The Future of MSP Pricing Models

I’m no Nostradamus, and I’m confident that many of my thoughts here aren’t novel, but this is a subject that has been on my mind for some time. Feel free to chime in with comments, questions or criticisms…I’m certainly open to constructive feedback.

Not terribly unlike that ancient, and in my opinion obsolete, commission model that has been espoused by realtors for years, the world of MSP pricing will and must change (please don’t get mad at me my fine realtor friends, but I have sold my own home on several occasions and saved the 6% hit). 

In the world of real estate, even with the advent and ubiquity of the internet, things have changed very slowly. Flat fee pricing models and FSBOs (For Sale by Owner) have only gained nominal traction. As I see it, the traditional percentage-of-sale model doesn’t take into account volume (total cost of the home’s sale – all houses are pretty much at the 6% no matter if they are $100K or $10M), economies of scale (a realtor could conceivably collect the 6% commission twice if they are listing both the houses in the transaction and will make the same amount no matter how easy it is to sell a house in a particular market), or the quality of the realtor’s work and the value of the home well after the realtor’s deed has been done.

Today in the Staffing MSP space, we see mostly two models; supplier-funded and client-funded. Both options are a percentage of gross sales, usually in the 2-4% range with most falling in a rather tight delta around the 3% mark. This fee includes the cost of the VMS, and if it’s not a proprietary tool that necessary component usually runs from .65-1.25% of revenue depending on the size, scope and sophistication of the program. Similar to the world of real estate, this has prompted an increasing number of companies to move the management of their contingent labor inhouse. By doing this, they eliminate the MSP fee while retaining the necessary VMS cost. 

The simple math is that if the MSP cost is in the conservative 2% range with a $100M program, they are paying $2M annually to outsource the program. So, the thinking goes, can we run the program by using internal resources for less than $2M while increasing alignment with corporate values and communication with suppliers? Often, if so inclined to take on such a project, the answer is “yes.”

However, other models exist, and I believe they will become more prevalent. Here are some possibilities with the most radical first:

Risk-Reward – Based on the cost and operational goals of the client, which are not pricing or markup reduction alone, I can see the MSP being compensated based on clear-cut and reasonable cost or process improvement objectives. For example, if demand management challenges (the unnecessary use of contingent workers) or excessive overtime are driving up program costs, why couldn’t the MSP, working in close collaboration with both their client and the suppliers, potentially be compensated for positively impacting both of these numbers? And, correspondingly, their baseline fee negatively impacted if they can’t produce the required improvements.

SLA Driven – It is common in MSP contracts to find flow-down language from the client that dictates expectations around on-time fill percentage, assignment completion, compliance, turnover, etc. Sometimes, much to the chagrin of the suppliers, these are both unrealistic and have financial penalties attached to them. So, if these metrics are so important, why couldn’t the MSP's take-home remuneration reflect the accomplishment of these same goals, without the traditional fee or that fee at a reduced rate? What’s good for the goose is good for the gander, right?

Flat-Fee – Much like a BPO or SOW pricing model, other than push back from the MSP community, why isn’t this a viable pricing model? Yes, the contract would have to clearly delineate the roles and responsibilities of the MSP and certainly factor in the size, scope and sophistication of the program, but I see this model as having great potential. After all, we often see a single-markup-for-all-locations pricing model for suppliers in the name of “making it easier to budget.” So, why not the same with MSP fees, maybe with contractual caveats reflecting any substantive changes in the program or MSP responsibilities?

Markup Based – Let’s be brutally honest, the MSP fee as a percentage of sales, as opposed to markup, causes plenty of confusion. Not only do many suppliers not realize that the impact on their markups is considerably higher than a fee number based on revenue, but some MSPs don’t seem to understand this either and others use the supplier’s ignorance against them to portray their cost to the supplier as lower than it actually is. Thus, creating reduced supplier profitability than they presumed and a nightmare when trying to reconcile Accounts Receivable. Why not just make things apples-to-apples and state the MSP fee in terms of a markup? Not a brilliant suggestion on my part but I see so little of this.

Hybrid Model – using 2 or more of these, architecture something that is fair and benefits the client, the MSP, and the entire talent supply chain.

Again, I’m sure that some of these models, or combinations thereof, are in place somewhere. I, however, see very little of them and have worked in excess of 100 programs, evaluating nearly 5 times that number. Maybe it’s time that we rethink the way MSPs charge for our services or we might very well see the trend of inhouse programs accelerate, where they can justify the move not only on cultural grounds but also financial ones.

Want to learn more? Please contact Linden Wolfe, PHR, CCWP, VP of Onin Optimum MSP, at [email protected].