Funding models and pricing methods for contingent workforce technology

Organizations are increasingly adopting a flexible talent approach that relies on an extended workforce that can adapt quickly to market changes and business strategies. To source the top talent they need to succeed, and to manage this extended workforce, many companies have historically used a vendor management system (VMS).

For more than 20 years, a VMS has helped to increase talent sourcing efficiency, reduce costs, and mitigate regulatory compliance risk. With market-leading VMS functionality at its core, Beeline Extended Workforce Platform is built on the latest technologies available. Addressing every phase of the extended workforce life cycle, the extended workforce platform connects businesses, talent suppliers, and people in one central, secure ecosystem that fuels business productivity.

Financial value

One of the most significant impacts of streamlining and automating the contingent workforce management process is the potential for cost savings, which can often be achieved with minimal capital investment.

There are multiple ways to fund this. Whatever model and methods you adopt, you can expect to achieve both direct savings (from better rate negotiations, standardization of volume discounts, early payment arrangements, etc.) and indirect savings (faster hiring cycle times, contract optimization, reduction of timecard errors, etc.). Typically, companies achieve savings or cost avoidance of between 10% and 30% of their current non-employee workforce spend.

A word about "models" and "methods"

You will frequently hear terms like “transactional model,” “supplier-funded model,” “license model,” and “client-funded model” thrown around as if all “models” were equivalent, alternative answers to a single multiple-choice test. They are not.

These terms represent aspects of a multidimensional puzzle involving how a VMS service should be funded and who should provide those funds. The extra dimension of this puzzle comes from the fact that managed services provider (MSP) or self-managed program office funding is often interwoven with the VMS funding equation.

To simplify this discussion and prevent confusion between the who and how dimensions available to contingent workforce program managers, this paper will:

• use the term “model” to discuss the two primary funding choices — who does the funding,

• and the term “method” to discuss the range of service fee pricing alternatives — how the price is calculated.

It is important to remember that any pricing method can be combined with any funding model. How you choose to pay your VMS provider is independent of the way you choose to fund your program. The only requirement is that your VMS must be sophisticated enough to support the combination of pricing methods and funding models that works best for your program, and adaptable enough to manage any pricing or funding changes as your program matures.

Common funding models and pricing methods

Funding models

The majority of contingent workforce programs using a VMS today have adopted a Supplier-Funded Model. In this funding approach, some or all of the program expenses are funded by a fee deducted from the staffing suppliers’ invoices for contingent staffing assignments or statement of work (SOW)-based contract services managed through the VMS. Under this model, the client pays only the gross rate billed by the supplier, with no additional cash outlay for using the VMS.

The supplier-funded approach can be contrasted with the Client-Funded Model in which the organization using the VMS pays the VMS provider a fee (based on one of the pricing methods below) for the use of the software and associated services and pays its staffing suppliers the full invoice cost of their contingent staffing or contracted services.

Some organizations also use a Hybrid Funding Model in which some services (typically contingent staffing assignments) are handled on a supplier-funded basis and other services (typically SOW-based contract services) are handled on a client-funded basis.

Basic pricing methods

The two most prevalent VMS service fee pricing methods are subscription and transactional. Both pricing methods are based on the volume of contingent workforce spend managed in the VMS. The Subscription Method can involve either a flat fee for a specific level of qualified spend or a variable fee based on multiple levels of qualified spend. (See Subscription Pricing Method description and charts below for more details.)

Rather than applying a single service fee for a particular level of qualified spend, the transactional method computes the service fee by multiplying actual spend for each staffing transaction within one or more predefined ranges by a percentage agreed for that range.

The transactional method can incorporate either flat-fee pricing or progressive pricing. In a flat-fee scenario, all transactions are billed at the same rate. In a progressive scenario, all transactions within a particular range are billed at one rate, but additional transactions above that range may qualify for a volume rebate. For example, the fee might be 75 basis points of contingent worker bill rate until total spend reaches $10 million, and then 65 basis points per transaction for spend above $10 million. In a progressive scenario with multiple tiers, the volume discount may increase as the value of transactions reaches each higher tier level.

Here are some pros and cons of the supplier-funded model

Advantages

• Enables companies to deploy a sophisticated contingent workforce program with little to no out-of-pocket expense.
• Because these programs do not require significant outlays but provide significant initial benefit, they may be implemented without the C-level attention that might attend other software deployments.
• With some exceptions, program sponsors do not have to lobby for a major budget allocation every year.
• The business units that use the program the most also benefit the most — and end up paying the most through direct payment to staffing suppliers.

Disadvantages

• By focusing on a percentage of spend as opposed to the true cost of service delivery, the actual expense of managing a program – and the program’s ROI – are unknown and program managers and business users remain unaware of how their behavior affects the performance or profitability of staffing suppliers, service providers, and technology providers.
• This disconnect tends to drive providers' costs — and therefore profitability — ever lower, reducing their incentive to provide the highest-quality staffing candidates and support services.
• Buyers incorrectly focus on the supplier fee in an environment where the true cost of program management is not apparent. As buyers negotiate lower costs and their demands become more specific and costly to deliver, service providers may respond by deploying fewer and less costly resources.
• The funding model is disconnected from the suppliers’ true cost to deliver, creating unpredictability when it comes time to renegotiate service contracts.
• Companies with global programs may find that staffing suppliers and service providers in countries outside the U.S. are unfamiliar with or unwilling to operate under this funding model.

Typically, the transaction fee is so small that, when managed appropriately, suppliers willingly accept these discounts without passing the costs back to clients in the form of inflated bill rates. Frequently, contracts are structured so that the transaction fee varies based on spend volume, with the technology fee decreasing on transactions that occur after the client has reached an agreed-upon spend level.

The primary advantage of transactional pricing is that it ties costs directly to contingent workforce spend. The primary disadvantage of this pricing method is its unpredictability, forcing VMS providers to manage their client service resources more conservatively or set fees higher than they would if spend levels were more certain.

Alternatives to transactional pricing

Subscription pricing method

Many contingent workforce programs have adopted a subscription method to reduce unpredictability for both clients and providers. In this pricing method, the client pays a subscription fee on a regular basis (monthly, quarterly, or annually). In its predictability, this model is similar to a traditional software license model. However, it can be tied to spend volume, but with less variability than the transactional method.

While this pricing method is sometimes called a “license” or “licensure” method, it differs from traditional software licensing in which customers are typically charged for all the capabilities the software can provide, regardless of whether the client chooses to implement or use all these capabilities. Consequently, these licenses may entail a high total cost of ownership. While a software license entitles the licensee to use the software, the license may or may not include ongoing service and support.

In contrast, a VMS subscription includes support services and is generally more closely aligned to the capabilities a client chooses to implement and the value it provides. In the example below, an annual services fee subscription is shown, reflecting both contingent staffing and services procurement capabilities. It combines a base fee amount (“initial services fee”) with a table of additional service fee levels that apply if the spend volume exceeds the “annual qualified limit” during the year.

Contingent staffing and services procurement

Hybrid pricing model

Some clients elect to deploy a hybrid model in which one part of the technology fee is calculated using transactional pricing and another part is managed using subscription pricing. While the transactional method may be used for contingent staffing, the subscription method may be used for other labor categories, such as services procurement, where supplier funding, while viable, may not be worth the supplier adoption effort. Clients may also choose to deploy a hybrid model for countries where supplier funding is either not legally viable or where margins are too commoditized to allow for effective adoption.

How financial complexity can add value

Why do VMS funding and pricing have to be so complicated? Actually, it’s not. VMS funding and pricing can be very simple. But sometimes, funding and pricing complexity can add flexibility and value, especially for more mature contingent workforce programs.

For example, an organization might want to use one pricing method and funding model to launch a contingent staffing program with a VMS and MSP, a different approach when it adds services procurement, and a third approach when renewing its VMS and MSP contracts based on prior experience and increased proficiency in predicting contingent staffing requirements. In this case, the progression of pricing methods might look something like this: