The VMS/MSP Tradeoff for Staffing Companies

Vendor management system (VMS) and managed service provider (MSP) programs can be a double-edged sword for staffing companies. The VMS is usually the software platform; the MSP is the company that runs the program on the client’s behalf.

On one hand, they can provide access to large national and regional clients that may be difficult to reach on your own. They can create a steady flow of job orders and give smaller staffing companies an opportunity to compete with much larger firms.

But there is a price to pay for that access, and staffing companies need to understand the cash-flow implications before taking on the business.

The first question is simple: Who actually owes you the money?

In many VMS/MSP arrangements, the staffing company provides the services to the end client, but invoices are submitted through a VMS. The VMS or MSP manages the process, but that does not necessarily mean they are responsible for paying the invoice. Depending on the agreement, the payment obligation may remain with the end client. And if the agreement includes a “pay-when-paid” clause, the MSP pays you only after the end client pays the MSP, so the MSP’s own financial strength matters too.

From a funding perspective, that distinction is extremely important. At Madison, we look beyond the name of the VMS or MSP. We want to understand the end client, its creditworthiness, the VMS/MSP, the approval process and exactly how the payment chain works. We also look at whether the agreement restricts assigning receivables or requires notice before an invoice can be funded.

The second question is: What does it cost?

VMS and MSP fees commonly run a few percent each, and when both apply, they can take 5% or more off the invoice. That can be a significant cost and needs to be factored into the staffing company's margins before accepting the business. In many programs the fee is deducted from the payment rather than billed separately, so remittances arrive short and have to be reconciled against the original invoice.

Then there is the portal.

Some VMS portals are easy to navigate. Others create significant administrative work. Timecards, approvals, purchase orders, coding, compliance requirements and invoice submission rules can all create opportunities for delays. A perfectly legitimate invoice can sit unpaid because of an incorrect entry or an unapproved timecard.

And then there is time.

A staffing company may hear, “Our terms are Net 30.” But Net 30 does not necessarily mean 30 days after your employee works. The clock may not start until the timecard is approved. The VMS or MSP may then have additional time after receiving payment from the end client before paying the staffing company.

That can turn Net 30 into 45, 60, 75 or even 90 days of cash tied up in receivables.

For a staffing company funding payroll every week, that is a big deal.

This is where the right funding partner can make a difference. At Madison, we evaluate VMS/MSP receivables based on the actual cash-flow cycle, not simply the stated payment terms. We look at who ultimately pays, how invoices are approved, how long customers historically take to pay and whether the receivable fits within your available funding.

VMS/MSP business can be very good business.

Before accepting a VMS/MSP account, ask:

·       Who is responsible for paying the invoice?

·       Does the agreement allow me to assign or fund these receivables?

·       How difficult is the billing and approval process?

·       How many days from the employee working until cash actually reaches my bank account?

And finally:

Can my funding source support that cash-flow cycle without putting unnecessary restrictions on my growth?

That is where Madison Resources can help. For more than 30 years, we have understood how staffing companies get paid, how they fund payroll and how VMS/MSP arrangements can affect cash flow.

The VMS may control the portal. The MSP may control the process. But you still have to make payroll.

Funding staffing companies isn't just something we do. It's what we know.