Incenting MSPs Now and in the Future: Spend Under Management Just Doesn’t Cut It Anymore
Updated: Jan 26, 2021
As demographics shift, workplace standards evolve, and companies push for more creative pricing and savings opportunities, MSPs must adapt or risk further erosion of profit margins. (This applies to their VMS partners, too.) I would also argue clients bear an equal share of program risk responsibility. This includes program fees.
MSPs are expected to save money year over year, fill roles quicker while sourcing hard-to-find specialty talent and communicate company culture on the fly – at times without proper messaging or collateral. They must offer creative solutions to attract and retain talent and provide training and education opportunities for workers in order to guarantee program success. At times, the MSP provides these at their own expense to ensure client standards are maintained and to further demonstrate commitment to a true business partnership.
Let’s remember, MSPs are in the business to make money, too. Their fees are the lifeblood for funding operations, compliance standards, innovation, and upskilling. Typically, fees are calculated as a percentage of Spend Under Management (SUM). But, with measurable savings expected year-over-year, if clients don’t include all eligible categories (including human cloud, consulting, offshoring, etc.), the MSP is in a zero-sum game. MSP (and VMS) digital transformation, program synergies, process simplification (thus reduced resource allocation) taken together can’t overcome the speed with which SUM is decreasing especially in maturing programs.
It’s imperative that the client enables the MSP (with the VMS) to pursue a true holistic category approach, even if there are different fee structures per category.
The traditional SUM pricing model isn’t flexible enough to meet the needs of mature customers and stifles innovation, service delivery, and program evolution. In today’s environment, vendor-neutral SUM fee models also hurt the client.
That may be a provocative statement. Yet, this isn’t a new challenge. Many clients continue to structure and agree to SUM only terms and expect savings results from the MSP, when the anticipated spend that drove program design (and thus revenue expectations of the MSP and VMS) is simply not there.
While considering the future MSP relationship, I would also suggest connecting fees to SUM is not only outdated, but it does not foster a true partnership nor any risk/reward behaviors that should drive optimal program performance.
One option to consider is a cost-plus model. For example, for every $100M being run through your program, the MSP would provide (for example) — X number of onsite resources, basic supplier management, quarterly business reviews, and certain SLA’s that must be achieved. It’s the MSPs all-in annual cost plus some level of negotiated margin. In my view, this is a viable option for managing a smaller staff augmentation program (or single category) with simplified services that are not strategically leveraged across the client organization.
This model provides clients transparency of costs and the ability to track MSP resource allocation and activities. For MSPs, this option provides too much transparency. Markets talk. If this option is considered within today’s challenging talent environment, I would bet many MSPs would decline pursuing this piece of business. And, given the lack of strategic leverage, operational complexity and scale, these opportunities are better suited for either client self-management or an outsourced master vendor with technology solution (note many MSPs provide this offering).
Another option for clients and MSPs to consider is the risk/reward model. The MSP (and possibly VMS) agree to a set of mutual SLA’s and shared risk metrics with the client. (Please note the term shared.) The client has responsibilities here, too and is measured just like the supplier. A step schedule of performance thresholds and associated value is established at time of engagement. At the end of each year, these metrics are re-assessed based on business changes (i.e. M&A, organic expansion, etc.), market conditions, and changing program requirements, and reset as necessary for the upcoming year.
During the annual term, if established metrics are achieved, the MSP receives a predetermined performance bonus payment which allows them to reinvest in program innovation, technology, functionality, and partnerships that, in turn, increase their value to the client organization. In complex programs, a piece of this reward can be provided as a rebate back to Procurement to be counted towards their savings targets.
Conversely, if subpar performance leads to missed thresholds, there would be a short remediation period (in weeks or months — not years). The current measurement clock “stops.” Fix the problem and relaunch. Should the problem continue to exist, a penalty would be incurred. This can be in the form of cash or a measurable service credit back to the client. To be clear, if the client fails to uphold their responsibilities, they too will pay a penalty whether in cash or extended contract terms.
Many in the industry would say this is no different than a typical SLA. I would argue it is in the sense that these risks/rewards should have weight to them – think 10-12% v. the industry average +/-2% of fees.
This risk/reward model considers a total talent management approach by placing value on these ancillary services (as you would large consultancy relationships via SOW) rather than seeing an MSP program as simply a tactical partner for procuring contingent labor paid as a function of spend throughput. Strong, accountable metrics tied to meaningful incentives drives high performing behaviors.
The critical success factor in launching and managing a performance-driven fee structure is a strong, accountable joint governance body comprised of client Business Leaders, Operations, HR, Talent Acquisition, Legal, Finance, and Procurement as well as program leaders from the MSP and VMS. This group agrees to a set of operating principles, defines the talent strategy to realize the company business strategy, ratifies investments, mitigates risks and agrees to a set of joint performance metrics including risk/reward incentives. They also drive mutual accountability and success by monitoring performance and actively managing agreements and fee structures. This may seem daunting. Yet, I’ve seen it work with the right leaders in place that drive shared accountability and resulting program success.
Achieving High Performance
There are many factors to consider when deciding what’s best for your organization. Contemplating your internal expertise and anticipated investment in those resources, future global footprint, corporate culture, and scalability/flexibility are important considerations. Your decision – and how you plan to measure program success – is critical. Talk it through at all levels of the business, with a trusted partner, and with other organizations who’ve gone through similar considerations outside the contingent labor category. Incenting high performance will drive program innovation. SUM alone will not.
Being forward-looking and creative in your fee structure is more important than ever. The performance of your program and your future business success depends on it.