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A Brief Historical Recap of Our Industry
Key Takeaways
• The .Com boom and the changing business model of the Big Five and traditional system integrators
• The birth of MSP and the evolution of traditional temporary staffing organizations
• Corporate America’s rapid adoption of services procurement software and VMS & MSP programs
• Low barriers to entry into the marketplace and intense competition
• The Rising star of the CPO
• Fragmented purchasing process
IT contract labor plays a critical role in enterprises across the globe. Walk into any Fortune 2000 company today and you will quickly discover that the Information Technology department-a once non-revenue generating back office cost center-the focal point of discussion for innovation creation and competitive differentiation. Today CEO’s are increasingly turning to their CIO’s not to just simply reduce costs but to help their organization’s gain a competitive edge, grow and prosper. As a result, those very same organizations are turning to ITSP’s to provide them with a reoccurring fresh supply of best-in-class talent to help them develop new products, enhance existing products and take them to market faster than their competition. These organizations are also turning to ITSP’s for best-in-class talent to help them carry out their strategic corporate initiatives whether it be the implementation or upgrade of an ERP or CRM system, the architecture and design of their Services Oriented Architecture or server virtualization for cost reduction.
The .Com Boom and the Unbundling of the “Big Five”
Shaping the marketplace early on were the “Big Five” (soon to become the “Big Four”) tax auditing and accounting firms. While the function of information technology was gaining popularity in corporate boardrooms, the director or vice president of IT was still reporting into the Chief Financial Officer, not the CEO. As a provider of tax and accounting services, the “Big Five” had the ear of the CFO, which made offering IT systems integration consulting an easy sell. Having tight relationships with the Chief Financial Officer during the .com boom allowed the “Big Five” (along with traditional system integrators) to dominate the marketplace. They provided a number of services but largely focused on managing and delivering large, complex ERP, CRM and eCommerce initiatives. This included providing an end-to-end, turn-key solution where they would provide the client with project management over-site; their own proprietary software development methodology, technical expertise and knowledge transfer to meet the project’s goals and objectives. However, their business model was flawed. In fact, these firms were known for their switch and bait tactics. Senior Level practitioners would sell multi million-dollar deals to the CFO and agree to deliver a project, for example, an SAP implementation. However, once a contract was sold that senior level practitioner was off to sell the next contract. In exchange of that senior level practitioner, the firm provided the client with a much less experienced project manager who would be responsible for meeting the service level agreements outlined in the contract. Further reducing the chances of the project manager’s likelihood of meeting those SLA’s was their project team, typically made up of fresh college graduates. Under this model it was the responsibility of the project manager to ensure their under-skilled team who lacked the necessary experience to deliver the project on time, to specification and under budget.
What began to happen in the marketplace was a high percentage of IT projects were failing. Depending on which report or publication you read, approximately one out of every three IT projects failed and the “Big Five” (along with others) consulting firms took the heat for it. As a result, executives running IT organizations responsible for delivering strategic IT projects became very nervous about outsourcing large complex projects to external consulting firms. In response and in large mass, they began to bring their projects in-house and to build out their PMO’s (Project Management Office). project management would now become an internal core competency within corporate IT departments. This fundamental shift significantly impacted the IT professional services industry. Rather than asking an external consulting firm to own and manage their projects, customers decided they would eliminate that risk altogether and take full ownership of their projects. Under this new model the client began hiring their own internal full-time project managers to manage their projects. With project management now a core competency within client organizations, clients no longer needed a consulting firm to manage their engagements. Instead, clients wanted the ability to hire the expertise on a “just in time” basis. As a result, client organizations would now lean on IT staffing providers to provide them with the consultants needed to carry out key tasks such as business analysis, design, development and software quality assurance. This model provided client organizations with the flexibility to “scale up” with IT consultants/contractors during the peaks of a project and “scale down” once the project or a phase of the project was completed. It also allowed the client to own and manage their projects on their terms. We refer to this fundamental shift in the marketplace as the “the unbundling of the Big Five.”
In response to this shift in the marketplace, the “Big Five” and traditional systems integrators began offering staff augmentation services. While they’re mostly known for and continue to provide large-scale project management of strategic and complex projects, the reality is that these organizations now generate a significant portion of their revenues through IT staff augmentation. As a result, ITSP’s have to compete with these firms. The challenge for ITSP’s is understanding exactly how to compete against these firms. For example, these organizations don’t employ traditional sales representatives or a sales force but rather technologists and practitioners. As a result, ITSPS’s often are competing against “partners” from these organizations who spent years as a software engineer, architect, program or project manager. Clearly that would give them the competitive advantage when it comes to hands on IT and systems implementation experience. They’re practitioners who have spent their whole careers working with business executives including CIO’s. We will explore this further in the implications section of this document and how ITSP’s can overcome this challenge.
Today the “Big Five” is known as the “Big Four” due to either mergers or the systems integration and consulting arms of these tax & auditing organizations breaking off to become separate entities.
The Birth of Master/Managed Service Programs & The Evolution of Traditional Temporary Staffing Services
As the role and function of information technology within corporate America and across the globe has become more strategic and critical to the growth of organizations, the growth of IT staffing providers has soared. Other developments have also reshaped the marketplace. One such development is the birth of the MSP program (master/managed service program) where one staffing (or managed service provider) vendor supplies the client organization with all of their contingent labor staffing needs across the enterprise, manages all secondary suppliers, (other staffing vendors who supply temporary workers to the program) ensures regulatory compliance, enforces rate compliance and provides overall management of the program. Up until this point relationships between ITSP’s and client organizations centered primarily between the sales representatives of the ITSP’s and the IT leadership within the client organization. The expansion of the MSP has changed that. With MSP’s, IT staffing providers (and suppliers to the program) are typically required to communicate through the Managed Service Provider (usually a competitor) responsible for managing the program on behalf of the client, thus cutting off communication with the hiring managers. Additionally, these MSP programs have been offered and managed by the more traditional temporary staffing service firms such as Adecco, Manpower or Kelly Services and others. Historically, the core competency of these organizations has been in providing temporary staffing for non-professional, entry level positions including warehouse workers, administrative assistants, receptionists and manufacturing assemblers. Today however, these organizations now provide a full portfolio of staffing services ranging from entry level to professional temporary staffing services in such disciplines as information technology, engineering and scientific & life sciences. Leveraging their sheer size and scope, and their newly formed professional staffing services capabilities, these service providers have become uniquely positioned to offer master service programs. What seemingly happened overnight, IT staffing providers not only had a whole new set of competitors (big five, systems integrators, traditional staffing firms), but an entire new industry in MSP programs to compete against. Further altering the competitive landscape of selling professional services is the fact that the MSP providers are no longer just selling to the human resources leadership team, but to the purchasing and procurement leaders within client organizations. In fact, the rise of the CPO within corporate America can largely be attributed to development and expansion of MSP& VMS programs along with procurement services and workforce management software.
Proliferation of Procurement Services Software and Vendor Management Programs
Services procurement applications are designed specifically to help companies buy services such as temporary workers, consultants, outsource vendors, ad agencies, legal services, and similar categories. Services procurement products are a subset of a larger eProcurement market of software that purchasing employees use to make purchases of goods and services.
During the mid and late 1990’s we saw the growth and continued adoption of procurement software. Enterprises were purchasing products like Ariba, Oracle I-Procurement, SAP Supplier Relationship Management and others. Enterprises purchased these software applications to automate the process and leverage their spend in the purchasing of goods including travel, office supplies and marketing materials among others. For several years the focus had been solely on goods, not on services. But more recently, under the leadership of the Chief Procurement Office we are now seeing organizations utilize procurement services or workforce management software for the purchasing of professional services. Enterprises are now purchasing software products such as IQ Navigator, Click Commerce, FieldGlass and others to help them purchase temporary employees, consultants, outsource vendors, and legal services. According to a study conducted by Forrrester Research titled Services Procurement Grows Despite Obstacles, purchases of services represent 30%-70% of all company spending yet the services procurement market today is only a $200 million-dollar market. This is very bad news for ALL professional services organizations including information technology staffing providers. Why? Because there is such a huge opportunity for organizations to achieve significant cost savings through procurement services software.
As noted earlier, traditional, administrative temporary staffing service providers pioneered the MSP model and that model continues to play an increasingly larger role in client organizations. The proliferation and adoption of procurement services software has led to next generation MSP programs. These are vendor management systems or VMS programs. VMS programs can come in slightly different flavors and variations depending on the client’s needs but in general a VMS program is a managed service program in which there is a procurement services software tool used by the client organization for the procuring of contract labor. A team (either internal to the client or an external service provider) manages the program including the participating vendors. An increasingly popular flavor of VMS is that of a VMS vendor neutral program. For example, if Adecco is managing the program for ABC Company, Adecco is not allowed to participate in supplying ABC Company with temporary workers. The purpose of this is to create a fair and even playing field for the approved vendors supplying the program and to eliminate any potential biases or preferential treatment by not allowing the vendor who manages the program to submit candidates to open job requisitions. Under this model there are numerous benefits to the client, the most obvious being cost reduction by creating a competitive vendor environment. But as we will see in the implications and analysis section of this paper, the VMS model has a negative impact on client organizations as well as ITSP’s and all professional services organizations.
Fragmented Purchasing Process for Professional Services
According to the Contract Labor Benchmark Report published by The Aberdeen Group, responsibility for managing contract labor programs is shared between four main groups: Human Resources (30%), Procurement (22%), the business unit hiring manager (18%), and Finance (14%). This fragmented process is significantly impacting how ITSP’s must go about selling and marketing their services. As mentioned earlier in this document, the relationship historically has been between IT leadership within the client organization and the sales representative from the ITSP. Depending on the client organization, when it came time to sign a contact, the sales representative would work directly with their client to authorize a contract and purchase order. With support from their client, the sales representative might also work on the contract with human resources or the legal department. Today however, it’s not enough to have a strong relationship or relationships with the IT leaders of your client company, even if for years you have been the incumbent vendor. Under the CPO’s agenda to extract excess expenses and reduce costs, change must be implemented across the enterprise. Change, as it relates to ITSP’s and all professional service providers comes in the form of new human resource and procurement policies that enforce IT hiring managers to only work directly through their HR and procurement office for the hiring and management of contingent labor. Once granted the autonomy and freedom to work with the service providers directly to get the services they need to effectively run their business, IT hiring managers and the like no longer have that ability due to these policies. We’re now seeing cases where relationships are cut off in favor of procurement driven initiatives, even with vendors who are in good standing with both the IT hiring managers and leadership from the human resources organization. We will take a closer look at this in the following section.
Implications & Analysis
Key Takeaways
• Little or no client loyalty
• Eroding profit margins
• Inability to differentiate
• Service commoditization
• Low morale & high turnover
• Poor quality of service for client organizations
The Impact of MSP, VMS and Procurement Services Software is Significant
With the proliferation of MSP and VMS programs ITSP’s are feeling the pain in a variety of areas. With most MSP and VMS programs, communication between sales professionals and their clients-the hiring manager-is either completely terminated or reduced to a bare minimum. Sales professional watch all of their hard work to establish the relationship wither away. Under this model, sales representatives can no longer negotiate with their client let alone develop client partnerships. Furthermore, procurement departments within client organizations dictate standard markups (what the ITSP’s can charge the client on top of the hourly pay rate) that all participating vendors must adhere to. In other words, they are dictating the value of the service that is being offered before the opportunity has even presented itself or a solution has even been proposed. Client organizations are able to do this because there are so many vendors in the marketplace to choose from, and in many markets supply often outweighing the demand. To the demise of ITSP’s, many professional services organizations, mostly traditional administrative staffing services but also ITSP’s, are willing to agree to work under these terms. As with selling any product or service, once one provider lowers their price and attempts to undercut the competition, commoditization soon follows. IT staffing providers thus are stuck with a dilemma, continue to provide services to the client organization through the program under unrealistic terms and conditions or walk away from the account. If they choose to supply through the program then they have a significant internal sales pitch to make to their delivery (recruiting) team. Seasoned recruiters (as well as seasoned sales professionals) tend to shy away from working with MSP and VMS programs because of the follow program characteristics:
• Unrealistic or unknown bill rates
• Very low gross profit margins, client imposed markups
• Inability to communicate directly with the client or anyone at all
• “Shoot and Pray” strategy: Recruiter submits candidates to a “black-hole” (the VMS system) & they prey they get feedback on their candidate
• Lack of collaboration with the client, reduced to a commodity
• Each job order is a “beauty contest” or online auction with many vendors actively working on each order.
• Long sales cycle and high percentage of cancelled/unfilled orders
• Little or no candidate feedback to suppliers
• High risk for recruiters to “loose face” and “goodwill” with their consultants
It sounds like the perfect solution for client organizations. But as we will examine below, there are hidden pitfalls for them as well.
MSP & VMS Programs Negative Impact On Client Organizations
For the hiring manager, they too are frustrated now that their “hands are tied” because they can no longer participate in what have been productive client-partner relationships. The hiring managers have the most to lose under this new paradigm yet they tend to be the ones forgotten and left out of the decision making process. After all, it’s the hiring manager's who have to produce work product and deliver projects. It’s the hiring managers who are held accountable for the work product. By definition doesn’t that make them uniquely qualified to decide where and how to procure the services they need?
Even though traditional global temporary staffing service providers who often sell, manage and supply MSP and VMS programs, they experience high turnover and lack the internal expertise to consistently deliver the caliber of talent that today’s information technology leaders need. Their sales and recruiting teams simply don’t have the knowledge or the network that the core IT staffing providers have. Traditional temporary staffing firms also don’t have the business model to support these programs because they operate on very thin profit margins. As a result, their field offices are staffed to a bare minimum where they can barely support their existing book of business, let alone be a supplier into a high volume program. Their staffs are also made up of recent college graduates who lack the necessary skills and experience. These firms serve as the “training grounds” for college graduates entering the industry. After they learn the basics and develop a foundation, they soon discover that higher compensation and better career opportunities await with the niche and boutique IT staffing providers. They move on and the training cycle within the field offices of the traditional temporary staffing service starts over. It’s also very difficult for any staffing organization to develop a compelling compensation plan that can drive the behavior to support these programs & offer sufficient incentive for the sales and recruiting teams. When talking with recruiters we found that they dedicate the least amount of their time to orders associated with an MSP or VMS program. And that is what it ultimately comes down to, time and money. Top performing sales and recruiting professionals are driven by money and there are only so many hours in a day for them to achieve their goals. They simply cannot achieve their goals by supporting VMS and MSP programs. The performance metrics and personal financial goals of sales and recruiting professionals of all professional service organizations are at odds with the goals and objectives of an MSP and VMS program.
The Chief Procurement Officer drives VMS programs. It’s the job of the CPO and their team to reduce costs and optimize spend management. While they certainly have an obligation to deliver quality programs and to keep their internal customers satisfied, their mbo’s (management by objective) are tied to cost reduction, not quality assurance. The more they save the company money the more they earn at the end of the year. As a result, the procurement professionals who drive and manage these programs are often too excited and focused on the cost reductions they have achieved from over negotiating with the suppliers than to focus on quality of service. They are also too far removed from the reality of the transactions and activity that takes place day to day within these programs and therefore don’t understand the real challenges that the managers and individual contributors who carry out the work face each day. We’re not suggesting they don’t want a quality program, but we are suggesting that they tend to be blind to the fact that there is real, hard work involved in recruiting IT talent and that the recruiters for these organizations expect to be compensated for that work. There does come a point when a supply chain becomes over-optimized. Not until after a program has been implemented does it come to the attention of the CPO from their internal client, the Chief Information Officer and their support cast that the program is of poor quality.
Inability To Differentiate
While participating in a MSP or VMS program strips away the ability for an ITSP to differentiate from the competition, it’s still a business decision that they choose make. After all, ITSP’s don’t have to participate in these programs. So what about accounts where there is no MSP or VMS program? Sales professionals continue to struggle and often fail to differentiate themselves within these accounts. How do we know? Because everyday while prospecting into accounts sales people are directed to, and “stuck” selling to human resources and purchasing/procurement departments even though their strategy and goal is to sell directly to the IT hiring managers. They fail to differentiate themselves. If they had, they wouldn’t be trying to claw their way out of the “HR bucket”, instead they would be sitting down with the leadership of the IT organization discussing their key initiatives. The challenge is sales professionals tend to lead with, and focus on selling features and benefits, often tailored to human resources and procurement professionals.
Competing against “big four” and traditional systems integrators presents an entirely different challenge for IT staffing providers. For one, most ITSP’s are not aware of the fact that they are often competing against these firms. When IT staffing providers find themselves in a competitive situation with a big four consulting firm however, they tend to shy away because they assume they can’t win. The reality is that most professionals who work for an IT staffing provider simply don’t understand the strategies, business and delivery models deployed by these firms. If they did they would recognize that there are numerous ways in which to sell against these firms as well as to partner with.
Recommendations For Action
Key Takeaways
• ITSP’s need to have a well defined business model and go-to-market strategy
• Sales professionals must understand the inner workings of MSP and VMS models to effectively sell around or within these programs
• Sales professionals must be able to sell value to executive business & IT stakeholders
• Sales professionals must have multi-faceted sales skills including the ability to effectively sell IT solutions and sell to human resources, legal, and procurement executives
Define Your Business Model & Strategy and Commit To It
ITSP’s must understand that MSP, VOP (vendor on premise), procurement services and workforce management software and their associated VMS programs are here to stay. ITSP’s now must decide: Are they going to be a supplier to those programs? Are they going to run and manage those programs for their clients? Are they going to try to sell around these programs and capture “maverick” spend? Or, will they simply pass on those accounts and build an entirely different business model and go after a different market segment? These are not easy questions or decisions to make as each has a number of pro’s and con’s and implications to be considered. Yet we find many ITSP’s struggle with these decisions and as a result, they straddle back and forth as they contemplate the issues, thus not committing to a specific strategy but rather trying to do a little of everything.
If it is your strategy to sell around these programs and capture the maverick spend or to only work with client organizations where you can have the autonomy of one-on-one relationships with your client then sales professionals need to be able to quickly and accurately identify where within the contingent workforce management strategy continuum the client resides. For example, does your client have a decentralized process for hiring contract labor? Do they have a preferred supplier list? Do they have a primary supplier? Is there is a master vendor? Is there, or are they considering implementing a master/managed services program? What is their ERP system and what is their strategy for utilizing the supplier relationship and/or procurement functionality within their ERP application? Have they automated the process for hiring goods such as travel and office supplies? What is their purchasing process for hiring IT consultants? Are they considering implementing services procurement or workforce management software to manage their continent labor workforce? Will there also be a VMS program? The ability to quickly decipher the answers to these questions is critical to effectively qualifying accounts. The ability to identify and understand exactly where the client organization stands and the direction they are headed within this continuum will enable the sales professional to quickly devises a sales strategy.
ITSP’s also need to commit to the market in which they are selling into. It has often been the case that ITSP’s tend to chase any piece of business they can get yet they lack the delivery capabilities to support such a strategy. The field of information technology is too wide and extensive and technology changes and evolves too fast for any ITSP to effectively support this strategy. Not only does this strategy take away the ability for an ITSP to differentiate, but it further commoditizes their service offering. ITSP’s must commit to a strategy and build their sales & service delivery capabilities around that strategy.
Lastly, in order to have success as a supplier to an MSP or VMS program, ITSP’s must have a strategy and cost effective delivery model. For example, participating in high-volume VMS programs where the opportunity is significant but time to market is of the essence, ITSP’s must deploy flexible internal staffing models with dedicated resources and the appropriate skill sets in order to support such programs without negating their high-value client relationships.
Understand The Inner Workings of MSP & VMS Programs
In order to effectively sell around these programs, sales professionals must understand the inner workings of how these programs work including who purchases them, their features and benefits and the challenges to deploying and managing them. For example, understanding the change management issues that commonly occur when deploying these programs can provide ITSP’s with the necessary insight to effectively sell around these programs as well as to sell an MSP or VMS program.
Sales Professionals Must Learn to Effectively Sell Value to Executive IT & Business Stakeholders
In order to maintain the integrity of gross profit margins and not succumb to the pricing pressures and mark-up’s associated with MSP and VMS programs, sales professionals must understand the value of their service offering and be able to clearly articulate that value to executive stakeholders. It is no longer good enough to simply fill pre-defined, budget-approved job orders for hiring managers and human resource professionals. Instead, sales professionals must understand how to uncover critical business issues within client organizations, turn those issues into sales opportunities and demonstrate how their service offering can solve those critical business issues. This requires selling to and building relationships with functional business line executives in addition to selling to the information technology, procurement, legal and the human resources community. Until they can do that, sales professionals and ITSP’s will struggle to maintain current GP margins let alone grow them. Gross Profit margins are a direct reflection of the value ITSP’s deliver to their clients.
In order to differentiate, sales professionals and ITSP’s must understand and come to terms with the fact that their service offerings by and large are no different than their competitors. While each service provider might have different business processes, practices and procedures for accomplishing the same outcomes, their service offerings are the same. Instead, individual sales representatives should focus on becoming an expert or thought leader within a given area in order to distinguish themselves from other sales professionals within the marketplace. This includes but is not limited to enhancing their business acumen, functional industry knowledge and technical competence. There are a variety of ways to achieve this, especially with the ease of use and availability of Web 2.0 technologies and information available on the Internet. In addition to becoming an expert, sales professionals need to learn how to have meaningful business discussions with senior management within their client organizations. In order to craft a solution for a client, sales professionals need to understand the clients goals and objectives, their strategy and underlying tactics for achieving those goals and how the implementation of technology will help them carry out their strategy. When sales professionals engage in this level of dialogue with their clients, the client changes their perception of them as a sales person, their organization and their service offerings. The sales professional is no longer viewed as an “order filler” simply chasing orders but instead a problem solver offering real solutions.
Conclusions
With the proliferation of MSP and VMS programs ITSP’s are feeling the pain in a variety of areas. While client organizations see many of the benefits upfront associated with MSP and VMS programs, we expect in due time that client organizations will soon see the shortcomings of these programs. One such example is the recent bankruptcy of Ensemble/Chimes where a number of providers to those programs are wondering if and when they will get paid for their services. There is financial risk for the suppliers to support these programs.
Critical to the future success of client organizations are the agendas that will be carried out by the Chief Information Office and the Chief Procurement Officer. Now that the CIO has a seat in the executive boardroom and is being asked to create innovation and competitive advantage by utilizing technology, they will need consistent access to best-in-class talent. The Chief Procurement Officer on the other hand continues to rise in the enterprise as they deploy a variety of cost cutting, demand management and supply chain optimization initiatives. So the question begs, will these VMS programs be able to deliver the talent that the CIO needs on a consistent basis to carry out the organization’s strategy? And if they can consistently deliver the talent, at what price will it come? How long will ITSP’s and all professional service organizations be able to operate within these models and still remain profitable and return value for their shareholders? The answer to these questions will certainly have a significant impact on the future of ITSP’s. Until then ITSP’s will have to improve upon selling value.
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