Everything you ever wanted to know about MSPs in Staffing
Dec 12th, 2018
What are MSPs?
Managed Service Providers or Managed Staffing Providers (MSP) are outsourced agencies that manage the procurement of contingent workers for large companies that spend over ~$25M in hiring contractors. MSPs program manage the process of sending requirements to the approved staffing agencies of the company. MSPs help buying companies with their staffing industry domain knowledge and experience from doing this for other companies.
Why do Companies use MSPs?
Unlike the old days, many large companies have decided that some tasks are better done when outsourced to specialists, so they can spend more time and effort on their own core competencies. Just as they don’t want to own trucks to ship goods or hire cooks for their cafeteria- outsourcing the hiring of contractors through staffing agencies to MSPs is natural, especially as the legal, HR, compliance regulations, and overhead involved in keeping abreast of all the latest changes in laws and regulations is too burdensone. MSPs also offer other benefits like reduced cost and better insights.
What does an MSP engagement look like for a client
For a given client, the MSP is a small team consisting of a PM who oversees the program, a few category specialists to make sure every open position is getting attention and administrative personnel to take care of paperwork of selected contractors and payments to staffing agencies. The MSP team uses a VMS system like Beeline to conduct all communication.
Who selects the staffing agencies in a MSP program
MSPs don’t select staffing vendors normally exclusively. They are usually given a list of approved staffing agencies by the client’s category manager for contingent staffing based on past performance, some strategic reasons or a selection of diverse vendors the client wants to keep. MSPs can sometimes influence the client to use their own vendors that they have had experience with or have niche skills or are diverse.
Does the MSP select the individual contractors from those submitted or is it the hiring manager?
No. The selection of contractors is done by the client’s hiring manager. The MSP’s role is like a gate-keeper and although they may be responsible for the quality or speed of sourcing, screening or selecting candidates, their role is like an enforcer. They'll stay out of the way if everything is working fine but if the program is not working well, they may start micromanaging the process and vendors, replace staffing agencies or advise the client on how to improve things.
What are the Pros of MSPs
MSPs make it easy for large companies to stay compliant with labor regulations as they distribute the cost of staying up-to-date with new regulations across many clients..
MSPs can be more knowledgeable about the staffing industry than most category managers as they do these activities for hundreds of companies.
MSPs can benchmark and keep vendors honest as they are aware of market conditions.
MSPs can also bring the new vendors to the program that they find from other programs.
MSPs even the playing field for staffing agencies by inserting themselves between hiring managers and staffing agencies.
MSPs can be good for payrolling pre-identified contractors by the client for very low markups.
MSPs can reduce costs for their clients by leveraging best practices and staffing market knowledge.
What are the Cons of MSPs
MSPs are not directly responsible for the candidate quality, rates, candidate selection and as such can only act as an overseer of the staffing program. If things go wrong they can lay the fault on the client of the staffing agency or the client.
MSPs commoditize staffing agencies whose only job now is to source candidates based on a common job description sent to multiple agencies at once. Staffing agencies often can't provide any extra value in understanding the requirements and often get no feedback on why their candidates are not making it. Many staffing agencies refuse to work with or just do the minimal amount required to stay as active vendors.
MSP's have caused staffing agencies with low cost offshore recruiting operations to do well. They can afford a lot more recruiters-and subcontractors- many working on contingent basis, pay their recruiters less, scrape jobboards, spam candidates as they are less worried about CAN-SPAM, and submit candidates with minimal vetting with the hopes of getting lucky with one of their submissions. While this is cost efficient for the MSPs and clients, it makes the contractor candidate experience really bad as can be seen from their comments about these staffing agencies.
MSPs can also unfairly benefit from learning about a staffing agency’s competitive secrets including its strategy of finding candidates, quality, rates, markups. The risk is that an MSP employee can join a staffing competitor in the program with all the insights and what makes another competitor successful.
When MSPs take their best performing staffing vendors from one program to another they could be doing a disservice to their client who may have groomed the staffing vendor. Having that staffing vendor now work for their competitor decreases the advantage the client company had.
The MSP is considered as the main vendor of the client and the staffing agency providing the contractor is a subvendor. In addition to being demoted and cut-off from the actual hiring manager, staffing agencies often face trouble getting visas approved in these situations.
What do MSPs charge?
At a typical Fortune 1000 company, the MSP charges a standard 2-5% of the Staffing Spend. This is added to the supplier’s invoice to the client. So the client (or contractors if you look at it another way) end up paying for the extra cost.
How profitable are MSPs?
Most MSPs are private companies or divisions of public companies so it's hard to say exactly. MSP’s contracts with the clients are volume (cost) based and not success (deliverable) based. Their focus is low risk-high efficiency and a small but assured margin. This is the opposite of their competitors- BPOs or consulting companies that take on staffing projects in an outsourced (SOW/deliverable) basis with a high risk-high variability- high reward strategy.
For example- If a company spends $100M/year to hire 1,000 contract workers, $3M of it goes to the MSP. The MSP will need a 5-10 member MSP team costing them ~$1M for a $2M gross margin and a $1M net margin.
What is the future for MSPs in staffing?
MSPs are very established in companies, so they are likely to stay around in one form or another. The structure of these MSP engagements could change very rapidly though as staffing companies trying to become MSPs themselves. Ont he other hand large outsourcing and consulting companies have been entering into the staffing space though SOWs to avoid the client's co-employment risks and allowing contractors to work for many years without having to take an artificial break for a few months. Other threats are Freelance Management Systems (FMS) and client companies themselves looking into self sourcing contractors. There is a lot of inefficiency and friction in this staffing space still and a great model is yet to emerge. Our guess is there will be multiple models working at the same time.