Part 2: sourcing models

The Fundamentals of Managed Service Provider (MSP) Programs Part 2 of 3 Part 2: sourcing models By Jennifer Spicher

contents This is the second of a three-part series designed to outline key components of a Managed Service Provider (MSP) program in support of a company s more comprehensive strategy for Talent Supply Chain Management. p3 Introduction Two of the major stakeholders most often engaged in this strategy are Procurement and Human Resources our experience indicates that when these two groups work p4 Sourcing Models together effectively, an MSP program delivers significantly higher value than without this Sole-Source (Master Vendor) Sourcing Model / 6 vital collaboration. Primary Supplier Sourcing Model / 7 This series addresses common questions about MSP programs, and provides a framework Jennifer Spicher Structured Tiers Sourcing Model / 8 that allows for informed decision making. The series will explore three key areas: Vendor Neutral (Open Bidding) Sourcing Model / 9 1 Explains what an MSP can do for your company and why it s important p12 Integrating Sourcing Models through an MSP 2 3 Demonstrates how multiple sourcing models can integrate with MSP strategy Articulates the business case for MSP and helps to determine your readiness p15 Conclusion 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. This information should prove valuable to procurement and human resources personnel as they plan and prepare for the future. 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? 2 3

100% 80% 2011 2007 20eleven 200seven sourcing models While there is no firm rule, generally speaking, the use of sole-sourcing bidding models decreases with the use of higher-skill positions. 60% 40% 20% 0% Primaries Structured Tiers Open Bidding Sole-Source There are five common sourcing models that companies use to procure external labor: Prevalence of Various Vendor Bidding Models 1 2 Sole Source (Master Vendor) Primary Supplier 100% 80% 2007 2011 20eleven 200seven 3 Structured Tiers 60% 4 Vendor Neutral (Competitive Bid) 40% 5 Hybrid According to industry data, most companies have more than one sourcing or bidding model in place, as reflected in the following chart. The use of multiple sourcing models is not surprising when one considers how supply and demand factors vary across skill sets. For skill sets that are more difficult to fill, a company will likely increase its supply base using a more responsive and adaptable talent sourcing approach. In contrast, for skill sets that have higher supply and availability of talent, a more efficient, transactional sourcing approach can be effective. 20% 0% Primaries Structured Tiers Open Bidding Source: Staffing Industry Analysts buyer surveys conducted in 2007 and 2011. Sole-Source Based on SIA Buyer Surveys conducted in 2007 and 2011, growth of usage occurred across all sourcing models. However, the use of primaries has grown significantly, with 84 percent of companies using this model to source contingent labor. These trends indicate a shift toward more complexity and greater variation in the models used by most companies today, which will lead to more complex solutions, and the demand for more robust management of these different sourcing strategies. The definitions for each model, as described by Staffing Industry Analysts (SIA), are provided in call-out boxes on each page for your reference. 4 5

Sourcing Models SIA DEFINITION OF sole source: Sole-Source (Master Vendor) Sourcing Model The sole-source contingent labor (Master Vendor) model has been around for decades. It Primary Supplier Sourcing Model The Primary Supplier sourcing model is widely adopted to staff a range of skills the top SIA DEFINITION OF PRIMARY SUPPLIER: Contingent worker recruiting opportunities serviced by a single Master Vendor who in turn may subcontract some jobs. is frequently utilized to procure industrial (67 percent) and administrative (30 percent) skill categories. In this sole-source model, the Master Vendor fills all orders, subcontracting only those orders they cannot fill by using their own network of preapproved suppliers. Pros: The Master Vendor (sole-source) approach works best when skill sets are readily available in the market, allowing the client to get a volume-leveraged discount price when one supplier can fill all the demand. It enables vendor consolidation, increased visibility, two being Information Technology (88 percent) and Engineering/Design (77 percent). The model is similar to Master Vendor, but is not sole-source. In this case, several primary suppliers are utilized. 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. Contingent worker recruiting opportunities distributed to a select handful of primary staffing agencies, who in turn may subcontract some jobs. standardized workflow processes, and simplified problem resolution. Cons: If an MSP program is not in place, the primary supplier sourcing model can increase a Cons: This model seldom works when sourcing for highly skilled positions, due to scarce company s administrative costs because they must directly engage with more suppliers in resources in the market coupled with limited use of subcontractors. Subcontracting, which what can be a highly transactional environment. This may mean multiple ordering tools, is often found in this model, is not legally viable in some countries. 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. Client s Administrative & Industrial positions Wide range of client s positions Master Primaries Easiest to fill Hard to fill Pay/markup structure Pay/markup structure High volume High volume 6 7

Sourcing Models SIA Definition of Structured Tiers: Structured Tiers Sourcing Model Structured Tiers are also used to source highly skilled contingent labor, most predominately Vendor Neutral (Competitive Bid) Sourcing Model This sourcing model gained acceptance in the mid-1990s when IT resources were scarce SIA DEFINITION OF open bidding: Contingent worker recruiting opportunities are distributed to specific groups of staffing agencies in a formalized order. in the Finance/Insurance industry (66 percent). In addition to the Finance and Insurance industries, this model is prevalent for sourcing skill sets in engineering (57 percent) and IT (56 percent). 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 identified. Pros: Direct engagement with the recruitment providers can improve hiring metrics. and companies experienced difficulty finding resources at a reasonable 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 firms introduced technology that automated the competitive bid sourcing model, and gave companies a way to efficiently engage with multiple staffing agencies. With this automation, MSPs became integral to managing the business processes and policies that bring together the supply base, contract administration, Staffing agencies bid on individual contingent worker recruiting opportunities based on quality, price, and availability; often implemented via a reverse auction process. Cons: This model can often be more costly to manage, with the client taking on more data analytics, and the technology. administrative responsibilities because of the increased number of suppliers. Pros: This model enables broader access to talent and allows the best supplier with the best candidate to fill each position at competitive rates. Cons: This model may not work well for some highly transactional skill sets. It is not readily used in the manufacturing sector (19 percent) nor for those primarily purchasing Industrial/ Logistics skills (17 percent). Client s Finance, Engineering & IT positions Client s Professional & Technical positions Tiers VMS Companies Open Bidding Harder to fill Pay/markup structure Moderate volume Hardest to fill Bill rate structure Low volume 8 9

Sourcing Models On Vendor Neutrality Over the past few years the term MSP has gained acceptance as a strategy to manage external labor, separating the client-facing service from VMS tool functionality. The 2012 SIA MSP/VMS Landscape report showed that for 75 percent of MSPs (affiliated or owned by a staffing firm) that had vendor-neutral spend, less than 10 percent of that spend was through their own staffing arm. In fact, four of the top five vendor-neutral 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. 10 11

Integrating Sourcing Models through an MSP The ability to integrate multiple sourcing models into one efficient management model, while simultaneously shifting their focus to oversight, is a key factor in why many companies have adopted MSP programs as part of their long-term workforce strategy. MSP Hybrid Program: MSP hybrid defines multiple sourcing models within a contingent workforce program. Typically, a hybrid program would include elements of vendorneutral, as well as mastersupplier programs. As described earlier, most companies are using more than one sourcing model. Each sourcing model may have applicability within an organization s contingent workforce strategy. The sourcing of higher-skilled, professional/technical positions is more likely to benefit from structured tier or vendor neutral (competitive bid) models to increase the responsiveness and access, while less technical and easier-to-fill positions are more likely to leverage a sole-sourcing model. A managed service provider (MSP) can help to bring any and all of these models a hybrid model approach under a single strategically managed workforce program. When selecting an MSP partner, the client should consider the MSP s supplier management resources, financial viability, global infrastructure, program staff expertise, and its VMS compatibility A B C Administrative & Industrial positions Master MSP Program Management Wide range of positions Primaries VMS Technology Finance, Engineering & IT positions Structured Tiers IT Project & Services Spend Vendor Neutral Vendor Neutral Recruitment characteristics are continuously evaluated for changing market conditions, which can influence modifications needed to the sourcing models. and flexibility. The graphic (right) illustrates how an MSP program can integrate sourcing models under a single management program to address the full array of contingent talent needs for an organization. D Easiest to fill Pay/markup structure High volume Hard to fill Pay/markup structure Moderate volume Harder to fill Open bidding/not to exceed bill rates Low volume Hardest to fill Open bidding/not to exceed bill rates Low volume An MSP enables the management of the entire spectrum of the contingent workforce on behalf of and in partnership with procurement, HR, and operations. By outsourcing program accountability to the MSP, the client can turn their attention to more strategic and transformational initiatives, while alleviating procurement, HR, and operational teams from transactional oversight. This is a key factor in why many companies have adopted MSP programs as part of their long-term workforce strategy. 12 13

Integrating Sourcing Models through an MSP conclusion An explanation of components A, B, C, and D from the graphic on page 13 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. The MSP will partner with the client to structure the program in alignment with their objectives, including broader workforce classifications such as IT project work, retiree populations, and consulting firms, among others. B Next, and often in consultation with the MSP, the client will explore VMS options. For technology, they look at VMS tool features, financial viability, a development roadmap, integration costs, client references, and MSP compatibility. 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 an integrated sourcing model via an MSP program 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. C D 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. Lastly, recruitment characteristics are continuously evaluated for changing market conditions, which can influence modifications needed to the sourcing models. 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, Engineering 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/Competitive (Open) Bid is a sourcing model that became widely adopted when VMS firms entered the market in the 1990s. It is most frequently used to source talent in the Energy/Chemical and Technology/Telecom industries. 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 skill sets, using a range of sourcing models. 14 15

Index Managed Service A company that takes on primary responsibility for managing an Sole Supplier A sourcing method in which only one supplier is selected to provide Provider (MSP) organization s contingent workforce program and the various sourcing all services for a customer within a service line, geography, or for an models within it. Typical responsibilities of an MSP include overall entire program (See also: Sourcing Model, Master Supplier). program management, reporting and tracking, supplier selection and management, order distribution, and often consolidated billing. Sourcing Model The method by which a company identifies, selects, receives, and pays for contingent workers and related services. Companies may Master Supplier A staffing supplier that takes overall responsibility for providing employ more than one sourcing model within a contingent workforce clients with temporary staff. In a master supplier relationship, all program. Sourcing Models can be identified by a company s position orders will usually go first to the master supplier to either be filled or along three independent axes: competitiveness, rate elasticity, and distributed to secondary suppliers. Sometimes a master supplier will vendor integration. Competitiveness is the degree to which staffing not only provide a significant portion of the temporary staff working agencies are invited to bid against each other with respect to at the employer s site but also manage an organization s contingent submission time, candidate quality, and price. Typical options include workforce program. Also known as Master Vendor (See also: Vendor sole-source, primaries, structured tiers, and open bidding. Rate on Premises). elasticity is the degree to which demand affects rates, with options including fixed rate cards, pay range plus markup, max bill rates, and MSP Hybrid Program In the early days, an MSP hybrid was the way to define multiple sourcing models within a contingent workforce program management or MSP. Typically, a hybrid program would include elements of vendor-neutral as well as master-supplier programs. For example, a open bill rates. Vendor integration is the degree to which a company uses external resources, with options including complete program outsourcing, on-site administrative support, off-site transaction support, and no use at all. buyer might engage a single provider to act as the sole supplier for its Light Industrial job requisitions while having multiple providers Structured Tiers Selection of multiple suppliers in a specific priority, usually based on competitively bid on IT positions. Now, the hybrid is typically pricing level, combined with size and capacity (See also: Sourcing dropped since it has become commonly accepted that an MSP Model). includes the management of many different sourcing models within the program. Primary Suppliers Two or more suppliers that have the majority of a company s staffing requirements distributed to them, in lieu of, or underneath an MSP arrangement. They may be on-site and they may or may not be in a competitive bid situation (See also: Managed Service Provider). From the SIA Lexicon 2011/12 16 17

index Vendor Management System (VMS) An Internet-enabled, often Web-based application that acts as a mechanism for business to manage and procure staffing services (temporary help or in some cases, permanent placement services) as well as outside contract or contingent labor. Typical features of a VMS include order distribution, timekeeping, and significant enhancements in reporting capability over manual systems and processes. Vendor Neutral A term used to describe a model in which a managed services or VMS technology handles its tasks (e.g. order distribution or candidate selection) based on client-defined policies that mandate that all (or a pre-defined set of) staffing suppliers (vendors) be (a) given an equal opportunity to fill each order, and/or (b) selected for each order based on the same criteria. Under a vendor-neutral model, a managed services or VMS provider could not, on its own accord, push orders to itself or any other staffing vendor. The presumed advantage of a vendor-neutral model is that the best supplier with the best candidate will fill each position. References Aberdeen Group, Contingent Workforce Management: The Next-Generation Guidebook to Managing the Modern Contingent Workforce Umbrella May 2012 Staffing Industry Analysts, 2011 Contingent Buyer Survey: Vendor Bidding Models and Staffing Agency Rate Structures March 2012 18 19

About the Author Jennifer Spicher is Vice President & Americas Practice Lead, Contingent Workforce Outsourcing Solutions with Kelly Outsourcing and Consulting Group (KellyOCG). She joined KellyOCG in 2009 to help accelerate the company s growth in strategic accounts. Ms. Spicher is responsible for solutions design and architecture, implementation and overall program delivery, as well as customer satisfaction for client programs. She has a wealth of experience and demonstrated accomplishments in the human capital industry, which has fueled her ability to consult with clients, understand their needs, and recommend customized solutions to align with their workforce strategy. Jen was named a 2013 Pro to Know by Supply & Demand Chain Executive magazine. About KellyOCG KellyOCG is the Outsourcing and Consulting Group of workforce solutions provider, Kelly Services, Inc. KellyOCG is a global leader in innovative talent management solutions in the areas of Recruitment Process Outsourcing (RPO), Business Process Outsourcing (BPO), Contingent Workforce Outsourcing (CWO), including Independent Contractor Solutions, Human Resources Consulting, Career Transition and Executive Coaching, and Executive Search. KellyOCG was named to the International Association of Outsourcing Professionals 2012 Global Outsourcing 100 list, an annual ranking of the world s best outsourcing service providers and advisors. Further information about KellyOCG may be found at kellyocg.com. kellyocg.com All trademarks are property of their respective owners. 2013 Kelly Services, Inc. Y0167B