Why is vendor management system pricing broken?
Traditional vendor management systems (VMS) are priced based on a percentage of contingent workforce spend-under-management. For example, an enterprise that spends $50 million on its contingent workforce per year would incur a VMS software fee of $250,000 annually (e.g. a 0.5% fee).
But that fee is usually hidden in what is known as a supplier-funded model. Managed Service Providers (MSPs) will add the VMS fee on top of the markup rate for the worker.
This system of pricing creates a few different problems for enterprises trying to better control costs or achieve total workforce management.
Spend-under-management pricing hides the true cost of your workforce
While enterprises typically gain thousands of workers through statement-of-work (SOW) or business process outsourcing (BPO) contracts, it is not in the financial interest of the business to enter these contracts into a VMS because it would dramatically increase their fees.
Typically, these workers are left out of the VMS, preventing HR and Procurement teams from having visibility into worker spend, systems access, and more. The percent of spend model disincentivizes enterprises from entering those workers in the VMS and disincentivizes top suppliers from wanting to participate in the program
Client-funded models give businesses more transparency
Supplier-funded pricing makes the buying process easier if all the costs are combined with the MSP. But it means you don’t really know the price of the worker or it can be difficult to price out the costs of program delivery versus system fees.
Ignorance is bliss, sure, but finance and procurement teams know granular pricing helps manage costs better. With the enterprise actively buying the system, they have better visibility and accuracy of their program costs.
Subscription fees are more predictable and scalable
Last year’s estimate for your extended workforce spend isn’t always a good predictor of the next year’s. But spend-under-management threshold models typically ask you to forecast your spending and price based on that. You could easily end up overspending if it turns out there is a recession that requires you to decrease workforce costs.
Active worker pricing is a more reliable and predictable way of spending. You only pay for the workers that are currently in engagements rather than guessing at how much you will spending.