Covendis News and Views

VMS/MSP Best Practices Countdown: #5 One Size May Not Fit All

This is the sixth installment of a 10 part series on Vendor Management Solution (VMS) and Managed Services Provider (MSP) best practices. If you are considering implementing a VMS or an MSP or are trying to evaluate your existing program, stop back often as we count down the top best practices.

You’ve probably noticed that a common thread running through all of the best practices for VMS and MSP solutions is that, while technology is an important enabler of a successful program, it is almost always more important that the program AND the technology support the business by meeting business requirements rather than trying to rationalize away business requirements in favor of program or technology limitations. In our experience, it is more often the case that successful businesses are really “ecosystems” of diverse organizations that each both common and unique business requirements. Trying to ignore the unique requirements in order to implement a shared program or service often results in poor adoption and workarounds by managers, thus circumventing the very benefits the program was supposed to achieve.

Said another way, attempting to “harmonize” everybody’s requirements results in a solution that works for nobody.

For VMS and MSP programs, two scenarios that require a solution to be flexible and accommodate unique requirements include:

§        A company or organization has distinct and separate lines of businesses that operate autonomously and may even be divided into distinct legal entities. Examples include State and local government, large multinational organizations, and conglomerates or a portfolio of companies or consortia.

§        A company or organization that intends for a VMS or MSP to manage multiple “categories” of services. For example, a company intends for a VMS or MSP to be able to simultaneously manage a combination of IT, Admin/Clerical, Light Industrial, Engineering, and other services.

For either scenario above, clients may wish to ensure that the solution is able to separately configure for each entity within its “ecosystem”:

§      Organizations and Users

§    Approval Workflow

§      Supplier/Subcontractors

§      Pricing

§      Billing and Invoicing

§      Reporting

Some of the above, such as Organizations and Users are self-explanatory, especially where distinct legal entities are concerned. The ability to maintain different supplier or subcontractor pools for different organizations, geographies, or categories is also intuitive, since the services market is highly fragmented and no single supplier services all markets and all categories equally well or even adequately. Pricing is a bit more subtle. Of course different geographies or categories will have different pricing but managing different service categories may also require managing different pricing models. For example, a company or organization may wish to utilize market-based pricing for its professional categories but, because of collective bargaining or other considerations, may wish to implement a markup-based model for Admin/Clerical or Light Industrial, where wage rates may be predetermined. And while invoicing may seem like an area ripe for consolidation and standardization, different compliance or reporting requirements may drive different invoicing formats and the use of different underlying billing codes. Approval workflow may appear to be an area that can be easily standardized. But scratch beneath the surface and you might find it better to be able to establish a different workflow to engage a replacement receptionist than for a temporary Technology Director.

In our experience, the most successful VMS and MSP programs undertake the following as early as during the visioning stage of the program, long before even considering potential VMS or MSP providers:

§        Understand the business requirements and determine what can be the same across the organization/service categories, and what needs to be different

§        Design a minimum standard process from the above information, and enable the separate geographies, business units, entities, etc. within your organization to be able to “layer” additional process requirements or configuration on top of the minimum standard process

§        Take a step back and ask “Does the process (minimum standard plus “layering”) both achieve the program’s objectives AND support the business? If the answer is “no” or “maybe”, start by rethinking the minimum standard process and the assumptions that went into establishing it.

A word of caution: the best VMS and MSP programs are positive, constructive solutions that support the business in achieving objectives such as efficiency, accountability, or savings. Avoid utilizing the program as a policing mechanism or punitively. Such objectives often result in cumbersome processes that punish the many for the (potential) sins of a few. For example, while there may be a concern that a manager might preselect a specific supplier or contractor without evaluating other candidates, establishing too many controls is often counterproductive. Someone so determined to utilize a specific contractor or supplier is going to find a way around the controls anyway and now the process has become cumbersome for everyone else. We generally recommend the opposite: make the process as streamlined and efficient as possible, and a good VMS/MSP will be able to help detect undesirable behavior that can be flagged for follow up or training and other change management initiatives.

In summary, a one-size-fits-all VMS or MSP program can be a challenge to implement and adopt because it has difficulty meeting the diversity of requirements of the business. By spending time at the very beginning of the process to identify and understand the business requirements and then finding a flexible solution that can meet those requirements can improve the program’s success and vitality.

About Covendis

Since 1999, Covendis has helped companies and government organizations buy services more quickly and efficiently, including hourly, fixed-price, and contingency or retained services. Covendis clients have saved money, standardized and automated key processes, and gained greater visibility across the enterprise. Covendis, a vendor-neutral company, has over 10 years of experience managing Vendor Management Solutions (VMS) and Managed Service Programs (MSP) in North America, Europe, and Asia, and owns and operates a commercially available VMS.

 

Covendis Launches Social Media App For Job Opportunities

Covendis, the leading vendor-neutral Managed Services Provider (MSP) for the commercial and public sectors, has recently launched a social media application designed to broadcast contract and temporary opportunities to interested contractors and individuals.

As contract and temporary opportunities come available within Covendis, they are immediately posted to Covendis’ social media sites where interested contractors and individuals may review and apply for these positions. On Facebook, users may “like” the Covendis page to keep updated on new positions as they become available.

This innovative functionality enables Covendis clients to access and attract a large and growing independent contractor audience that are able to provide contract and temporary services. As the market for skilled workers grows tighter, companies and organizations are exploring novel ways to attract the skilled talent that they need to complete important work.

The Covendis Facebook page with job listings can be found here:

https://www.facebook.com/CovendisJobs

To learn more about the Covendis MSP program and how we may be able to enable your contingent workforce strategy and help you better manage your contractors and consultants, please contact Covendis at 1-866-COVENDIS (1-866-268-3634) or send an email to info@covendis.com.

About Covendis

Since 1999, Covendis has helped companies and government organizations buy services more quickly and efficiently.  Covendis clients have saved money, standardized and automated key processes, and gained greater visibility across the enterprise. Covendis, a vendor-neutral company, has over 10 years of experience managing Vendor Management Solutions (VMS) and Managed Service Programs (MSP) in North America, Europe, and Asia, and owns and operates its own technology platform.

VMS/MSP Best Practices Countdown: #6 How To Approach Market Based Pricing for Professional Services

This is the fifth installment of a 10 part series on Vendor Management Solution (VMS) and Managed Services Provider (MSP) best practices. If you are considering implementing a VMS or an MSP or are trying to evaluate your existing program, stop back often as we count down the top best practices.

In a previous installment, we discussed why rate cards don't work in professional services, particularly IT services. This is because, unlike some other categories such as admin/clerical or Light Industrial, professional services are generally not commodities, and the diversity of the skills and experience required of certain positions is too broad to place into "buckets" of rate cards.

Proponents of rate cards may argue "If the rate cards are too broad, they just need to be made more granular" or "For niche or specialized positions, simply establish an exception process." These statements are making our argument for us: while rate cards may be made more and more granular, they may be made so granular as to become unwieldy and unable to keep up with a rapidly changing market such as IT. And an exception process is essentially an attempt at market based pricing but can only be used under certain circumstances.

Others may argue that rate ranges could be used, only to find out that, given a range of rates, suppliers will generally submit only at the highest end of the range. This is explained by the way companies recruit candidates: when a requisition is posted, suppliers will take the rate, calculate their desired margin and overhead and then advertise the position based on the implied underlying wage rate. What incentive do they have to recruit candidates at the lower end of the range which might either reduce the quality of candidates, or reduce margins, especially when they are competing with other suppliers?

For those looking for a viable market-based alternative to rate cards, there are some obstacles to overcome:

§      Implementing an efficient and effective mechanism for obtaining market-based pricing

§      the concern that without limits, rates will rise uncontrollably

§      the concern, especially from procurement organizations, that cost savings will not be measurable

The stock exchange is a good example of an efficient market that technology has made more efficient. Some attributes of the stock market that enable its efficiency include

§      Detailed standardized company information and reports, allowing buyers and sellers to make informed decisions (e.g. annual reports, prospectuses)

§      A real-time technology platform that allows buyers and sellers to efficiently interact (e.g. real-time electronic stock exchanges)

§      Rules that ensure transparency (e.g. that no party has an unfair information advantage - No insider trading!)

Adopting market-based pricing for professional services requires similar attributes:

§      Service requests (requisitions) need to have sufficient detail on the requirements such as scope, qualifications, and experience so that suppliers may properly evaluate the opportunity and submit quality proposals or candidates

§      Proposals should also be structured or standardized in a way that facilitates objective evaluation (scoring would be even better)

§      The MSP/VMS should be able to facilitate real-time, open and transparent transactions, including posting of requisitions, communication of clarifications, standardized requirements gathering, proposal submissions, evaluation, and award

To address the issue of control, an MSP, enabled by the VMS, will be able to flag certain transactions for further review or approval. This allows organizations to implement appropriate controls and oversight, while enabling the operating entities a high degree of flexibility and autonomy.

The program should also ensure a level-playing field, where all suppliers receive information simultaneously. A best practice for an MSP is to not just allow but to facilitate communications between parties while discouraging and preventing inappropriate contact that allows certain suppliers with an unfair advantage, usually to the detriment of the buyer. In our experience, it has been rare, but certain suppliers have been disbarred because they simply cannot operate in an environment of fair and open competition and seek unfair advantage.

There are a number of other things that can get unbalance the playing field and potentially derail open competition. Some questions to ask of your current program:

§      Are some suppliers allowed to receive the opportunity (requisitions) before others?  For example, how effective would the stock market would be if some participants were able to buy and sell before others?

§      Do some suppliers have greater access and communications with hiring managers, i.e., have access to better information than other suppliers? What would happen if only certain investors were given detailed information on companies and other investors kept in the dark?

§      Are some suppliers allowed to have higher rates or markups than other suppliers?

In summary, market-based pricing enables organizations to obtain the highest available professional services at market competitive rates while capturing available savings opportunities. The prerequisites to implementing market-based pricing include an enabling, real-time VMS, and policies and procedures that ensure fair and open competition within a robust and flexible supplier network.

 

About Covendis

Since 1999, Covendis has helped companies and government organizations buy services more quickly and efficiently, including hourly, fixed-price, and contingency or retained services. Covendis clients have saved money, standardized and automated key processes, and gained greater visibility across the enterprise. Covendis, a vendor-neutral company, has over 10 years of experience managing Vendor Management Solutions (VMS) and Managed Service Programs (MSP) in North America, Europe, and Asia, and owns and operates a commercially available VMS.

VMS/MSP Best Practices Countdown: #7 What is the Optimum Number of Suppliers to Include in a VMS or MSP Program?

This is the fourth installment of a 10 part series on Vendor Management Solution (VMS) and Managed Services Provider (MSP) best practices. If you are considering implementing a VMS or an MSP or are trying to evaluate your existing program, stop back often as we count down the top best practices.

Most VMS and MSP programs don’t include enough suppliers and there are plenty of reasons why. From an administrative point of view, there is a lot of work involved in contracting and managing a large supplier network, especially when many of the suppliers are small businesses. Also, the conventional wisdom for strategic sourcing is to reduce the number of suppliers, aggregate the volume and then bid out the volume to extract the most competitive rates. So it makes perfect sense that organizations have tried to reduce the number of suppliers with whom they have contracted. One Fortune 10 financial services institution we worked with reduced that number down to 6 suppliers for over $250MM in annual IT staffing.

But what many companies don’t realize is that if there aren’t enough suppliers, many positions will be subcontracted or otherwise outsourced, and since there is less control under many subcontracting arrangements, there may be negative implications on both quality and price. In our experience, many organizations are unaware that their positions have been subcontracted, even if subcontracting is prohibited.

There are a number of reasons why the right number of suppliers is higher than you might think:

§      The staffing industry is highly fragmented

§      There are no economies of scale and may even be diseconomies of scale by reducing the number of suppliers

The Staffing Industry is Highly Fragmented

According to our analysis based on a number of industry sources, the staffing industry is highly fragmented, with the 10 largest suppliers accounting for about 25% of the market, and the next 84 that are over $100MM in revenues accounting for another 25% of the market. So the 100 largest staffing companies account for about half of the market!

The staffing industry is also highly regionalized, with many specialty and regional firms, so depending upon the specific category (e.g. IT, Admin/Clerical, Light Industrial, etc.) and the location, the number of qualified firms will vary.

No Economies of Scale

As described earlier, the conventional wisdom in strategic sourcing is that aggregating volume with fewer suppliers will result in savings. The problem is that the industry and process don’t necessarily support this theory. For example, the largest costs for staffing suppliers are wages and statutory costs, and these do not decrease with increases in volume. Another large area of costs is commissions. I had a frank conversation with the President of a large IT staffing firm and he was fairly adamant that even if we could make his administrative costs go down to zero, commissions to recruiters and account managers would remain high. The process of recruiting is highly individual, and recruiters will tend to focus on positions where they can maximize their rates and commissions. It is true that the recruiting process in temporary staffing does not necessarily require a lot of overhead, but almost certainly requires one-on-one involvement by recruiters and account managers. Our analysis of hundreds of placements reveals that it is the smaller companies that have lower overhead costs and can offer candidates the highest wages while keeping their billing rates low.

So What? What is the Problem with Subcontracting?

For the reasons listed above, when the number of suppliers is reduced or somehow limited, positions are subcontracted, often without the client’s knowledge. So what? As long as the position is successfully filled, why should anyone care?

There is nothing inherently wrong with subcontracting, as it is a normal business practice. There are a few reasons why organizations should take a closer look at subcontracting, and how the best manage it.

The primary reason is economics. When there is another party involved, the “pie” needs to be divided between more parties. This generally results in one of two things: a) the pie has the get bigger, i.e. the bill rate goes up to accommodate the additional parties or, b) each party gets a smaller slice of the pie, which usually means that the candidate is offered lower wages for that particular position. Since it is the candidate that is performing the work after the placement is made, organizations end up either paying higher rates for the same quality candidates or risk candidate quality in order to fill positions at the same rates as non-subcontracted positions.

Other reasons include reduced accountability and reduced controls. For example, if an organization has requirements for insurance, policies and procedures, since subcontractors are not party to the same agreements, how are those requirements enforced? If certain metrics are measured or reported, how are those metrics reported for subcontractors?

The Optimum Number of Suppliers and Other Recommendations

The optimum number of suppliers is going to depend upon such things as the category of service, the specific positions that need to be filled, and where those positions are located. As a general rule of thumb, a program of about $10MM in annual spend in a professional services category such as IT is going to require at least 24 suppliers. There are going to be some “generalist” suppliers as well as some suppliers for niche skills and possibly a few sole proprietors that work independently and provide highly specialized services. However, the exact number of the supplier network will shrink and grow as the market changes. Creating a highly flexible supplier network based on market conditions is where an experienced MSP can add significant value. As the market becomes more competitive, the supplier network can be expanded to ensure quality. When there is an oversupply of skills, the supplier network can be reduced. And in either case, the experienced MSP will ensure that the onboarding and off boarding process is streamlined and that the organization’s requirements are met by all suppliers within the network, even subcontractors.

A few questions to ask:

§      How many suppliers, including subcontractors, are actually involved in the program and if subcontractors are involved, how are requirements applied and enforced?

§      Would there be economic, quality or other benefits in contracting directly with a larger number of suppliers, including those that are currently subcontracting?

§      Is the current supplier network flexible enough, i.e. if we had to expand or contract the supplier network, what effort would that require?

About Covendis

Since 1999, Covendis has helped companies and government organizations buy services more quickly and efficiently, including hourly, fixed-price, and contingency or retained services. Covendis clients have saved money, standardized and automated key processes, and gained greater visibility across the enterprise. Covendis, a vendor-neutral company, has over 10 years of experience managing Vendor Management Solutions (VMS) and Managed Service Programs (MSP) in North America, Europe, and Asia, and owns and operates a commercially available VMS.

VMS/MSP Best Practices Countdown: #8 Fixed-Price vs Hourly Based Professional Services

This is the third installment of a 10 part series on Vendor Management Solution (VMS) and Managed Services Provider (MSP) best practices. If you are considering implementing a VMS or an MSP or are trying to evaluate your existing program, stop back often as we count down the top best practices.

If you are considering a Vendor Management Solution (VMS) or a Managed Services Program (MSP) you are probably already looking at including one or a number of Hourly based services categories such as IT, F&A, Admin/Clerical and a others. Also called "Staff Augmentation", the concept is that you need some temporary help or expertise, and are seeking to augment your staff or team with individuals on a temporary basis. There are certainly efficiencies to be gained by implementing a VMS or MSP solution, but the overall benefit may be modest, since the model is not transformational, ie, it is essentially a recruiting process and the management, supervision, and risk are the same as before.

Leading companies and organizations are looking at ways to transform the model by focusing on outcomes rather than hours, thereby, shifting some of the risk and management responsibilities to their contractors. By doing so, contractors become partners rather than recruiters, and the model is turned on its ear; where the overarching incentive is to deliver these outcomes ahead of schedule and under budget rather than trying to maximize rates and hours. You have probably already observed that the individuals putting in the most hours on any project are generally the contractors paid by the hour.

Instead, companies or groups of companies are engaged, who are responsible for sourcing and managing their own teams, and delivering modules that have predefined specifications and pricing. It's often a win-win scenario. The primary benefit to the customer, especially one that is operating lean, is that some project management and risk are shifted to the contractor, who must successfully deliver or forego payment. The contractor that successfully delivers the module or project early is able to improve their margins and utilization.

While the concept is pretty straightforward, incorporating fixed-price, deliverables-based, or milestone-driven projects is going to require transformational changes to:

• The skills and capabilities of the MSP
• The process and technological requirements of the VMS
• The profile of the contractor/subcontractors pool (number and characteristics) and how they are managed.

The Skills and Capabilities of the MSP

Today, many MSP and VMS companies are staffing companies or have their roots in staffing and staff augmentation. This makes a great deal of sense for hourly-based work, where managing and overseeing recruiting and screening are important capabilities. The capabilities and expertise required to source and manage deliverables-based or milestone driven (DBMD) projects is a lot different, especially since the stakes are much higher. Typical staff augmentation engagement in IT can range from $25-$250K on an annualized basis. Project, on the other hand, can range from $25K to $10MM or more! First, the MSP must be able to facilitate cross-functional teams in order to help define what the successful deliverables will look like, how they will be measure and evaluated, and how they will be priced. Second the MSP must be able to facilitate market organization, ie to successfully publicize the opportunity and facilitate the formation of teams and joint ventures between companies and groups with the requisite skills and experience, enabling a robust set of proposals. The MSP must have experience and expertise in managing the evaluation and selection process to ensure that the best qualified and highest-value proposal is selected. Finally, the MSP must have experience in managing risk and mediating change orders and disputes that may arise in large projects, especially where large teams of individuals are involved.

The Process and Technological Requirements of the VMS

The enabling technology, the VMS, must also be able to support the process, which is very different from managing time and expense bills. For example, the VMS must be able to manage the milestones themselves, including the tracking, submission, approval and payment of milestones, along with the management of a holdback (or retainnage) of funds to help mitigate risk, and the facilitation of a change order process (discussed above) as the scope of deliverables within large projects will change as the project progresses.

The Profile of the Contractor/Subcontractors Pool and How They are Managed

Finally, the contractor/subcontractor pool must be dynamic; depending on the project requirements, the number and types of firms and teams qualified to submit proposals will vary greatly. A successful MSP will facilitate the sourcing and organization of the contractor pool in order to obtain the best available proposals for a given opportunity. An efficient and effective process will encourage future participation. One side benefit is the ability to encourage and participation by small, boutique firms that generally have a high degree of experience and expertise, but do not have the bandwitdth to participate in laarge, drawn-out RFPs.

A Case Study: Integration for the Oregon Health Insurance Exchange

Covendis recently worked with the Oregon Department of Human Services (ODHS) on a project to design, develop and build over 125 required interfaces for the Oregon Health Insurance Exchange (OR-HIX). This was anticipated to be a large, multimillion dollar undertaking. Since there was a short timeframe mandated by the federal government but many of the interfaces had not yet been identified, ODHS was reluctant to onboard contractors on an hourly basis where the risk for the project would be high and also could not spend several months to a year on a traditional RFP. ODHS wanted to engage a contractor that had expertise in developing the interfaces, would have project management capabilities and would be able to share the risk in the project. ODHS also had a budget established and wanted to be able to pay for successful delivery of each interface to address both project and budget risk.

Covendis worked with DHS to develop a framework that would enable ODHS to accomplish its objectives of managing the project and budget risk while enabling the awarded contractor to receive progress payments for successfully completed work. Covendis also helped to develop a change order process that would enable the parties to discuss and manage the unknown elements of the project, without drastically changing its scope or nullifying the contract. Finally, Covendis was able to facilitate the submission and evaluation process.

The entire process, from opportunity posting to award, including a number of onsite oral presentations, took only 6 weeks, instead of the 9-12 months it would have taken for a traditional RFP process. The successful proposal was also nearly half the estimated cost of the next best proposal due to the competitive bidding capabilities of the Covendis VMS, a savings to the state of several million dollars! And the Covendis VMS is now managing over 400 deliverables for the project that will be paid only when successfully delivered to the State, reducing risk and also encouraging the contractor to finish ahead of schedule.

In summary, leading companies and organizations are including the capabilities to manage deliverables-based or milestone-driven (DBMD) engagements as part of their MSP programs to reduce project and budget risk.  When evaluating MSP solutions for IT or any other professional services categories, it is important to ensure that the MSP and underlying VMS are able to successfully source, track, and manage these engagements.

About Covendis

Since 1999, Covendis has helped companies and government organizations buy services more quickly and efficiently, including hourly, fixed-price, and contingency or retained services. Covendis clients have saved money, standardized and automated key processes, and gained greater visibility across the enterprise. Covendis, a vendor-neutral company, has over 10 years of experience managing Vendor Management Solutions (VMS) and Managed Service Programs (MSP) in North America, Europe, and Asia, and owns and operates a commercially available VMS.

IT Project Opportunity: State of Oregon Health Insurance Exchange (HIX) Integration Open for Proposals

Covendis, the State of Oregon’s Managed Services Provider (MSP) invites potential subcontractors interested in submitting proposals for Oregon’s Health Insurance Exchange.

As stated in a previous posting, Oregon Health Authority is developing a Health Insurance Exchange (HIX or Exchange) that will create a modular, reusable IT solution. This project is called HIX-IT, and is funded by a grant from the Center for Consumer Information and Insurance Oversight (CCIIO). For small businesses, citizens shopping for insurance coverage, and health insurance carriers, the Exchange will provide a market place for a variety of insurance options and access to federal insurance premium tax credits. The Exchange will provide its customers with seamless access to information, financial assistance and easy health insurance enrollment.

The project, expected to be the first of its kind to be managed through an MSP and VMS, is expected to last through 2013, and contemplates having a responsible subcontractor develop the internal and external interfaces to the HIX using the Oracle SOA Suite. The Covendis MSP will manage this fixed-bid contract, including approximately 480 estimated deliverables, review and acceptance, invoicing, and progress payments via its Vendor Management Solution (VMS).

By utilizing Covendis' MSP and VMS solutions to manage this large, fixed-price project, the State of Oregon expects to streamline the procurement process while reducing costs and mitigating risks.

Some key dates for this opportunity include: 

• All questions due by June 7, 2012 at 4:00 p.m. PDT
• A conference with project principals is anticipated to be scheduled on June 7, 2012 at 1:00 p.m. PDT 
• Answers to written questions shall be posted on or around June 8, 2012
• All proposals are due by June 18, 2012
• Oral presentations (if necessary) will take place on or around June 26, 2012

Minimum requirements for interested subcontractors include: 

• Three (3) years development experience with the Oracle products listed with emphasis on Oracle OSB and SOA products
• Three (3) years of experience in the development of IT systems for the government sector
• Demonstrated balance of IT project management and technical experience necessary to provide the full range of expertise required to successfully deliver the required interfaces

Interested parties should contact ormsp@covendis.com for more information.

About Covendis

Since 1999, Covendis has helped companies and government organizations buy services more quickly and efficiently, including hourly, fixed-price, and contingency or retained services. Covendis clients have saved money, standardized and automated key processes, and gained greater visibility across the enterprise. Covendis, a vendor-neutral company, has over 10 years of experience managing Vendor Management Solutions (VMS) and Managed Service Programs (MSP) in North America, Europe, and Asia, and owns and operates a commercially available VMS.

VMS/MSP Best Practices Top Ten Countdown: #9. Why Rate Cards Don’t Work in Professional Services

This is the second installment of a 10-part series on Vendor Management Solution (VMS) and Managed Services Provider (MSP) best practices. If you are considering implementing a VMS or an MSP or are trying to evaluate your existing program, stop back often as we count down the top best practices.

Covendis has implemented a number of VMS and MSP programs over the years, and an issue that everyone seems to struggle with is pricing, particularly with rate cards. In its basic form, a rate card is a predetermined rate (or rate range) for a standardized position title or skill set for a specific unit of work (e.g. hourly, daily, weekly, monthly, annually, by-the-piece, etc.). Rates for these standardized position titles or skill sets may also vary by level (e.g. Expert vs. Non-Expert), geography, supplier, etc.

By way of background, Covendis has a lot of experience managing rate cards. For example, for a Fortune 10 financial services institution, Covendis successfully managed over 11,000 rate cards for hundreds of positions across several skill tiers and geographies. We’ve also managed global as well as supplier-specific rate cards, rate cards with rate ranges, and rate cards with exceptions based on certain criteria. We’ve managed rate cards for Information Technology, Admin/Clerical, Light/Heavy Industrial, Engineering, Scientific, and other categories. You get the picture; we’ve seen a lot of rate cards over the years.

So why are rate cards so popular? In a nutshell, they provide a lot comfort:

• Pricing can be highly complex. Rate cards provide a seemingly logical and organized way to purchase (and charge) for services
• Rate cards seem familiar, especially to organizations that have implemented salary and benefit grading or banding
• For companies seeking to control costs, rate cards are thought to limit excessive rates paid for certain services thus eliminating “maverick” spending

• For firms or individuals that provide consulting services to help control costs, rate cards seem to provide a way to compare pricing between suppliers and to calculate estimated and actual savings

This all sounds really good, right? So what is the problem with rate cards? There are a number of issues with rate cards (some have even been the topic of Nobel Prize-winning research) but most can be distilled down to one of the following:

• The use of rate cards encourages reduced quality of services

• Rate card pricing cannot keep pace with market rates

• Rate card pricing cannot effectively accommodate the specialized skill requirements inherent in professional services

The use of rate cards encourages reduced quality of services

No matter how granular or specific the rate card, rate card pricing is based on the notion that, for a specific skill set or position, pricing can be grouped (e.g. mean, median, mode, percentile, etc.) to a specific rate or rate range. In Information Technology (IT) for example, the rate card for a Java Developer may be $75 per hour. This rate may have been established by using salary or rate surveys or benchmarking for similar positions placed within the last 12 months. Assuming that the data is accurate and that the positions used for the salary surveys are comparable (and that is a very big assumption), it should be reasonable to expect to successfully engage a Java Developer for about $75 per hour. And by implementing the rate card structure, the executives are comforted that out in some far flung outpost of the organization, someone isn’t engaging a Java Developer for $1,000 per hour!

But here’s the problem: Among the Java Developers with similar backgrounds, experience, and skills, some are going to be great, others good, and others perhaps not very good at all. Those that know that they are good or even great also know that their capabilities enable them to obtain higher rates than the $75 offered and will seek other opportunities. Those that know they are not as capable and cannot normally command a rate of $75 will be only too happy to work at the rate card rate. An economist might call this “adverse selection” which is just a fancy way of saying that the better candidates will seek better rates, leaving a lower quality pool to select from. And, in contrast to other categories such as Admin/Clerical or Light Industrial, the difference in productivity between two professionals with similar backgrounds can be dramatic.

Rate card pricing cannot keep pace with market rates

As discussed earlier, rate cards are often established on the basis of some historical survey, benchmarking, and/or analyses of comparable positions or skill sets. Rates may be refreshed periodically, usually in the best cases, annually.  In today’s fast moving, global economy, rates are constantly changing based on ebbs and flows in both the demand and supply of skilled professionals. So by the time the rate surveys are published and the rate cards refreshed, it is likely that the rates are at least one if not two or more years old.

One of our clients had rates established for their rate cards five years prior. For one position the rate card rate was about $65 per hour whereas the current market rates for that position was now about $45 or nearly a third lower!  In fact, we discovered that the supplier was able to recruit a candidate at much lower current market wages and was enjoying nearly a 200% profit margin. We’ve also observed the reverse case: A rate card established two years prior was much lower than the current market, thus limiting the pool of qualified candidates willing to consider the position.

So utilizing rate card pricing, even when the rates are refreshed often is like trying to drive by looking only through the rear view mirror. The problem is compounded by the fact that, because in most markets professionals are fairly mobile and can migrate to greener pastures, organizations usually only overpay for certain positions but are not able to underpay for these same positions when market conditions change, at least not for very long.

Rate card pricing cannot effectively accommodate the specialized skill requirements inherent in professional services

The other major component of a rate card, the position or skill set, is also usually based on some standardized grouping or average. For example, the rate card for the Java Developer, used in an earlier example, might call for a Java Developer with 5 years of experience working with the usual development tools on large, enterprise applications. The rate card rate (as determined through surveys and benchmarking analyses) is $75 per hour. Now what if the project called for experience with a very specific or emerging technology? Or for experience in a highly specific industry? The number of available candidates, available at that time, for that location is likely to be extremely limited, requiring a much higher rate than the average.

The Solution

Organizations have employed a number of strategies to address the inherent flaws of rate cards as described above. Expanding the number of position titles, skill sets, and levels to more and more granularity (remember we worked with a client that maintained over 11,000 rate cards!), establishing exception-based pricing mechanisms (e.g. “Hot Skills” pricing), and increasing the frequency of rate card pricing adjustments are common. Tactics such as “Rate Card Inflation” (using a higher level/higher-priced rate card for a lower-level position) are used to circumvent the pricing restrictions of rate cards and to address the gap between existing rate card rates and market rates.

 The net effect in many cases is that current or actual rates are markedly different from those initially established, or that there are so many exception-based rates as to make the standard rate card structure irrelevant and extremely costly to maintain and administer.

In our experience, all of the mechanisms used to circumvent or alter the rate cards are used in an attempt to obtain current market pricing for the services. If organizations were able to efficiently and effectively advertise position or skill requirements and then obtain competitive market rates, they would be able to abandon rate cards and obtain the highest quality services at any given budget. This is the ultimate objective for Vendor Management Solutions (VMS) and Managed Services Programs (MSP). A robust VMS, paired with an effective MSP, provides organizations with a market-making mechanism for professional services.

For our clients that have moved away from rate cards or gone straight to implementing a market-based pricing model, if the candidate pool for a particular position is weak, they are able to increase the advertised rate to attract a better candidate pool. If there are many qualified candidates for a particular position, they are able to use our VMS to negotiate rates downward. To address potential  abuses, anomalies in the bidding process are identified and either flagged or routed within the VMS for further review and approval. Other pricing tools built into the VMS (to be discussed in future posts) have also helped to effectively manage rates when added to these MSP programs.

In summary, the use of rate cards or other flavors of standardized pricing for professional services, while initially attractive and logical, are inherently flawed. Rather than trying to triage a flawed system, leading organizations are able to leverage process and program improvements, enabled by technology, to obtain higher quality services at competitive rates.

 

About Covendis

Since 1999, Covendis has helped companies and government organizations buy and manage services better through the development of innovative VMS and MSP programs. Covendis has over 10 years of experience managing Vendor Management Solutions (VMS) and Managed Service Programs (MSP) in North America, Europe, and Asia, and owns and operates a commercially available VMS.

Covendis Encourages Information Technology Services Subcontracting at the 2012 Governor’s Marketplace Conference

Covendis, the State of Oregon’s Managed Service Provider (MSP) for Information Technology Services recently participated in the 10^th Governor’s Marketplace Conference held in Salem, Oregon. The conference, held annually, focuses on supporting economic prosperity and equitable opportunities for Oregon businesses. Covendis’ IT MSP program fully supports this focus, with approximately 1 in 3 opportunities awarded to certified OMWESB firms (Oregon Minority Women and Emerging Small Business).

Yunhwa Tak, Covendis’ Oregon Associate, presented information on how the IT MSP and its online system makes it easy for the State to engage firms for IT Services, both hourly and project (deliverables) based, including but not limited to:

• Streamlined (online) review of opportunities

• Streamlined (online) proposal submission and screening

• Electronic bill presentment and payment

• Reduced subcontractor costs (e.g. reduced insurance costs)

Covendis’ IT MSP minimizes the “friction” of business transactions with the State, enabling businesses large and small to focus on delivering quality IT services better and faster than before.

Ms. Tak also discussed how easy it is to get started with Covendis and the IT MSP. If your firm provides IT services and you would like to apply to become a subcontractor, please complete the contact form on this site (http://www.covendis.com/contact.html) or send a request to ORMSP@covendis.com.

 

About Covendis

Since 1999, Covendis has helped companies and government organizations buy and manage services better through the development of innovative VMS and MSP programs. Covendis has over 10 years of experience managing Vendor Management Solutions (VMS) and Managed Service Programs (MSP) in North America, Europe, and Asia, and owns and operates a commercially available VMS.

About the Governor’s Office of Economic & Business Equity

Economic & Business Equity promotes economic opportunities for Oregon's disadvantaged, minority-owned, woman-owned, and emerging small businesses. We assist Disadvantaged Business Enterprises (DBE), Minority Business Enterprises (MBE), Women Business Enterprises (WBE), and Emerging Small Businesses (ESB) in the certification process, provide support and advocate on behalf of certified firms to government entities.

For more information, please go to: http://governor.oregon.gov/Gov/MWESB/index.shtml

VMS/MSP Best Practices Top Ten Countdown: #10. VMS and MSP Fees: Who Needs to Know? (Where’s the Beef?)

This is the first installment of a 10-part series on Vendor Management Solution (VMS) and Managed Services Provider (MSP) best practices. If you are considering implementing a VMS or an MSP or are trying to evaluate your existing program, stop back often as we count down the top best practices.
 
Covendis has participated in a number of surveys and proposals over the years for both VMS and MSP projects, and one of the issues that clients seem divided over is whether to have the VMS/MSP fees quoted separately from the rest of the proposal, particularly for MSP programs, where a single provider is to provide and manage hourly staffing services via a web-based vendor management solution (VMS).
The proposals range from requesting only a final bill rate to be charged for a particular position (e.g. a rate card), to itemizing all major underlying costs including such items as:

• Wages paid to the contractor
• Statutory Costs
• Benefits
• Overhead/Profit
• Fees (e.g. Administrative fees and/or VMS and MSP fees)

Perhaps interestingly, even when requesting a detailed breakdown, some proposals lump the VMS/MSP fees within the “Overhead” category. We propose a simpler way to divide the final billing rate as follows:

• Candidate Costs/Wages (Candidate)
• Recruiting Costs (Staffing Supplier/Subcontractor)
• Management Costs (VMS/MSP)

Aside from the fact that rate cards (specific rates or ranges of rates tied to specific positions) don’t work as intended (to be addressed in a future blog), there is no good reason not to have the VMS or MSP fees quoted as a separate line item on the proposal. The reason is straightforward: In order to evaluate the value (price vs. services provided) of the MSP services provided, the fees and the services should be clearly identified. Opponents argue: “So long as the final price you are charged meets your budget or expectations, why should it matter how the costs are divided?” However, even when the MSP is providing staffing services, it is imperative to break out the services and the costs. Bundling all of the services and costs together not only makes it difficult to evaluate value, but can create incentives and opportunity for reduced quality of services.

For example, let’s say you were evaluating 2 fresh food delivery services. You want to purchase 2 steaks to grill, set aside a budget of $40, and both services quote $40, including delivery. Either service should work, as the final cost to you is the same, right? Not so fast! One service charges $15 for delivery, leaving $25 for the steaks, and the other charges $3 for delivery, leaving $37 for the steaks. If both services ordered their steaks from comparable butchers, which service would be able to provide the higher quality steaks? Everything else being equal, which delivery service would you purchase from? Seems obvious, right?

However, the above scenario plays out every day in MSP/VMS solicitations that don’t require that proposals detail the MSP/VMS fees. In fact, in a recent RFP, the winning proposer’s MSP fees were almost ten (10) times the average of the rest of the proposals. So while the billing rates proposed were about the same, in the winning proposal, the portion of the bill rate left for the individuals actually performing the work was among the lowest, if not the lowest.

In summary, when evaluating MSP services, one best practice is to clearly identify the MSP fees being charged for the requested services. It may be helpful to keep in mind that one of the main reasons to engage an MSP provider is to provide high quality candidates; once placed, it is the candidate that will do the work and provide the services. Therefore, the first step to maximizing your ability to attract and retain top contract candidates is to clearly identify where the fees you are being charged are being allocated across the three following categories:

• Candidate Costs/Wages (Candidate)
• Recruiting Costs (Staffing Supplier/Subcontractor)
• Management Costs (VMS/MSP)

Where would you allocate most of the fees? Be wary of a provider that tells you that you don’t need to know or that it doesn’t matter. It matters. Ask yourself: What quality steaks do you want delivered?


About Covendis

Since 1999, Covendis has helped companies and government organizations buy and manage services better through the development of innovative VMS and MSP programs. Covendis has over 10 years of experience managing Vendor Management Solutions (VMS) and Managed Service Programs (MSP) in North America, Europe, and Asia, and owns and operates a commercially available VMS.

To learn how a Covendis VMS or MSP might benefit you, please contact us at info@covendis.com

IT Project Opportunity: Oregon Health Insurance Exchange (HIX)

Covendis, the State of Oregon’s Managed Services Provider (MSP) will soon be releasing a request for information (RFI) to potential subcontractors interested in submitting proposals for a project regarding the State of Oregon’s Health Insurance Exchange.

Oregon Health Authority is developing a Health Insurance Exchange (HIX or Exchange) that will create a modular, reusable IT solution. This project is called HIX-IT, and is funded by a grant from the Center for Consumer Information and Insurance Oversight (CCIIO). For small businesses, citizens shopping for insurance coverage, and health insurance carriers, the Exchange will provide a market place for a variety of insurance options and access to federal insurance premium tax credits. The Exchange will provide its customers with seamless access to information, financial assistance and easy health insurance enrollment.

The HIX-IT and DHSM projects are leveraging a suite of Oracle products to build their solutions.  These products include:

• Oracle Siebel Public Sector
• Oracle Policy Automation
• Oracle WebCenter
• Oracle SOA Suite
• Oracle Master Data Management

The project, expected to be the first of its kind to be managed through an MSP and VMS, is expected to last through 2013, and contemplates having a responsible subcontractor develop the internal and external interfaces to the HIX using the Oracle SOA Suite. The Covendis MSP will manage this fixed-bid contract, including over 100 estimated deliverables, review and acceptance, invoicing, and progress payments via its Vendor Management Solution (VMS).

Minimum requirements for interested subcontractors include:

• Three (3) years development experience with the Oracle products listed with emphasis on Oracle OSB and SOA products
• Three (3) years of experience in the development of IT systems for the government sector
• Demonstrated balance of IT project management and technical experience necessary to provide the full range of expertise required to successfully deliver the required interfaces

Interested parties should click here to register for the RFI.

About Covendis

Since 1999, Covendis has helped companies and government organizations buy services more quickly and efficiently, including hourly, fixed-price, and contingency or retained services. Covendis clients have saved money, standardized and automated key processes, and gained greater visibility across the enterprise. Covendis, a vendor-neutral company, has over 10 years of experience managing Vendor Management Solutions (VMS) and Managed Service Programs (MSP) in North America, Europe, and Asia, and owns and operates a commercially available VMS.