Why a vendor neutral MSP reduces cost – dispelling the costly “additional layer” myth

Vendor neutral managed services emerged primarily to offer an alternative management solution to agency staffing and master vendor models.

Specifically designed for organisations with more complex requirements - such as multi-site, multi-job category and niche roles – as existing master vendor service models simply were not able to address these levels of complexity. This is especially the case when staffing complexities are combined within an organisation, i.e. a mix of multi-site and multi role in one area of the business, and niche requirements in another.

New to managed services? Want to get up to speed on industry-specific terminology or understand the difference between a vendor neutral and master vendor service model? Click here to read our MSP definitions blog.

Since the vendor neutral model surfaced, many buyers have raised the question: “Why would I buy vendor neutral? Surely it just adds another layer that will cost me more?”.
The reality is vendor neutral models often work out less expensive than master vendor services.

Why? Two main reasons; 1) a vendor neutral model is entirely set up to procure services from external suppliers – it’s core to the way it operates; 2) a vendor neutral model is independent from the staffing supply element. This results in recruitment suppliers viewing the vendor neutral model as a route to market, and therefore they lower the cost of sale.

A master vendor is likely to be viewed as a threat, and with less opportunity for the supplier, meaning rates naturally increase.

But many years after the creation of the vendor neutral model, the same question is aired, particularly from buyers new to the category. If this is you, and you are unsure of the definitions of the types of service model we reference, do check out our explainer blog here.

In this article we will explore and compare the component parts of both master and vendor neutral models and their associated costs. We’ll also discuss the vendor neutral ‘additional layer’ question, what it really refers to and why it is often misconstrued.

The component parts of a master and vendor neutral MSP model

Supply is but one component of the service - whether vendor neutral or master - managed service models are typically made of three main constituent parts:

1. The procurement and management of the recruitment supply chain that provides the workers. With master vendor, this includes direct supply of workers by the master vendor itself
2. The technology and people that provide the interface between the end user and the supply chain, managing the transaction
3. The contract management team that ensure the service is delivered, the supply chain performs, client end users and central management teams get what they need and the exceptions generated through multiple transactions are managed effectively

Each element delivers a specific benefit:

1. The supply chain delivers the workers that an organisation need
2. The technology and people managing the transactional process control costs, demand, streamline process, manage risks and deliver visibility
3. The contract management team make sure the overall service meets customer objectives

Each service component has a cost

Agency supply costs

Recruitment agencies typically separate their staff into teams that focus on delivering spot business, and teams that support volume business.

Spot business are trained to ‘hunt’ out opportunity and broker deals that maximise margin revenue. Teams supporting volume business do not have to hunt out opportunity. They simply respond to orders placed with them and identify suitable candidates from their candidate database. They typically support or form part of a master vendor team within a recruiter or provide staff for vendor neutral models.

Both master vendor and neutral vendor providers engage the services of agencies. Master vendor models buy from their own organisation and external recruitment agencies. Vendor neutral providers only buy the services of external recruitment suppliers.

In either case, the rates secured are dependent on the service providers total buying power, but as we have explained previously, a neutral provider will secure more competitive rates than a master vendor provider.

Transaction management costs

Automation invariably brings cost and process efficiency. So its unsurprising that all models use some form of technology to manage the transactional process. The costs of this technology are normally absorbed within a management fee or within a % of the overall margin.

In vendor neutral models, many processes are automated with all suppliers treated equally, and controlled using uniform steps. Whereas, in master vendor models where a second tier of agencies is used to support capacity, there is a higher level of manual (people) intervention and therefore cost.

Contract management costs

The key difference here is the difference in service. A neural vendor provider will have a lower cost as the model relies more on technology to fulfil the service (and thus a smaller team are employed) to give hiring mangers self-sufficiency in the hiring process.
In comparison, a master vendor model is likely to have a higher contract management cost, due to the need for a bigger team (and thus higher employment costs) to support increased levels of involvement in recruitment activity.

The vendor neutral ‘additional layer’ is a misconception

So back to the original buyer question - “Why would I buy vendor neutral? Surely it just adds another layer that will cost me more?”

The truth is, this “additional layer” is a misconception - it’s a service cost you pay for either way, as both models assume an element of risk when priced for customers. Let’s explain that below.

Neutral vendor models price either on an expected number of hours running through the contract per annum or spend level.

If there is a significant opportunity to deliver savings, they may also offer risk and reward pricing with the volume of savings again linked to expected volumes. Pricing is usually presented as a separate element to agency charge / buy rates, which is where buyers see an ‘additional layer’ comment.

Master vendor model’s predicate a level of supply filled by their affiliated recruitment brands. They then apply a margin % to the buy rates offered by those brands to cover their contract management and transaction management costs and profit.

In this instance, cost are often presented as a single rate, with the management costs or the ‘additional layer’ effectively disguised. Its still there, just hidden within rate charges.

Summary

When considering the costs of managed service models, the adage ‘there’s no such thing as a free lunch’ is a useful yardstick. There are costs associated with the resources, technology and infrastructure required to deliver a managed service, which one way or another will need to covered.

The ‘additional layer’ is in fact a fundamental component part of any managed service. Without this, you lose visibility and control of spend, and the subsequent ability to generate value and efficiency.

In order to establish which model is most cost effective for your organisation, you need to properly understand the complexity of your staffing requirements. Comensura have supported hundreds of organisations with this discovery process, either as an initial consultation process or as an objective third party.

Contact enquiries@comensura.co.uk to find out more.