/VMS Through Payroll Funding and Finance Companies
There is a the fourth model which can increase your level of VMS business but does not provide you with the tools to function as a MSP/VMS yourself. It allows you to easily walk into some customer accounts with a preference over other staffing agencies, with the funding already in place for the increase in business. In a nutshell, here is how it works. A staffing industry payroll funding or finance company will set up a VMS/MSP in your region and get a customer account in the same area. The funding organization then goes cold calling on staffing agencies in the area with the pitch that if they sign up for payroll funding or factoring, the agency will get some of the temp/contract business with that desired account (through the payroll funding company’s MSP/VMS).
The advantages of the fourth model are obvious. You get some temporary employees into an account that you could not get into before. Your organization bears little or no direct sales and marketing cost to get into the account. You are financially covered for the payroll amount regardless of how long it takes the customer to pay the bill (the timing of which the funding company is already well aware of.) And, if there is a problem collecting from the end user of the temps, the payroll funding company has your back with some inside knowledge of the account. As more of these bundled funding/VMS/MSP programs emerge there is also a list of limitations to consider before signing up for them:
- Think about why entrepreneurs go into business in the first place; one reason is to build up something for yourself that you can sell now or anytime in the future. It is unlikely that you will be able to sell any of this volume. The funding company may give you some volume at their VMS/MSP account IF you are with their funding program, but this joined-at-the-hip relationship may break down when there is a sale of the business. Many funding contracts are not assignable, transferable, or assumable like mortgages of the past; each staffing company and staffing company owner must stand on their own merit. If the people that take over your staffing company decide to fund with your current funder and qualify, they may be able to keep the VMS volume and you may be able to get price for the volume. More often, the new staffing owners have their own financial plan and agenda. A payroll funding company would have to agree to let any new staffing company owners continue with their VMS/MSP account for some agreed period of time (even if they would not be funding it) for you to be able to get any sell price for the volume. When the funding company and VMS/MSP are related, there may be an opportunity cost in that you are expending time and resources to service the MSP/VMS provided account while not building business elsewhere that you can get a multiple for.
- Getting into an account through a funding company’s VMS/MSP will likely be low markup/margin business to begin with. There are three reasons for this. One of the primary intrinsic benefits of the MSP/VMS model to an account that uses temp labor is that the MSP/VMS will work hard to get the best price/least cost for staffing services. Second, there will likely be other MSP/VMS companies vying for the business at the account; like every other business it is getting more competitive. Lastly, building VMS infrastructure is very costly and technical…the funding company will likely not be building these systems from scratch but rather be purchasing, renting them, or partnering with a VMS at significant cost. There are other costs that must be covered such as selling to the accounts, training, etc….all of which will cut into the margin to be had. Once again, there is an opportunity cost when you could be out building higher margin/markup business.
- One of the reasons the funding industry has come up with the MSP/VMS-funding combination is to make more money with the funding. Expect to be put into a long-term funding contract (with costly penalties for early termination) for the benefit of access to the VMS/MSP accounts. This will likely preclude or prohibit your usage of any less expensive funds from anywhere else during the lengthy term. It may also require you to fund more profitable or quick-pay non VMS/MSP accounts that you would otherwise not have to fund.
- In the traditional VMS/MSP model (when the VMS/MSP and financier have no relation or common ownership) the end user of the temporary labor pays the VMS/MSP and then the VMS/MSP turns around and pays the staffing agency. When a payroll funding company is both the funder and the VMS/MSP, you must be clear about the pay cycles and crediting of customer payments. The customer account payment for temp labor could be credited to the staffing agency as soon as the customer payment hits the funder’s VMS/MSP. Or later, when the VMS/MSP division sends the payment to, and is received by the funding division. There would be a beneficial quicker pay resulting in less funding cost if credit is given as soon as customer payment hits the VMS/MSP. And it could work the other way. The payroll funding company’s VMS/MSP could hold the check just one or two more days before moving it to the funding division, knowing that the delay will put the staffing agency into the next higher-cost category for later arrival. There are no specific reports of this happening with reputable companies already in this space, but there is potential for manipulation as other funding organizations enter the VMS/MSP field.
- For decades, it has been widely held in the staffing and funding industry that it is best for your payroll funding company, staffing finance company, or invoice factoring company to not be in the staffing business themselves because they have your customer list. This would include owning and operating staffing agencies with a division, controlling interest, or relative. The payroll funding company knows who your large accounts are, the volume, credit quality, how quickly or slowly they pay, margin and markups, the contracts, etc.. Going into the VMS/MSP business is a fast track into the staffing business. When the term of the funding contract and associated VMS/MSP relationship are over, there should be something in place that prohibits the payroll funder’s VMS/MSP from soliciting or taking over any of your other accounts. It would make sense to only go after your largest account(s) with a VMS/MSP– large accounts are the ones that would benefit the most. Again, there are no reports of this happening at the time of this writing–the reputable players already in the field have not done this–but there is potential for conflicts as other funding organizations enter the VMS/MSP field.
The Elephant in the Room with MSP/VMS Models
A caveat must be added to all of the models discussed above–there is a large elephant in the room. Whether any variations or alliances will ultimately work for your company will depend on marketplace reactions to the ACA Affordable Care Act. Any staffing agency that has more than ninety nine employees out in the world are going to have to get price increases to cover ACA.
The starting point of consideration involves three steps:
- Determine how many total temp employees (for your entire business) you are reporting to the IRS.
- Examine how many employees you would have at any particular MSP/VMS.
- See if arrangements have been made for the pricing to change after January 2015.
Suppose you currently have over ninety nine full time employees. At a particular MSP/VMS customer account you have less than ninety nine employees–say fifty employees for this example. You will have to get increases for ACA for those fifty people. The customer account would say, “I only have fifty of your employees so why should I pick up the price increase on fifty?” In the competitive staffing market, the MSP/VMS client who are the end users of your workers will likely show price resistance. When the temporary employees or contract workers are low rate–not at a high bill rate per hour–the percentage increase needed to cover ACA will be a significant amount. If the MSP/VMS you are going through and/or the customer account does not allow an increase, you would have to pull your temps (because of the ACA penalty plus markup.) Also consider that it may be easy for the current MSP/VMS to move the jobs out to smaller sub vendors who do not have ACA liability.
Alternatively, if MSP competition demands price raises from the customer for ACA, you might be the one to come in as the new MSP/VMS (with a new separate entity) and say you will parcel it out to smaller agencies with less than ninety nine employees resulting in lower cost to the customer.