Vendor Management Systems (VMS) are software solutions that help companies manage their external workforce – from temporary workers to services providers on SOW contracts.
Looking to learn about Vendor Management Systems in more detail? You’re in the right place!
This article is part of our guide on independent contractors’ management.
How Do Vendor Management Systems Work?
VMS technology originated back in the early 2000’s. The intention of the software was to support procurement teams with controlling their costs and attaining compliance of contingent workers, which was mainly managed through professional agencies, staffing agencies or Managed Service Providers (MSPs).
These solutions support the entire procurement lifecycle of a vendor from defining a project, distributing requirements to potential suppliers, approving payment milestones, and reporting spend and compliance. Vendor management includes activities such as selecting vendors, negotiating contracts, controlling costs, reducing vendor-related risks and ensuring service delivery.
As the freelance economy has evolved in recent years, a “new type” of external workforce has become increasingly common – the knowledge-based independent contractors who work directly with companies and not through service providers.
VMS are able to support this process — but the software was not designed for this purpose. In fact, back when VMS solutions became popular, companies rarely worked with freelance talent directly at all.
Vendor Management Software Core Capabilities
Most VMS solutions are great at all the tasks that procurement traditionally took care of. VMSs will usually offer features such as:
- Vendor sourcing: Finding non-payroll staff through sourcing platforms such as staffing agencies and MSPs.
- Vetting and selection: Streamlining back and forth communication by limiting the pool of candidates by pre-set policies.
- Contract negotiation: Supporting negotiation of terms, including knowledge of local expectations for global talent.
- Onboarding: Administering security IDs and access to necessary systems. Ensuring background checks are completed compliantly.
- Tracking performance: Using time sheets to manage the hours that contingent staff have worked.
- Compliance: Maintaining vendor and contractor records and documentation, similar to the process for full-time employees.
- Payments: Automatically generating pro-forma invoices based on time sheets, and viewing all details of payments.
While VMSs have evolved over time to offer a wider breadth and depth of services, including advanced analytics of spend and compliance and often enabling a flexible, cloud-based infrastructure, they are still heavily focused on the procurement point of view and cannot serve the HR or the hiring managers functions.
The Downsides to Vendor Management Systems
VMS is often offered as the solution when companies are struggling to manage their external workforce.
When a company doesn’t have visibility into its non-payroll workforce spend, or they are struggling with managing a high volume of SOW-based projects, a VMS may seem like the clear choice.
The obvious downside that most professionals will think about is the time it takes to implement a VMS, including the complexity and costs involved. It usually takes more than 12 months to deploy a vendor management solution throughout the enterprise, and even then only after meticulous planning. Most vendors will charge separately for the implementation process due to its complexity and duration.
This is definitely a consideration, but the truth is, even if a company has plenty of time and budget to implement a VMS, we see a lot of larger issues that make a VMS an outdated solution to manage a contingent workforce.
First, take a look at the realities of the workforce today. It has changed beyond recognition due to new generations joining the workforce, the rapid advancement of technology, remote work, and the freelance revolution.
These changes have dramatically impacted the types of talent companies are seeking and the working relationship with those talents. Companies now must rely on consultants and knowledge workers who don’t want to engage with MSPs or staffing agencies. They want to work directly with companies, forming long-term relationships and taking control over who they work for, the work they complete, and the money they make.
This means companies need a solution that supports working with freelance talent directly on non-SOW projects.
Second, today’s VMS technologies might have modernized in terms of their use of the cloud or automation, but they haven’t fundamentally changed in terms of their processes or capabilities, or who they are intended to serve.
Ultimately, a VMS is a tool for Procurement teams, when today — managing a contingent workforce falls to HR, hiring managers, Finance teams, Legal, IT, and Operations teams.
Traditionally, companies might have viewed external workforce management from the point of view of cost savings and compliance. However, today’s companies are taking a more holistic view over the management of non-payroll workers.
They want to improve business agility with the support of a more diverse workforce, and they need a solution that meets the needs of hiring managers, HR, IT and any other teams across the business.
To take just one example of the hiring managers, research has shown that a VMS doesn’t provide value to hiring managers, who regularly feel that these tools ruin the relationship between them and the worker, and “actually inhibit the attraction of top talent at a mid-senior level”. This leaves the hiring manager choosing between a quick hire and the quality of the worker that they receive.
Not only that, but to attract the best talent, companies now need to keep the freelancers in mind, too – offering them a far better user experience than they can achieve via a VMS.
Vendor Management Software vs Freelance Management Systems
VMSs are a legacy technology used by Procurement departments to automate their own internal processes, and not to simplify the processes for the entire organization. FMSs are designed to provide a wide range of employees the collaborative tools and the autonomy they need in order to leverage the freelance economy productively, adding visibility, flexibility, and control.
With an FMS, hiring managers can work directly with independent contractors as the freelance revolution grows, engaging with top experts in their field who aren’t turned off at the presence of staffing agencies or middle-people between them and your company.
Look for a next-gen FMS that offers:
- A smart talent directory: A catalog of vetted vendors and contractors with cross-organizational reviews, to shorten time to fill.
- Background checks and screening: Verify data such as business reports, financial and credit risk data, KYC/AML and background checks.
- Workforce classification: Misclassification regulations vary globally, and come with heavy penalties and fines. Correctly classify a contingent workforce with ease.
- Easy vendor onboarding: Register all non-payroll workers, including their equipment, system and data access.
- Contractor self service: Reduce manual effort by allowing non-payroll workers to self-serve, updating their information and tracking payments.
- Simple budgeting: Organized, dynamic budgeting, with in-built policies, advanced approvals, and budgets organized by team or persona.
- One-click payments: Consolidate all of your payments into a single invoice that can be paid on your contractors’ terms.