The Case for Master Vendor Programs

May 28, 2015

In the mid-90s when managed service programs first started taking off in the UK, the purchasing decision tended to center around the merits of a vendor neutral proposition (VNP) versus a master vendor (MVP) approach.

Generally the vendor neutral approach won the day. The feeling was that having a good number of agencies that all shared equal status and were managed by a program operator who wasn’t also a supplier provided the best chance of finding the right candidates. It was also thought this approach prevented any single supplier from becoming too big; the competition would drive down costs. It was also easier to implement, and perhaps just appealed to the British sense of fair play. Many such programs were sold and several new operators established themselves based solely on this business model.

However, things have undoubtedly changed significantly during the past 20-plus years. For starters, candidate databases are now everywhere: LinkedIn, CV Search, Monster, Facebook, Job-site, CareerBuilder, and the list goes on and on. The Internet and social media have eliminated the challenge of finding a candidate record; the difficulty now is in selecting the right candidate record from all the background noise. With quick access to job boards, in-house databases and social media, candidates can be identified, qualified and contacted with a speed that was just not possible in the mid- 90s. In short, you no longer need multiple suppliers to ensure access to all the available candidates.

Recruitment Economics Have Changed

The economics of the recruitment industry have also changed dramatically. Before the dot-com bubble burst in early 2001, even clients with a significant spend might have been paying margins in the high teens or low twenties. This meant that a vendor neutral operator could negotiate margins down with the agencies, add a 3-5% transaction fee for themselves and still show a useful savings to the client. However factors such as online auctions, cost-plus contracts, and open book pricing, together with challenging economic conditions, sophisticated supplier management and a very competitive market, mean that margins are now considerably lower that they were even 10 years ago. There is just insufficient margin now for a vendor neutral operator to make a reasonable transaction fee.

Rather than delivering cost-savings, in this low-margin environment the inevitable margin-stack arising from vendor neutral program can actually end up increasing costs for clients. So, alternative methods of funding vendor neutral operators are emerging, such as transferring contractors from incumbent agencies to the program operator, or driving down pay rates and taking a share of the savings. However, poor implementation of these techniques typically results in alienating both the agencies, and more importantly, the candidates who naturally follow the higher pay rates offered elsewhere.

Recent changes in legislation have forced agencies to take on higher liabilities, and complying with this legislation has caused business to become more complex. So, agencies are reluctant to engage in a supply chain where they feel marginalized.

Dynamics Change with Single Company

Establishing a partnership with a single company that assumes responsibility for filling all positions creates a completely different dynamic. The volume and visibility means economies of scale and efficiency gains can be fully realized. Ownership and accountability for quality, speed, accuracy and compliance is no longer an issue. The challenge created by margin stack disappears and the supply chain is simplified and streamlined.

In this model, second-tier suppliers are engaged for their expertise in a specific sector, region or skillset and often they are given some level of exclusivity in this space, which increases engagement and maximizes leverage.

This model also has a positive impact within a recruitment company. A recruiter is much more motivated if he knows he is the only person working on a requisition, and the candidate appreciates receiving one call, rather than fielding calls from multiple agencies, all rushing to be the first to submit his CV.

Vendor neutral programs played a very important role and helped establish the market we have today, however as things have developed, the new programs increasingly awarded will be master vendor. After all you wouldn’t outsource your car rental, IT support or stationery to a vendor neutral supplier, would you?

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