by Steve Knapp, Vice President, Consulting
In the 8+ years I have been in this industry, Managed Service Providers (MSPs) have been squeezed out of one-third of their per-deal-revenue.
Recently, I consulted with a large bank in the United Kingdom that was replacing their MSP for the third time in seven years. A procurement team member pondered, “Why do we fall out of favor with our providers every few years?” On the other hand, at a large MSP company, I heard employees routinely joke about how they have gone through four different ATS/VMS vendors in the last half dozen years.
Where is the Disconnect?
The cause of this fickleness is obvious to some and elusive to others. Vendors are often beaten up so much on price that it negated many of the gains made in quality performance. This is a common story in the industry, raising the question of whether it’s more costly for an organization to go through the tender and reimplementation process every few years. Wouldn’t it be better to build a long lasting relationship with a provider wherein both parties strive to achieve the same goals?
In short, the disconnect lies in a lack of alignment between vendors and procurers. Until they get on the same page, the vicious cycle will continue. Surely there are procurement and HR professionals who want that alignment – to go from tactical to strategic with their program; to have quality metrics be more important than cost savings metrics; to have the business beg for more.
The Risk and Reward Solution
For those of you who aspire to greatness and want to take your program to the next level, I propose a new style of MSP contract – risk and reward. The industry sees occasional, modest fee-at-risk contracts, but there are few examples of this practice operating at volume. Consider introducing a carrot and stick contract, creating a spectrum of fees based not only on volume of spend (the current standard) but also on quality metrics that align with strategic program goals.
To make this work, you need a palatable contract for both sides. The fee range must be small enough for vendors to accurately predict their revenue, while large enough to entice them to put their best people forward. Measurements must be comprehensive enough to achieve strategic goals, but simple enough to calculate metrics. Upfront this contract might require more work, so that both parties agree on terms. More effort may be required to manage these contracts, but the results can achieve enormous long-term savings and raise the bar on program quality.
A Case Study
I have seen this work with skilled industrial labor providers for a large oil company. The business had crucial goals like hands-on-tool time percentage, and safety objectives that had nothing to do with bill rate cost savings. A visionary category manager incorporated these metrics into performance-based contracts, helping to align the supplier goals to business goals. This quickly became the template for all of their suppliers and earned this category manager a swift promotion. Indeed, it was a win-win-win situation. The business was happy, the suppliers were happy, and of course, he was happy.
Change the Incentives, Raise the Bar
A tactical program has limited scope, basic processes, non-optimal adoption, a reactive and disengaged supplier marketplace, and constant turnover of your MSP providers.
A strategic program has demand management, value creation, global governance, best-in-class processes, full adoption, multiple categories, enterprise-wide scope and a proactive/engaged supplier marketplace.
To move from the former to the latter, consider incentivizing your MSP through a model that rewards achievement of these goals, and punishes failure to meet them. Make them want to do more for you and you will see the ROI in the long run.