Healthcare is home to ~9% of the total market share of the U.S. temporary staffing industry. Over the past few years, the role of managed services providers (MSP) has gained majority share of this system of temporary personnel delivery. What was once a pure technology solution, this model has become a tool for the largest staffing entities to control, and mandate terms for, candidate demand across the nation.
The operational efficiencies for clients are inherent in the model for aggregating and broadcasting orders to many suppliers, while funneling accounts payable into singular outputs. In prior blogs, I have referenced the financial impact of these intermediaries to independent staffing firms. The math is simple, and the response is as expected when markets are disrupted through new paradigms.
MSP COST REVIEW
To review, the difference between MSP fees and normal cost-of-labor fees is where the percentages are applied. Unlike workers compensation or state unemployment fees, MSP fees are represented as a percentage of the total. An example of the impact of this type of fee can be explained in the following simplified example.
For a firm on the lower end of gross margin, say 25%, the operating expenses (overhead) and profit must come from this percentage. This 25% is what is left after all pay and benefits and statutory burdens have been accounted for which is the total cost of labor. The mistake many firms make is assuming the MSP fees are just a cost of doing business and re-calculate their margins accordingly. The problem with this math is it does not go deeply enough into the true impact of these fees.
A MSP fee is NOT a percent of payroll, but a percentage of the total revenue. Here is the impact on the bottom line. If the math is done exclusive of these fees, and is figured at gross margin of 25%, we can assume that about 15% goes to overhead, and 10% to profit.
BUT WAIT! Now, we must put, as an example, a 5% tariff on all revenue, that is half of the available profit! (5% of the 10% profit). If an agency can run an unheard of 20% profit with higher margins, the 5% would still represent 20% of profit. (5% of the 20% profit).
ONE LEVEL DEEPER
Now, let’s dig a little deeper into this model to uncover the true impact in the market.
If you are a fan of sports that are played outdoors, you have no doubt seen games played in extreme weather. When asked how the weather will affect the team, most coaches will remind the interviewer that the weather is exactly the same for the opposing team. In the MSP world, this is NOT the case. For the agency-controlled MSPs, the pass-through fees are not a part of their bottom line. The impact of this phenomenon is the advantage MSP holders have in profitability and funds available to pay candidates.
If the bill rate is constant, and your competitor has more funds available because they do NOT pay the MSP fee, some of this excess can be paid to the candidate without the adversity to the bottom line that sub-agencies experience.
Put in simple terms, an agency-owned MSP can pay candidates more while remaining just as profitable as their subcontracting agencies. If an agency chooses to reduce their pay rates to candidates to maintain reasonable profits, their candidates may choose to move to the MSP agency that DOES NOT have to pay these fees and receive a higher compensation package.
THE WORLD IS... FLAT?
If the response to this market shift seems daunting, it need not be. A recent book by author Thomas Friedman, “The World is Flat”, presented new rules of market engagement. A couple of these can be applied to the changing landscape of our industry.
- Rule #2-“And the small shall act big”…..One way small companies flourish in the flat world is by learning to act big. Really, really big. The key to being small and acting big is being quick to take advantage of all the new tools for collaboration to reach farther, faster, wider and deeper.
- Rule #4-“The best companies are the best collaborators.” ….In the flat world, more and more business will be done through collaborations within and between companies for a very simple reason: The next layers of value creation – whether in technology, marketing, biomedicine, or manufacturing – are becoming so complex that no single firm or department is going to be able to master them alone.
As the title of this post suggests, if you can’t beat them, be them. There are two components to most MSPs in the healthcare market.
- Their supply of talent, and
- Their existing Vendor Management System (VMS.) Too many staffing firms are focusing solely on the talent supply and fail to examine the possibility of becoming a better MSP solution for the client.
For a deeper dive into the nature of the VMS/MSP relationship, check out my post here.
As Thomas Friedman points out, the next layer of value creation will ultimately require collaboration.
ABOUT THE AUTHOR
President, BlueSky Synergy
As the original architect of BlueSky Medical Staffing Software, Tim’s vision has been at the forefront of healthcare staffing technology for more than two decades. Tim lives and works in Nashville, TN. His philosophy remains “take care of the customer and your employees, and fair profits will follow.”