For many companies, labor costs represent a significant part of operating costs.  In an effort to more intelligently manage labor costs and leverage relationships with suppliers, organizations are searching for ways to accurately assess their contingent workforce spending and to streamline the on-boarding and off-boarding of this adaptive workforce. 


A Vendor Management System (VMS) has typically been defined as any internet-based procurement application that enables companies to manage the process of outsourced procurement of temporary and permanent staff. 


The cost savings from VMS programs seem seductive – immediate reductions to the bottom line and possibly a reduction in the number of intrusive sales calls from vendors.  However, the reality is often something quite different.  The VMS programs often treat people as a commodity – the lowest hourly bidder of temporary labor gets the job.  This creates a number of problems that are difficult to quantify in any feasibility study. 


-          There is no VMS system today which asks the supplier of temp labor for the contractor’s IQ.  Therefore, an 80 IQ contractor is considered as good as a 130 IQ contractor.  However, the 80 IQ contractor will get very little done in terms of productivity in a technology that requires some mental horsepower. 


-          If a contractor must supply the lowest hourly rate to procure an assignment, what does this do to the loyalty of the contractor and service supplied by the agency?  Will the temporary labor leave if a higher-paid position is available? Does this affect productivity? The solution to this piece of the labor puzzle is to pay market rate, not lowest rate.  There are a number of detailed studies that will provide good market rate data.  If the temporary agency supplying the labor has to endure cuts in rates, they will have to cut services.  Most agencies are forced to use very junior recruiters in order to meet the cost guidelines, with no qualifying of the talent supplied.


If the VMS system is administered by a temp labor agency, the complications increase exponentially. 


-          The “prime” temp labor agency will often charge the sub-contracting agency a percentage of the sub-agencies’ profits, making it impractical for the subs to continue providing labor.  This reduces the amount of IT temp labor available to the client.  In fact, some of the sub temp labor agencies will then consider the client to be a resource rather than a client. 


-          This evolves into a situation where the prime temp labor agency is the sole supplier to the client, with a few small groups working out of their basements with no G&A expenses and no services other than providing resumes (services from quality agencies include QA departments, in-person interviews, background checks, video email of interviews, and skill assessments).


-          The prime labor supplier will also often limit access of labor suppliers to project managers.  This reduces the effectiveness of the temp labor subcontractor since all information is never included on a written job description – “is this a team environment, or a single person working alone?  Is there much travel involved?  What is the end client environment like?  What are the deadlines?  What other skills would be nice to have?” This will increase cost since the hiring manager will end up interviewing candidates who may fit the generic job description but not the true position.


-          The prime temp labor supplier will also often hold the job description for several weeks, hoping to fill the position themselves.  The sub labor providers therefore know that they are only getting the “extremely difficult” job orders to work on. 


So, what has the risks a client company faces  with a VMS system? 



-          Limited access to the job market

-          High turnover of their workers

-          Less than satisfactory results from temporary labor

-          Slowed delivery in realizing benefits from new systems

-          Loss of key partners who have spent years learning the company and developing valuable business relationships

-          Disruption of the labor market supply chain



What’s the solution?  How does a company assure quality access to a strong, highly-qualified labor market?


The only way to attack this problem is to locate a good piece of vendor management software and run the system independently of any of the vendors using the system.  This will assure equitable treatment for all vendors.  Rates will take care of themselves through a process of supply and demand.  If you receive 3 resumes, all qualified, with a difference of $10 per hour, there is no reason not to select the lower cost person so long as this person is at market rate. 


This would also be the best way to assure that the VMS interfaces with the company financial systems.  Where does one begin?   The steps in a company’s successful use of a VMS   have been itemized below:



1)                  Keep it Vendor neutral


2)                  Keep the lines of communications open.  This is key!

a.       Vendors should be able to communicate with client management and hiring managers.


b.      Some of the VMS vendors evolve into mini-dictators.  They mandate that vendors cannot communicate with the end client. 


c.       Quarterly/twice a year vendor summit meetings are important.  This will provide valuable input from the vendor community.

3)                  Allow the cost savings to be a result in improved back office efficiencies instead of using the VMS systems to drive down bill rates to unworkable levels.  You get what you pay for!

a.        Resist the desire to establish multipliers and/or a rate card.   Many of the existing VMS systems were established by administrative staffing companies.  They have taken this business model and have tried to make IT and Financial staffing fit within this model.  The IT and Financial staffing model is much different and requires more services than the Administrative staffing model. 

b.      The fee for using the system should be in addition to the bill rate and shouldn’t impact the vendor.  

4)                  Don’t allow the system to overly reward quick submittals and the number of submittals.  Finding good people takes time and effort, and typically the best candidate isn’t one of the first submitted.   Anything else is just pushing paper.

5)                  Put Service Level Agreements (SLA’s) in place with the hiring managers.   A common impression of VMS’s is that they are nothing but black holes. Resumes are submitted and then feedback is never received. Managers should be required to provide proper feedback within a specified time period. Otherwise recruiters are reluctant to work on these openings.

6)                  Enter only real and thorough Job Orders.

a.       They must be funded and ready to be filled.

b.      Must contain details on what the person will be doing.

c.       Must contain details on the required skill set and the desired skill set.

d.      Must contain rate and duration.

e.       Must be kept up-to-date.  If you think you have enough submittals then put the position on hold.  Close the position once a candidate has been identified.

7)                  Advertise your success and let the vendors know what happened with a position.

a.       Let the vendor community know how many positions have been filled (weekly, monthly, quarterly)

b.      Let the vendor community know how a position was closed (was it filled by a vendor, was it filled internally, did the position go away …)


The foregoing comments identify a number of requirements for a successful VMS implementation.  Clearly, the implementation of a VMS can present the client company with a number of risks, usually associated with interrupting the company’s supply chain for contingent labor.  A successful implementation must be well managed not only during implementation, but on an on-going basis after implementation in order to achieve the milestones detailed above.