October 23, 2018

Climate Change: To Survive, the VMS has to Evolve to a More Holistic Solution

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So much has been said about the vendor management system. There are those who love to hate it, others who think it commoditized the industry, and still more who believe that the tool changed the face of the industry. This year marks my 15th year working with, on, for or around VMS platforms and providers. It’s a good moment to reflect on the past, survey the present and look to the future as the VMS as we know it is going to evolve.

What’s in store? New funding models, global expansion, a different name and a more holistic approach. Read on.

The Good Ol’ Days

Am I the only one who fondly remembers the early days of VMS back in the early 2000s when we were still working with dial-up modems and heavy client applications? Back before the acronyms of MSP and VMS were so codified in our vernacular. Back when if you had a handful of clients with a few million in spend, you were a big-time player. Early in my career, I actually worked as a recruiter and was responsible for submitting candidates to all of our clients who utilized a VMS tool. As the youngest person in the office, I was expected to be “good with computers.” To be fair, the limited functionality and clunky user interfaces that the early systems offered did sometimes require some advanced computer skills.

As the 2000s chugged along, two key things started to happen: Bifurcation and specialization. This meant the “one stop shops” with both VMS and managed service provider offerings began to split up, resulting in companies that specialized in either technology or services only. That’s not to say that these “combined offering” companies no longer exist or that they don’t provide good offerings; however, for the most part, the biggest and most successful VMS companies are now run independently of an MSP, even if they are both owned by the same parent company. Why did this happen? The reasons are many, but the critical point is that in order to create the most robust technology platform, a company must act and be managed like a technology company. Sometimes decisions will be made in the best interest of the product that do not align with the desires of an MSP organization. Of course, it doesn’t hurt that you get a much better multiplier when selling a “SaaS” company (i.e. VMS) versus a “services” company (i.e. MSP). Just ask the founders of Fieldglass.

As contingent workforce solutions - including VMS and MSP - progressed in their evolution, so too did the responses from staffing agencies. Certainly, when these solutions came into force in the early days, the majority of suppliers hated them. All of a sudden, they would have to pay a fee and couldn’t walk the halls and sweet talk managers. In fact, account managers were no longer needed in their old form, because business no longer needed to be discovered. It was delivered to your inbox. Some agencies embraced this model and happily paid the fees.

Remember what I said I did when I was a young recruiter? The fact was that our company made more profit on the half dozen accounts or so that I supported because we no longer had to account for the bonus structure of an account manager - which would have far outstripped the MSP/VMS fee being charged. So the only person who hated the CWM solution in our office was the account manager who was no longer getting her commissions.

When I moved to the MSP/VMS provider side, I discovered that other staffing agencies were starting to adopt a similar model. In fact, at our largest client, the No. 1 supplier year over year was an agency with no sales people and all virtual recruiters. This was cutting edge in 2005, but as the years progressed, more and more large suppliers were spinning up regional hubs to support all of their accounts with VMS solutions.

Today’s Tool

The bifurcation and specialization of the late 2000s led to the consolidation and dominance of the big players in this decade. This holds true for both MSP and VMS, but much more so when it comes to VMS providers. The amount of spend managed by the three largest VMS providers is head and shoulders above the rest. This was inevitable when you think about it. Investment in technology is expensive. As such, those companies making more revenue can invest more, allowing them to build better products and ultimately win more business. Wash, rinse, repeat. That’s not to say the other VMS providers have not advanced their products or won a decent amount of business, because in my current role evaluating a myriad of tools, I’ve been thoroughly impressed over the last few years with many of them. But in addition to functionality, other concerns like security and infrastructure are increasingly important to large corporations. Keeping up with the latest standards and ensuring the highest levels of security is an increasingly expensive endeavor. Building a world-class infrastructure requires a huge upfront investment, which the largest VMS providers have all been required to do in order to meet the strict requirements of their blue-chip multinational clients.

The world has also started to move on from the initial need for VMS platforms. The originating cause was suppliers ripping off clients and making massive profits. Companies needed a way to control and manage their contingent labor supply chain. Whether through a VMS or other mechanisms, this original premise is no longer as prevalent. To wit, what we are seeing is VMS branching out from temporary agency spend into all non-employee labor categories.

This isn’t an entirely new concept. In 2005, early versions of SOW functionality and independent contractor compliance management were present. But in the last five years or so, the growth of VMS usage has been perhaps more in the expansion of labor categories than in the acquisition of new clients. Trend reports all show a saturation of the market for larger buying organizations, yet an increasing volume of spend through VMS tools. Some of them are acquiring systems, some are integrating with “sister” tools and others are partnering with specialty providers. However they are accomplishing it, the goal is the same - to get more spend through the system. Of course, the reason for that is most VMS programs are still operating under the percent of spend fee model, which dates back to the early days when these solutions were purchased with no budget, for a single department, and were bundled with an MSP solution.

Coming Up

One big thing that I think will change over the next five years is the funding model for VMS platforms. The percent of spend model is increasingly challenging to implement, whether going into large SOW projects, low-cost light industrial workers, or fixed mark-up model countries. More and more, VMS platforms are being bought at a more strategic, enterprise level. And I believe that the funding model will evolve to be more in line with other strategic enterprise solutions.

As the funding model changes to more of a corporate platform-type system, the additional labor category and global adoption should increase exponentially. While expansion has been a significant element in recent years, it should surpass new logo revenue as more and more programs aim to put all non-employees into a single tool. Eliminating the transaction fee element should alleviate one of the key blockers to expansions to date.

I also think that the term VMS will eventually be phased out. Again, the initial intention was to manage vendors, hence the acronym. Moving forward, I think a lot more contingent talent will come through non-vendor channels, such as direct sourcing, freelancers and independent contractors. There will always be a need for suppliers who are able to find and cultivate the passive candidates, but the overall percentage of the supply chain they comprise is decreasing and will continue to do so. To that end, VMS providers will need to adapt to a more holistic “contingent workforce management system” (CWMS). You heard it here first.

The VMS landscape has been a fun and interesting journey for those of us who have seen it from one aspect or another for the last 15 or so years. The next 15 should bring about more change at a faster rate, as with most other technology platforms. I can’t wait.

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