How do you build an effective MSP cost model as part of the bidding process?

So many different questions arise when it comes to building an effective MSP cost model as part of the bidding process.

Just a handful of the ones we get asked by customers include: How do we do it? What do we include? What information do we need? What scenarios do we need to consider? How do we construct it so that our Executive Board can understand the cost benefit? How do we construct a commercial spreadsheet for a bid so that it’s effective and allows us to compare different suppliers accurately and objectively? And the list goes on.

To help, we’ve compiled our Top 10 Tips for Building an Effective MSP Cost Model

Gather your data first so that you’ve got a very detailed base model that you can use as a means of comparison. Use this base model to evaluate different suppliers in terms of overall cost
Know what your contingent worker population profile looks like and understand its source breakdown
Provide suppliers with detailed data around your current processes, current headcount and spend levels to allow them to put forward their best bid
Keep your pricing spreadsheet as simple as possible because it allows you to easily compare the total cost of agency fees for different suppliers. The more complicated you make it, the more variances you get
Keep your tech costs / Vendor Management System (VMS), a cloud-based software platform to manage your contingent workforce and service providers, separate
If changing supplier keep your savings from migration of incumbent agency workers separate
Get a commitment from suppliers of what percentage of direct fulfilment they’ll deliver as a minimum
Use specific terminology to understand what things mean when talking to suppliers
Consider using a percentage markup as it allows you to work with suppliers in a flexible way they recognise
Only compare pricing on things you will ask the supplier to contractually commit to. Don’t get too blindsided by pay rates that they’re submitting and the differences between pay rates because, at the end of the day, if a supplier isn’t being asked to contractually commit to those, they can put anything in there. Then, once they start delivery, they can ultimately charge what they want.

The importance of baseline data

Before you even think about building an MSP cost model, the first question you really need to be answering is: “What do we spend now?”

Simple as that may sound, a lot of businesses find it extremely challenging to understand what they spend in real terms, whether that be as part of an ad-hoc supply arrangement, a PSL or MSP.

“What you want is a very clear baseline of exactly what you’re currently spending,” said Alistair Haigh, Rullion Commercial Solutions Executive Director.

“If you don’t have your base costs, it’s impossible to work out what your cost savings are going to be because you don’t know what your starting point is,” he said.

What you want is to be able to construct a pricing model that you can take to your Board that illustrates what the total cost savings are going to be if you go down a certain route.

“That’s why looking at your current spend and breaking that down in terms of pay that goes directly to your contractors / temporary workers, agency fees, expenses, statutory costs (holiday pay, NI, pension, etc.), other costs such as medical/drug/alcohol testing, screening costs, DBS checks that all get charged back to you, is an imperative part of the process,” Alistair added.

What does your worker population look like?

You need to know what your contingent worker population profile looks like and to understand its source breakdown.

For example, what price are you paying for workers that are sourced directly by your supplier/s and what price are you paying for workers that are sourced by you and payrolled by your supplier/s?

If you want to build a cost model that applies tenure reductions over the duration of an assignment you need to look at the original start date of your workers as well your typical assignment duration.

The more data you pull together about your current contingent worker population, the better, including its:

Size
How many workers are currently on assignment
Their role
The name of their line manager
The location of where they work
Their pay rate
Their statutory costs
The breakdown of the charge rate
The source of those workers
Their start date
How long they’ve been on assignment
What percentage is sourced by your MSP provider and what percentage is sourced by 2^nd tier suppliers etc.

Having this information allows you to build up a robust picture of the entirety of this worker population and to make decisions based on that.

You can ask your current MSP provider or PSL / ad hoc supply chain to provide you with all this data in writing.

Starting to build a business case

You now have a good basis point to start building your cost model and to start conveying that information to your board around cost savings. It also means you can start to compare different suppliers when you go through the bid process.

For example, if you don’t know what the average tenure of your workers is or if you don’t know what the source breakdown of your workers is, how do you know which pricing submission from different suppliers works out best for you?

One supplier might give you a slightly higher rate for resourced workers than another supplier but have a lower payroll rate. If a large proportion of your workers are payrolled, you might be better off selecting the supplier that’s gone with the lower payroll rate but the higher resource rate.

If a supplier gives you a hefty discount after six months and again after 12 months, how do you know whether that’s going to be more beneficial or less beneficial than a supplier who gives you a better price from day one, but then gives you much smaller discounts over the course of the workers’ assignments?

Include as much detail as possible

Evaluating different pricing models is tricky if you don’t understand what your worker population looks like in detail, which in turn makes building an effective cost model virtually impossible.

“Ideally you want to be able to build a base cost model and then just drop the different pricing elements into it and have it automatically calculate what the total cost is going to be in terms of agency fees for the delivery of a solution,” said Alistair.

This information is not only in your interest from an MSP cost model evaluation perspective, but it also allows suppliers bidding for your MSP to price their bids as competitively as possible because they are equipped with all the data.

Questions, among others, suppliers want to know the answers to upfront tend to include:

What’s the pay rate to your workers?
What is the breakdown, by role, of the number of workers that you have?
What is the average duration of an assignment?
How many workers are assessed as inside IR35 / outside IR35?
What roles do you typically utilise contingent workers for?
How many of your workers are payroll?

During any bid process, suppliers will typically build a P&L (profit and loss) statement so that they can put their best and most price efficient costs forward.

If a lot of that detail around current costs, current headcount and spend levels is missing, suppliers will have to make assumptions or to work on worst case scenarios and can become very cautious when it comes to pricing.

The more data that you therefore provide suppliers with allows them to put forward their best bid and limits the number of further negotiations / discussions around pricing post contract award.

You’ve got your base costs, now what?

Once you’ve got your base costs, you can build a very simple cost model incorporating this data.

The next step is to build a pricing spreadsheet which includes all the charges your MSP bidders have given you, including the markup they will charge for payroll if you have identified the candidates, as well as what discount in agency fees they will give you after a specified tenure period. You can then take these figures and input them into your cost model to see what the total cost of delivery is for each bidder. This then gives you a very clear cost comparison of the different suppliers.

You are now in a strong position to support a business case for moving from one supply model to another (e.g., PSL to MSP) or from moving from one MSP supplier to another.

This is a simple exercise that is often only hindered by the fact that in many cases the original data is missing.

Keep it simple

Try to keep your pricing spreadsheet as simple as possible. The more complexity you add in, the more difficult it is to compare one supplier to another.

An example of keeping it simple is to ask suppliers to price their VMS / technology costs separately.

One of the reasons for doing this is you might want to consider buying your own VMS platform.

It also easily allows you to see how much cost you can save if you opt not to have your supplier provide the tech.

Sometimes suppliers factor their VMS costs into their agency margin. Only by pricing the VMS outside of their agency margin can you really compare what one supplier charges over another. Although these often only equate to small percentage differences, over a significant spend, it creates significant cost variances. It’s also the only way to know what reduction you’re going to get if you purchase your VMS separately.

Something else to consider in terms of tech

When procuring an MSP there are nearly always tech implications to be considered.

For example, when considering changing suppliers, you might want to keep the VMS product you currently have and assume a new supplier can take on the running costs of that. What you might not be aware of is that your current supplier has a contractual agreement with that VMS platform, and you may not be allowed to simply use the same system via another supplier.

If you’re a large enterprise client and you want to have flexibility to move between different MSP suppliers over a long period time, but you also want to keep the exact same VMS platform with all the customisations and configurations that have been made for you, then the best decision might be to pay for the VMS platform yourself. That way you will have the contractual agreement with the VMS provider, and you can change MSP providers without it having an impact on your tech platform.

Don’t forget about direct fulfilment

When you’re going through the bidding process you need all suppliers to commit to the percentage of direct fulfilment they’ll deliver as a minimum.

You also want to know what the markup will be for 2^nd tier suppliers and whether they will charge any additional markup for the management of those 2^nd tiers.

The importance of having this information from a cost model perspective is that 2^nd tier suppliers will charge considerably more than your MSP to deliver into your business.

For example, one provider might say they will charge 7% markup for workers that they source, but if they’re coming through a second tier, the markup is15%. Another supplier might say they will charge 6% for direct fulfilment and 15% for workers coming through their 2^nd tier. Initially the one that charges 6% appears to be the bigger cost saving, however, if they are only committing to 70% direct fulfilment via the MSP, whereas the supplier that is charging 7% is prepared to commit to a minimum of 90% direct fulfilment, then the latter works out considerably cheaper over the period because you’ve only got 10% of the suppliers charging you 15% as opposed to the other model where you’ve got 30% of your delivery coming in at 15%.

As well as asking what level of direct fulfilment your suppliers are committed to achieving, it’s a good idea to ask them what financial penalty they are prepared to commit to if they don’t achieve that minimum level of direct fulfilment. It’s all very well for a supplier to say they will directly fill 90% of all your roles but in real terms, if they start delivering 70% that will cost you. It is prudent to have a contractual element that specifies what the financial cost to a supplier will be if they don’t meet their minimum target for direct fulfilment.

Be fair

Remember, a supplier needs some time to deploy their account team and to start building up the talent pools that you need. This means they may not hit that 90% level from MSP go-live. Ask the question, “what’s the minimum level of direct fulfilment that you’re going to commit to supplying after six months and after 12 months?”

Fixed pence / pounds agency margin or percentage markup?

As a business you might be tempted to ask for a fixed pence or fixed pounds agency margin rather than a percentage markup from your suppliers.

The benefit to you: if there is significant wage inflation and your pay rate costs start going up, it doesn’t automatically mean that your supplier fees will go up too.

However, for most suppliers, delivering a fixed pence margin is problematic because there are too many unknown variables over the duration of the MSP contract, such as inflation and changes in legislation. Also, unless you provide suppliers with a great deal of data around what your current roles are and what the current pay rates are for those roles, they’re going to err on the side of caution to ensure they cover their costs. This means you will probably incur a higher cost initially as you’re asking suppliers to commit to a fixed amount for a considerable length of time.

Therefore, while fixed pricing may seem appealing, to get a good deal you need to put some mechanisms in place for reviewing that pricing on an annual basis, otherwise you are going to end up with suppliers submitting high prices upfront to cover their costs.

Using a percentage markup on the other hand, allows you to work with suppliers in a way such that if wage inflation increases their costs (finance costs, staffing costs, etc.), there is a mechanism for them to cover this with increased agency fees.

The importance of getting your terminology right when building a spreadsheet and pricing model

There is a difference between markup and margin.

Markup means suppliers will add a percentage to the total pay rate cost.

Margin means it is a percentage of the total charge rate.

In other words, if you have 7% markup and 7% margin, 7% margin will cost you more money.

You need to use specific terminology and to understand what things mean when talking to suppliers.

To make it simple, go for markup.

Markup for a PAYE worker will typically be applied to the total cost of supply of the worker. Elements that make this up are as follows: pay + holiday pay + National Insurance + pension + apprenticeship levy.

Markup gets applied on top of that.

Be aware of how that calculation is going be done. If you want it to be done differently, for example you just want to apply the markup to the pay rate plus the holiday pay and not the other elements, you will need to express that very clearly in your pricing model.

If you don’t, suppliers will assume the markup applies to all elements that contribute to that pay rate.

Breaking things down even further

To make things as simple as possible and to get real clarity around the breakdown of costs, you will need to build a model that looks at the following:

What suppliers will charge as a pay rate
What’s their markup for introduced candidates
What’s their payroll markup
What’s their markup for direct fulfilment for 0-6 months, 6-12 months, and 12+ months on assignment
What markup they’ll charge you for 2^nd tier suppliers for 0-6 months, 6-12 months, and 12+ months on assignment.

Once you’ve got these costs, it’s easy to drop them into any sort of pricing model that you have constructed and to be able to compare the different costs.

Contractual terms

Often overlooked but equally important to factor into an MSP cost model are the contractual terms you have in place with your current supplier/s in relation to your ability to migrate your workers from one supplier to another.

It’s easy to make assumptions about the cost savings you can make from migrating workers at the start of an MSP contract – whether that’s moving from one MSP to another or whether it’s moving from a PSL to an MSP – based on the difference in markup for the average worker charge rate.

However, that only works if your contractual terms allow you to migrate all those workers at no cost, which often isn’t the case. There will be clauses in your contractual agreement which specifies transfer fees and when they apply. There may be clauses within workers’ contracts that prevent them from migrating.

Understanding the contractual arrangements you have in place, at the start of the process, is crucial as it will have an impact on how much you can save by migrating those workers to another supplier at the start of an MSP contract.

Keep worker migrations separate

If worker migrations are going to be part of your cost evaluation, think about building two different cost models.

Migrations savings are a one-off saving that you will only get upon the change of contracts. Over a period of one to two years most of those migrated workers will no longer be with your business and it’s back to business as usual in terms of the breakdown of your supply.

On this basis, once you’ve got all the bids through, work out the total cost for each supplier based on your normal supply profile, excluding migrations completely.

Then do a separate pricing evaluation that looks at what benefit you get upfront from migrations.

A supplier might give you a very low fee for migrations which gives you a very big saving upfront but then over the duration of the MSP contract that supplier could end up costing you more money.

This way you can look at both cost evaluations independently of each other to understand what the differences in cost look like based on business as usual and what the migration costs are.

When you’re evaluating your pricing spreadsheet, you want to get to point where you have a series of base costs plugged in. Then, you can drop in all your suppliers’ markups and the percentage of direct fulfilment they have. At the end of it you’ll have a total number of the cost annually, or over the five or six years of an MSP contract, that you can compare between each of the suppliers.

Evaluating pay rates and pay bands as part of your cost evaluation doesn’t work – unless you can get suppliers to contractually agree to them

When building pricing spreadsheets, it can be tempting to ask suppliers to quote pay rates and pay bands for a wide range of roles and to build that in as part of your evaluation.

You will also probably evaluate a supplier who offers you a cheaper pay rate for the same role more favourably.

However, are you asking suppliers to contractually agree to those pay rates?

And have you honestly provided them with enough information that they can contractually agree to those pay rates?

Be very wary about building pay rates into your price evaluation model unless, during the tender process, you have provided the suppliers with a lot of detail in terms of job specs so that they can accurately price those day rates. Moreover, get a commitment from the supplier that says these pay rates will be fixed for the first 12 months of the contract. If suppliers are not contractually obliged to adhere to pay rates, they can completely disregard what they submitted once awarded the contract.

The reality is that all suppliers operate in an open market, and they will all ultimately end up paying the market rate for workers. Promising you much lower pay rates is pointless when they know the actual market rate is higher.

The best way to evaluate cost is based on what is constant and the same across all suppliers, and, most importantly, what you are going to ask them to contractually commit to.

You can ask a supplier to contractually commit to a markup. What they are unlikely to do is contractually commit to a pay rate, particularly given the levels of inflation and uncertainty we are currently seeing in the market.

Evaluate temp to perm pricing

Don’t forget to include suppliers’ price charges for transitioning temporary workers into permanent roles. Again, define this by the length of time that a worker has been on assignment prior to transitioning, 0-13 weeks, 13-26 weeks, and 26+ weeks so that you can build a cost evaluation of that.

Evaluate pricing for permanent hires

Although you’re going to market for an MSP provider that will predominantly supply you with temporary workers and contractors, there may be times they’re best placed to find you permanent candidates on an “as and when needed” basis.

That’s why it’s prudent to always include a price for permanent hiring within your pricing spreadsheet. The last thing you want is to be in a position where you’re negotiating that later, so get a commitment upfront. And it may be that you’ve got two suppliers who are very close to each other, and this might be a determining factor between which one you select.

Don’t make it all about price

Price is undoubtedly a big deciding factor of any tender process.

However, ensure that you balance pricing with a technical evaluation of your bidders.

This will give you confidence about what it will be like to work with them as a supplier, whether they will be a good technical fit for you as an organisation, and whether they will deliver for you within the timescales.

At the end of the day, price is one part of the evaluation.

But, if you start working with a supplier, and:

They don’t deliver
They haven’t got the candidates that you need
It takes longer to hire people than you would have ideally liked, so you end up having to pay overtime costs for other people.

You’ve got a problem.

Ultimately, what you want is for a supplier to deliver what you need as a business and at a price that you are comfortable with.

Struggling with how to build your MSP cost model? We can help. Contact us using the form below.