Working with VMS / MSP: Credit Danger
Steve Capper, Founding Principal / CEO, Flexible Funding - July 17, 2017
Field reports keep coming in. The majority of independently-owned staffing agencies are not thrilled about having to place workers through Managed Service Provider MSP middlemen and pay employee hours using Vendor Manager Systems VMS. Nobody likes being charged fees to place temps at a client and being pressured into lower markups and margins. For some there is the added insult of not getting paid timely, being short paid, or paid without user-friendly backup data. Between the independently-owned staffing agencies and the MSP/VMS
operators of the world it is still mostly an us-versus-them atmosphere.
Well meaning staffing trade associations have tried to help the situation by coming up with theoretical “best practices”– wish lists for acceptable MSP/VMS middleman operational behavior. In reality, extremely few of the recommendations have actually ever been adopted by the MSP’s/VMS’s and there is still a perception among staffing agencies that dealing with MSP’s is not a two-way street of fairness. Until the day MSP’s/VMS’s do adopt best practices recommendations, one of the better allies of staffing agencies, and one of the best resources for dealing with the frustrating world of MSP/VMS are the staffing funding companies, whether you fund or not.
Funding companies have become a virtual trade clearing house of credit information on the MSP’s/VMS’s– the credit information may be better than that provided by Dun and Bradstreet or Experian. MSP’s contract with clients and staffing agencies, build or utilize software, and pass through monies. They are a pass-through or pay-when-paid system; the MSP waits until it gets paid by the end user client and then turns around and pays the staffing agency. MSP’s really don’t purchase much and therefore tend to have very limited credit reports with few trade credit lines reported. Often by the time the staffing agency gets paid by an MSP, sixty days have gone by; two months of payroll equals a high credit amount which is rarely warranted by D&B or Experian credit report. A payment pass through operation rarely has any real money on the table–they have little investment or equity in their business and no big incentive for equity. The only large investment they may have is in their own proprietary software–which may not be sellable in the open market. Typically they are financially thin and not backed up by banks. Many financially-backed strong operators often will not pay you, even if they have the money; they will only pay you after they get paid by the client.
Staffing funding companies process thousands of payments made by numerous MSP’s/VMS’s. If the funding company doesn’t get a payment, they get a story from the staffing agency or the MSP/VMS. Nobody has their ear to the rail like a payroll funding company, as MSP/VMS accounts receivables are the funding company’s collateral. It is not unusual for friendly competitive funding companies to informally compare notes on payment history or complaints regarding a particular MSP/VMS, or to share information with members of trade organizations. Funding companies are also familiar with the MSP/VMS contracts and may warn you of their potential pitfalls.
Staffing funding specialists hear complaints from a wide cross-section of staffing agencies regarding various VMS information systems. Funding company in-the-trench field reports about data input, data extraction, poor payment remittance information and reconciliation difficulties can help an agency to head problems off at the pass. For example, a primary problem has been the necessity of data double entry. A staffing agency will have to pull data out of a VMS system, print the data, and then manually input it into their aging and payroll. The VMS systems do have computer files, but mostly they have not been in a format that you can use–you can’t import them. To help, a few of the funding companies have been working closely with software developers to alleviate the problem; hopefully soon, the software groups will import the files from the VMS, convert them to something understandable, and then export them to your aging and payroll.
Another problem with MSP/VMS systems has been reconciling remittances. You may receive a payment, but it will not have your generated invoice number. Or they may use a monthly total but when the remittance is received you may not be able to tell what amounts go to which week. Invariably, every check you get from the VMS is less than you expect–they almost always underpay.
Overtime pay is often a problem area; for instance you have to pay 1.5 times the normal amount for an overtime employee, but some MSP/VMS will only pay you one and a half times less 10%. Nothing or little from the VMS matches your own internal records and you have to spend so much of your time reconciling the difference every week that it is really costing your organization an additional 2% of expense in back-office reconciling time just to do business. Mistakes happen; one agency kept finding employees, that it had to pay, improperly not included in the VMS system billings. Another agency kept finding certain employee hours accumulated or recorded for the current week when the temp had only worked last week–the agency had already paid the temp and didn’t want to pay him twice.
More recent field reports about MSP/VMS find agency operators angry about MSP/VMS terms which disallow making adjustments for recent SUTA State Unemployment increases. The MSP response has been, “we don’t care…stay with your contractual obligations and take it in the shorts.” Additional expenses or mistakes related to MSP required insurances, surety bonds, health code taxes, etc. have also cut into staffing agency margins or delayed payments.
If you have already made payroll but did not collect payment from the MSP, you are out another week of funds. If the MSP/VMS contract terms call for payment in six weeks, you must conservatively figure that continuous confusing underpayments will take you out seven weeks or more. Be sure to take that into consideration when reading an MSP’s credit report and forecasting your cash or credit line needs.
These confusions occasionally go beyond sitting on cash for minor mistakes. An extreme example of how a funding company can be helpful in dealing with a VMS is in a major dispute. Generally you must log into a VMS website with a password to enter and extract data and get paid. The payroll funding company may also have access to the VMS system to follow the accounts receivables and all the supporting data. If you ever get into a dispute with an MSP/VMS, the first thing the VMS may do is lock you out of the system. You can be assured a funding company’s efforts and legal dollars will be spent to quickly get back into the system so that things can be sorted out. Two against one is better than just you versus the MSP/VMS.
Payroll funding companies may provide the most up-to-date information on staffing association recommendations on MSP/VMS behavior. Funding companies have their “ears to the rail’ to protect the financial interests of staffing firms – and their own! The following are some real-world realities, learned in the trenches:
- It has been suggested to ask the MSP/VMS for audited financial statements. So far, we have not seen them happily offering up financial statements at all.
- It has been suggested that the staffing firms and clients insist that the MSP/VMS secure the client funds owed to staffing firms for supplying employees under MSP/VMS contracts. Contractually, we have not seen them posting performance bonds, providing guarantees from financially responsible parent companies, or letters of credit from reputable banks.
- It has been suggested that staffing agencies should assure themselves that the client- end user’s funds are not commingled with the VMS provider’s or MSP’s general funds. And that contracts provide that client funds should either be paid directly to the staffing firms (instead of the MSP/VMS) or held in separate escrow or trust accounts earmarked for payment the staffing firms. If there is any progress in this area, the funding industry and their staffing agency customers haven’t seen it.
- There were staffing industry wishes for more safety and clarity in contracts; hopefully all three parties–the MSP/VMS, the client end user of temps, and the staffing agency–would all become parties to the MSP/VMS contracts. We see little evidence that this has evolved; the contracts tend to be two party documents only between the MSP and the staffing agency. However, when a funding company behind the staffing agency is an employer-of-record funding company, the EOR funding company does or can become a third party to the contract.
- It was suggested that staffing agencies look for financial warning signs to mitigate risk with an MSP/VMS. What are the assets of the MSP/VMS in relation to the buyer-end user funds sitting in the MSP’s/VMS’s bank accounts? At what rate is the MSP/VMS expanding its business and what is its overall credit exposure? Is the MSP/VMS, its parent company, or principals using client’s money to pursue unrelated business activities? Are the buyer’s funds subject to liens and can those funds be excluded from them? Will the MSP give the staffing agency confirmation or proof of the contract terms between the MSP/VMS and the client-end user?
Suggestions that MSP’s/VMS’s would be willing to offer up all of this information (or that one could get it from a third party) and keep a staffing agency regularly updated on a timely basis have been a far-fetched reality. You can certainly ask for any of this information, but too often the MSP’s/VMS’s are of the position, “we have a line out the door of independently-owned staffing agencies ready to provide temps at bare bones markups/margins who aren’t asking any questions at all…there is no reason for us to bend over backwards to provide all of that information.”
Absent the MSP’s/VMS’s offering up all of the above information and strong Credit Bureau profiles, reports from others on the street may be the only source of information as to how a MSP/VMS actually behaves. You may get some of this information by talking to payroll funding companies at trade shows, talking to your own funding company, or talking with other staffing agency members of your state chapter or regional staffing associations.
If you currently experience an MSP/VMS who is providing you healthy markups and margins (including a margin for payroll funding costs), and always paying your agency quickly with understandable and detailed remittance information, we would love a field report so we can spread the word. For more practical information on dealing with MSP / VMS see Temporary Staffing Industry Vendor Managers.