The Fundamentals of Managed Service Provider (MSP) Programs

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1 Part 2 of 3 The Fundamentals of Managed Service Provider (MSP) Programs Part 2: Sourcing Models kellyservices.com

2 Table of Contents Introduction / 3 01 Is it a Sourcing Model, or an MSP? / 4 Master Vendor Sourcing Model / 5 Primary Supplier Sourcing Model / 6 Structured Tiers Sourcing Model / 6 Vendor Neutral (Open Bidding) Sourcing Model / 7 02 Hybrid MSP the Strategic Sourcing Model / 8 Conclusion / 11 About the Author / 12 2

3 Introduction This is the second of a three-part series designed to outline key components of a Managed Service Provider (MSP) program. The papers will collectively discuss how companies today are deploying an MSP program to help transform their human capital investment. Two of the major stakeholders most often engaged in this strategy are Procurement and Human Resources Aberdeen research indicates that when these two groups work together effectively, an MSP delivers significantly higher cost savings than MSPs without this vital collaboration between HR and Procurement 1. The approach taken in this series will be to address common questions about MSP programs, and to provide a framework that allows for informed decision making. Regrettably, the complexity of available solutions, confusing messages from the marketplace, and an array of strange acronyms can make this process exceedingly difficult for organizations just beginning this journey. As such, each of these papers will incorporate perspectives from the staffing and workforce solutions outsourcing industry as related topics are presented and discussed. Numerous references throughout each paper are attributed to three well-respected sources: Staffing Industry Analysts (staffingindustry.com), Forrester Research (forrester.com), and Aberdeen (aberdeen.com). The series will explore three key areas: Part 1 Explains what an MSP can do for your company and why it s important Part 2 Demonstrates how your sourcing model can integrate with MSP strategy Part 3 Articulates the business case for MSP and helps to determine your readiness The following covers the second of those three areas Sourcing Models. Be sure to read parts one and three for additional observations on achieving effective talent management through MSP solutions. One final caveat This information should prove valuable to procurement and human resources personnel as they plan and prepare for the future. However, it also presents real value to stakeholders, whose operations may be impacted by the MSP program and leadership from many other areas, including finance, IT, or operational functions that may ask: What strategies can we deploy to manage the cost, technical competency, and risk inherent in utilizing external labor? 1 Aberdeen Group, Contract Labor Management January 2009, page 17 3

4 01 Is it a Sourcing Model, or an MSP? While there is no firm rule, generally speaking, the use of sole-sourcing bidding models decreases with the use of higher-skill positions. 4

5 01 Is it a Sourcing Model, or an MSP? This section will describe the four most common sourcing models that companies use to procure external labor: Master Vendor (sole-sourcing) Primary Supplier Structured Tiers Vendor Neutral (Open Bidding) According to industry data, most companies have more than one sourcing model in place, taking a hybrid approach 2. This is discussed further on page nine. While there is no firm rule, generally speaking, the use of sole-sourcing bidding models decreases with the use of higher-skill positions 3. SIA DEFINITION OF MASTER VENDOR: Contingent Worker recruiting opportunities serviced by a single Master Vendor that in turn may subcontract some jobs. The definitions for each model, as described by Staffing Industry Analysts (SIA) 4, are provided in call-out boxes on each page for your reference. This information will be used to demonstrate how these sourcing models can be integrated to form a holistic MSP strategy. The most critical value of this section is to show how an MSP can execute multiple sourcing models to deliver results. Master Vendor Sourcing Model Also termed sole-source, the contingent labor Master Vendor program has been around for decades. It is frequently utilized to procure Industrial (30 percent) and Administrative skill categories (24 percent) 5. This is a sole-source model in which the Master Vendor fills all orders, subcontracting only those orders they cannot fill by using their own network of preapproved suppliers. Pros The sole-source approach works best when skill sets are readily available in the market, since the supplier is expected to fill most orders with little subcontracting. It enables vendor consolidation and increases visibility, while providing for additional supplier resources (on-site, change management, program improvement), standardized workflow processes, and simplified problem resolution. Client s Administrative & Industrial positions Master Easiest to fill Pay/markup structure High volume Cons This model seldom works when sourcing for highly skilled positions, due to scarce resources in the market coupled with limited use of subcontractors. Subcontracting, which is often found in this model, is illegal in some countries. 2 Staffing Industry Analysts, Contingent Workforce Sourcing Model Benchmarks 2007, pg iv 3 ibid, pg 13 4 ibid, pg 1 5 ibid, pg 13 5

6 01 Is it a Sourcing Model, or an MSP? Primary Supplier Sourcing Model The Primary Supplier sourcing model is widely adopted to staff a range of skills the top two being Healthcare (47 percent) and Office/Clerical (45 percent) 6. The model is similar to Master Vendor, but is not sole-source. In this case, several primary suppliers are utilized, each with their own set of subcontractors. Pros Similar to Master Vendor, this approach delivers pricing discounts and additional supplier resources. It also delivers the added benefit of providing clients with direct access to more suppliers thus increasing their ability to source highly skilled positions. Cons The Primary Supplier sourcing model can increase a company s administrative costs because they must directly engage with more suppliers in what can be a highly transactional environment. This may mean multiple ordering tools, on-boarding rules, invoicing streams and supplier reports. In addition the client takes on more responsibilities for change management, program improvement, process design, and problem resolution. Finally, there is often little to no visibility to subcontractors and their compliance to program requirements. Structured Tiers Sourcing Model Structured Tiers are also used to source highly skilled contingent labor, though most predominately for Finance (38 percent) and IT (36 percent) 7. This model is similar to a Primary Supplier, except the client directly engages with the network. The shift from Master through Primary to Structured Tier sourcing models reflects a correlation between the difficulty in filling positions, and the need to directly manage the supply base to ensure that talent is found. Pros Direct engagement with the recruitment providers can improve hiring metrics. Cons Unfortunately, this model can often reduce access to supplierfunded resources, at the same time the client is taking on more administrative responsibilities, because of an increased number of suppliers. 6 Staffing Industry Analysts, Contingent Workforce Sourcing Model Benchmarks 2007, pg 13 7 ibid, pg 13 Wide range of client s positions Primaries Less easy to fill Pay/markup structure High volume Tiers Client s Finance & IT positions Harder to fill Pay/markup structure Moderate volume SIA DEFINITION OF primary supplier: Contingent Worker recruiting opportunities distributed to a select handful of staffing agencies, which in turn may subcontract some jobs. SIA DEFINITION OF structured tiers: Contingent Worker recruiting opportunities are distributed to specific groups of staffing agencies in a formalized order. 6

7 01 Is it a Sourcing Model, or an MSP? Vendor Neutral (Open Bidding) Sourcing Model From a contingent labor perspective, this sourcing model gained acceptance in the mid-1990s when IT resources were scarce and companies where having difficulty finding resources at a reasonable market price. Enterprise procurement tools lacked focus on the acquisition of contingent labor, leaving a technology gap in the marketplace. During the late 1990s, a few VMS firms entered the marketplace. Their technology automated the Open-Bid sourcing model, and gave companies a way to efficiently engage with many staffing agencies. While several staffing firms at that time offered an MSP solution, the VMS firms took this open-bid model further, positioning themselves as independent from staffing agencies, and commercialized the Vendor Neutral concept. Pros This model is frequently and quite effectively used to source Healthcare (37 percent), Technical/ Engineering (35 percent), and IT (29 percent) positions 8. Cons This model may not work well for some highly transactional skill sets. Hiring managers may wish to work directly with suppliers and circumvent the program. While there was some initial reluctance to this model for fear that staffing suppliers would withhold their best candidates, that is no longer a concern and it is important to note that in the United States this model is now widely accepted and common place. On Vendor Neutrality Over the past few years the term MSP has gained acceptance as a strategy to manage external labor, separating the clientfacing service from VMS tool functionality. In a recent SIA survey three of America s largest staffing providers, including Kelly, indicated they each have at least $1B spend under management in vendor-neutral programs 9. In fact, nine of the top 10 vendorneutral MSP providers are either owned by a staffing firm or the subsidiary of a staffing firm thus validating that staffing firms can be vendor-neutral. 8 Staffing Industry Analysts, Contingent Workforce Sourcing Model Benchmarks 2007, pg 13 9 SIA 2010 VMS and MSP Supplier Competitive Landscape Report Summary, pg 24 Client s Professional & Technical positions VMS Companies Open Bidding Hardest to fill Bill rate structure Low volume SIA DEFINITION OF open bidding: Staffing agencies bid on individual contingent worker opportunities based upon quality, price, and availability. Often implemented via a reverse auction process. SIA DEFINITION OF MSP: MSP is a company that takes on primary responsibility for managing an organization s contingent labor program. An MSP may or may not be independent of a staffing supplier. Typical responsibilities include overall management, reporting and tracking, supplier selection and management, order distribution, and consolidated billing. 7

8 02 Hybrid MSP the Strategic Sourcing Model Typically a hybrid program would include elements of vendor-neutral and Master Vendor programs. This integrated sourcing model approach elevates the MSP to a more strategic level. 8

9 02 Hybrid MSP the Strategic Sourcing Model The graphic below illustrates one perspective of a Hybrid MSP, which is the blending of different sourcing model attributes to manage the complete contingent workforce spectrum. Typically a hybrid program includes elements of vendor-neutral and Master Vendor programs 10. This is especially important due to the fact, as noted earlier on page five, most organizations use more than one sourcing model. This strategy enables the program(s) to manage the entire spectrum of contingent allowing procurement and HR to remove themselves from transaction management and elevate their role to strategic oversight. They can outsource program accountability to the MSP, and turn their attention to HR and Procurement transformational initiatives. The ability to integrate multiple sourcing models into one efficient model and simultaneously shift their focus to oversight is a key reason many companies have elevated their MSP to a more strategic level. A Wide range of client s positions External Labor Strategy Client s Administrative & Industrial positions Client s Finance & IT positions Client s IT Project & Services Spend B VMS Technology Outsource Contingent Labor MSP C Master Primaries Tiers Open Bidding D Easiest to fill Pay/markup structure High volume Less easy to fill Pay/markup structure Moderate volume Harder to fill Bill rate structure Low volume Hardest to fill Bill rate structure Low volume 10 SIA 2010 VMS and MSP Supplier Competitive Landscape Report Summary, pg 4 9

10 02 Hybrid MSP the Strategic Sourcing Model An explanation of components A, B, C, and D from the graphic on page nine are provided below: A The client s contingent labor strategy is developed by conducting a thorough assessment of their skill needs either for a site, a division, a country, or globally. More detail on this process is provided in Part 3 of this series. Many companies now include broader workforce classifications such as IT project work, retiree populations, and consulting firms, among others. B Next, and often concurrently, the client explores their VMS and MSP options, as these decisions often go hand-in-hand. For technology, they look at VMS tool features, financial viability, development roadmap, integration costs, client references, and MSP flexibility or the ability to change MSPs, but keep the VMS tool. Forrester Research has an excellent article exploring this and related topics that organizations may wish to consider 11. At the same time, and because some VMS tool companies also provide MSP services, companies explore their MSP options. They consider the MSP s supplier management resources, financial viability, global infrastructure, program staff expertise and VMS flexibility or the ability to change VMS tools, but keep the MSP. recruitment characteristics are continuously evaluated for changing market conditions, which can influence modifications needed to the sourcing models. C Next they assess their sourcing models to procure the skills, often working closely with the MSP to determine the best model. Sometimes the MSP will make the decision on which suppliers to utilize. D Lastly, recruitment characteristics are continuously evaluated for changing market conditions, which can influence modifications needed to the sourcing models. 11 Forrester Research, Simplifying Staff Augmentation with CWM Solutions, 20 March

11 Conclusion In summary, some key points with regard to MSP sourcing models include: 1. Most organizations utilize more than one sourcing model to find talent. An MSP strategy provides an integrated approach to bring all sourcing models under one common platform and management structure. 2. Creating a Hybrid MSP Strategic Sourcing Model means HR and Procurement remove themselves from transaction management and shift their attention to HR and Procurement transformation initiatives. 3. The Master Vendor sourcing model is commonly used for administrative and industrial skills. It s efficient and effective for this purpose, but it usually fails when used to source more complex skills. In addition, it may not be scalable due to country legislative limitations. 4. The Primary Supplier sourcing model is the most commonly used, with nearly 40 percent of companies saying they have one in place to acquire certain skills. But while it provides more direct access to a broader range of suppliers, it carries higher administrative costs, as well as reduced visibility and supplier resources. 5. A Structured Tiers model is most often used to source Finance and IT talent. Like Primary Supplier, it enables direct relationships with an even wider range of suppliers. But it carries an even higher administrative cost, with few supplier resources and further reduced visibility. 6. Vendor Neutral/Open Bidding is a sourcing model that became widely adopted when VMS firms entered the market in the 1990s. It is most frequently used to source Healthcare, Engineering, and IT talent. Be careful not to confuse this sourcing model with the much broader capabilities of a VMS tool, to integrate and automate many sourcing models in one MSP program. 7. As the industry has matured most have come to recognize that MSP service can be provided by both technology AND staffing firms without jeopardizing neutrality. In fact, some of the largest MSPs are staffing firms. 8. The Hybrid MSP enables organizations to outsource their program to an MSP who can design multiple sourcing models into one program strategy. This enables firms to procure a wide range of skills sets, using a range of sourcing models. 11

12 About the Author Tim Meehan, Vice President, Global Solutions and Services Tim Meehan is vice president, global solutions and services at Kelly Services, a leading workforce solutions provider. He currently leads a team of people that consult with Americas-based firms interested in enhancing their contingent labor workforce strategy. Mr. Meehan recently returned from assignment in Asia where he held a similar capacity, working with Kelly clients headquartered in APAC to develop their workforce strategies. Prior to that, he led a regional sales team tasked with developing new client relationships in the southeastern United States. Mr. Meehan joined Kelly in 2002 with nearly 10 years of staffing industry experience. During his time with Kelly he has deployed innovative workforce models to Fortune 100 firms, many in the banking, finance, transportation, and automotive industries. Prior to his work in the staffing industry he held significant leadership roles within the printing industry. Mr. Meehan was born in New Jersey and earned a Bachelor s degree in Political Science from Seton Hall University. Upon graduation he moved to California and earned a Master s degree in Business Administration from the University of Southern California. Mr. Meehan moved to Dallas in the early 1990s and, along with his wife and two grown daughters, calls Texas home today. 12

13 About Kelly Services Kelly Services, Inc. (NASDAQ: KELYA, KELYB) is a leader in providing workforce solutions. Kelly offers a comprehensive array of outsourcing and consulting services as well as world-class staffing on a temporary, temporary-to-hire, and direct-hire basis. Serving clients around the globe, Kelly provides employment to 530,000 employees annually. Revenue in 2010 was $5.0 billion. kellyservices.com This information may not be published, broadcast, sold, or otherwise distributed without prior written permission from the authorized party. All trademarks are property of their respective owners. An Equal Opportunity Employer 2011 Kelly Services, Inc. V1583

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