Vendor-funded pricing models have been in existence for many years, and the vast majority of Fortune 500 firms fund their Managed Service Provider (MSP) programs in this manner. Here's why the percentage of spend model is an industry best practice:

  • By fully mapping all of the processes associated with sourcing, selecting, on-boarding, managing, off-boarding and paying for temporary services, the MSP identifies wasted effort in legacy processes and is able to reduce the overall cost of fulfillment. This enables a vendor-funded model to yield savings on the vendor side of the equation while delivering the MSP solution to the client with decreasing temporary labor rates over time.
  • With an experienced MSP, there is generally no cost to the client for software, deployment or ongoing operational services.
  • The client essentially is able to fund additional administrative and process/program management positions without incurring additional selling, general and administrative expense.
  • The staffing industry is a highly fragmented industry. With very few exceptions, suppliers that do not perform, that subvert the intent of the MSP program or opt out of the program, can easily be replaced — there is a very large population of local, regional and national labor providers that can be accessed as needed.

Other funding models include:

  • Transactional fee models, which are the most difficult to manage because they involve the greatest amount of formal change management. With the transactional model (be it on a per-hire, functional task or other basis), each new support request by the client must be evaluated, priced and associated before formal scope change efforts can occur. Empirical data shows that client needs change and evolve over time, and that the majority of clients are looking to the MSP to solve business problems. The need to continually refine transactional pricing models often runs counter to optimal support and solution requirements.
  • Monthly fixed-fee models, which are often considered by potential clients that feel their legacy processes are best in class. These types of clients frequently believe they simply require access to new toolkits and additional manpower to facilitate the execution of their objectives. The major drawback of the fixed-fee model is that it is often built around headcount and as such offers limited scalability to the client when contrasted with the percentage of spend model.

A typical vendor-funded pricing model or percentage of spend breakout would look like this:

FEE COMPONENT PERCENTAGE OF BILL RATE
VMS Software Licensing Fee X%
MSP Services and Support Fee Y%
Implementation Services Fee There should be no charge
for this service.
Government Monthly Administrative Fee Rebate Z%
Total MSP Fee to Suppliers X+Y+Z%
Net MSP Fees for Services Rendered (X+Y)-Z%
  • Read the "Managing the contract workforce" feature to learn how managed service providers (MSPs) can provide turnkey services for "free" by using VMS software tools to ensure low rates, transparency and efficiency.

David Candler, CPPO, PMP, Senior Director, Government Services at TAPFIN Process Solutions, is a former administrator of Georgia's first MSP-VMS program. He can be reached at dcandler@tapfin.com.