In the world of contingent workforce management, Managed Service Provider (MSP) solutions have become somewhat of a buzzword. But do they really make sense for your staffing needs and budget? And if you already have an MSP in place, is it delivering enough ROI to justify the cost?
Below, we’ll break down the essential factors you need to consider before committing to (or continuing with) an MSP. You’ll also discover how self-management, direct sourcing, and Vendor Management Systems (VMS) can help you optimize your contingent workforce—and potentially save money in the process.
Why MSPs Have Become So Popular
MSPs typically earn revenue by charging a percentage of your total contingent workforce spend, which includes staffing costs, Statement of Work (SOW) engagements, and Employer of Record (EOR) fees. On the surface, it may look “free” because suppliers appear to be paying the MSP fee. But in practice, these costs are usually passed back to you through higher markups and staffing rates. Ultimately, the more you spend, the more the MSP earns—giving them an incentive to funnel as much of your contingent workforce spend (including SOW or EOR solutions) as possible under their umbrella.
With the rise of advanced VMS technology and self-managed strategies, many companies are now rethinking whether an MSP is still the right fit. If minimizing costs and maintaining tighter control are priorities, you may find that self-management, coupled with the right VMS, can achieve many of the same goals without the extra fees.
Table of Contents
- What is an MSP?
- What is a VMS?
- Key Factors to Determine If You Need an MSP
- Breaking Down Your Contingent Workforce
- Why an MSP Is Overkill for Most Companies
- When an MSP Makes Sense
- Conclusion: Do You Really Need an MSP?
- FAQs on MSP vs. VMS
1. What is an MSP?
A Managed Service Provider in the context of staffing is an external organization that oversees and manages your contingent workforce program—including staffing suppliers, temporary workers, compliance, and sometimes direct sourcing. MSPs typically charge a fee based on a percentage of total contingent workforce spend.
Why MSPs Are Trending
- They centralize vendor and supplier management.
- They promise standardized processes and compliance tracking.
- They bundle various workforce solutions under one umbrella.
However, MSP fees can add up. Many companies pay 2%–4% of their total contingent spend, which can become costly, especially if your workforce needs are not extremely large or complex.
2. What is a VMS?
A Vendor Management System (VMS) is a software platform designed to automate and streamline the administration of your temporary staffing, contractors, and sometimes Statement of Work (SOW) engagements. VMS software typically includes:
- Timekeeping and invoicing
- Supplier performance tracking
- Spend analytics
- Compliance checks
Unlike an MSP—which is a third-party service—a VMS is technology-driven. You or your team own the process, but the VMS helps simplify day-to-day management. This can significantly reduce overhead costs and improve real-time visibility into your staffing program.
3. Key Factors to Determine If You Need an MSP
3.1 Workforce Volume & Complexity
- Size of Contingent Workforce: If you’re managing thousands of workers across multiple regions, an MSP can keep things organized.
- Number of Vendors: Juggling a dozen or more staffing agencies? MSPs centralize relationships and billing.
- Hiring Complexity: Global placements, specialized skills, or high compliance demands might warrant external expertise.
3.2 Internal Capabilities & Resources
- In-House Expertise: If you have an experienced internal team handling vendor relationships, you might not need an MSP’s added layer.
- Technology & Data Management: A modern VMS can deliver many of the insights and efficiencies MSPs promise, but at a lower cost.
3.3 Cost & ROI Considerations
- MSP Fees vs. Internal Costs: MSP fees are often 2%–4% of total contingent spend. Would expanding your in-house team or using a self-service VMS be cheaper?
- Total Program Spend: Smaller budgets can see fees quickly eating into ROI.
3.4 Compliance & Risk Management
- Worker Classification: If you frequently engage 1099 contractors or international employees, an MSP may help reduce legal risks—though Employer of Record (EOR) services or compliance partners can also handle these. See HQ Simple's 1099 compliance solution.
- Regulatory Requirements: MSPs can help meet talent goals, local staffing laws, and supplier standards.
3.5 Standardization & Efficiency
- Consistent Processes: An MSP can standardize onboarding, time tracking, invoicing, and reporting across your entire contingent workforce.
- Performance Metrics: If you need robust, consistent vendor performance data, an MSP can provide regular reporting—though many VMS solutions also offer this.
3.6 Business Growth & Market Conditions
- Seasonal or High-Turnover Needs: An MSP might offer scalability if you’re ramping up or down frequently.
- Global Expansion: An MSP can help navigate new markets and legal frameworks, but so can a global EOR or specialized compliance consultant.
4. Breaking Down Your Contingent Workforce
To decide if an MSP is necessary, segment your contingent workforce into categories based on how you hire and manage talent.
4.1 Self-Recruited & Referral Hires (Direct Sourcing)
- In-House or Referral-Based Sourcing: Great for cost reduction and improved engagement.
- Brand Control: You control the candidate experience and maintain cultural alignment.
- Compliance: Can be overseen internally or via an EOR—no MSP needed.
4.2 Third-Party Staffing Agencies
- Fewer Vendors: If you only work with a small circle of trusted staffing firms, you may not need an MSP for oversight.
- Automation Tools: VMS platforms can automate key tasks, from invoicing to time tracking, making self-management more effective.
- 2%–5% Savings: Bypassing MSP fees means you can reinvest in higher pay rates, better benefits, or technology upgrades.
4.3 SOW & Compliance-Heavy Roles
- Statement of Work (SOW): Classification concerns—rather than vendor oversight—are often the main challenge.
- Independent Contractors: Use a specialized 1099 compliance solution or an EOR service to mitigate risks.
- Less Need for MSP: SOW-based engagements generally don’t need the additional layer of MSP management.
5. Why an MSP Is Overkill for Most Companies
- Direct Sourcing: Internal referrals and brand-driven recruitment already cut middleman costs.
- Small Vendor Pool: Managing a handful of suppliers can be done cost-effectively in-house with a VMS.
- Compliance Solutions: EOR and 1099 compliance services reduce co-employment and misclassification risks—no MSP required.
- Savings Potential: MSP fees (2%–5%) can be redirected into worker pay, benefits, or tech investments.
- Modern VMS Tech: Software solutions have advanced to the point where they provide real-time analytics, automated invoicing, and easier vendor interactions—without MSP involvement.
6. When an MSP Makes Sense
There are scenarios where investing in an MSP may still be worthwhile:
- Huge Scale, Multiple Locations: Managing thousands of contingent workers across different markets.
- Complex Vendor Ecosystem: Dozens of staffing suppliers needing tight oversight and performance tracking.
- Strict Global Compliance: Regulatory complexity, multiple currencies, and country-specific labor laws.
- Deep Analytical Needs: Real-time dashboards, advanced data science, or workforce forecasting at a massive scale.
7. Conclusion: Do You Really Need an MSP?
For most companies, a full-blown MSP is often unnecessary—especially as VMS platforms, self-management strategies, and specialized compliance providers become more robust. If you don’t face the complexity of large-scale, multi-region deployments or a sprawling list of staffing suppliers, the fees you’re paying might be better spent in-house.
By splitting your contingent workforce into direct sourcing, third-party staffing, and SOW/compliance-heavy roles, you gain clarity on where you truly need outside help versus where a VMS or an EOR service can carry the load.
Ready to Optimize Your Contingent Workforce—Without an MSP?
Contact us today to explore self-management strategies, VMS solutions, and specialized compliance services that can help you streamline your contingent workforce while saving money.
8. FAQs on MSP vs. VMS
Q1: What’s the difference between an MSP and a VMS?
Answer: An MSP is a third-party provider that manages your contingent workforce for a fee (often a percentage of total spend). A VMS is a software platform you use to automate vendor management tasks such as tracking time, invoicing, and compliance. MSPs often rely on a VMS to operate, but you don’t necessarily need the MSP layer if you can manage the tool yourself.
Q2: Can a VMS replace an MSP entirely?
Answer: In many cases, yes. If you have an internal resource or team to oversee your staffing suppliers and run the VMS, you can achieve much of what an MSP does—without paying the extra percentage.
Q3: What if my company has strict compliance requirements?
Answer: A modern VMS with built-in compliance checks or partnerships with specialized EOR or 1099 compliance services can handle most legal and classification needs. MSPs can also help, but may be overkill if you primarily need compliance support.
Q4: How do MSP fees affect my overall staffing costs?
Answer: MSP fees typically come out of a percentage of your contingent spend. Although suppliers may initially pay these fees, the costs usually get passed through in higher markups—leading to increased overall program spend.
Q5: Is direct sourcing always cheaper than using a staffing agency?
Answer: Direct sourcing can often be more cost-effective because you avoid agency markups and MSP fees. However, it requires strong internal recruiting capabilities and a compelling employer brand to attract top talent.