10 Pitfalls of Working With a Vendor Management System

As a recruiter, job orders are king and the more job orders the better it gets, especially if you can fill them! That’s exactly what a Vendor Management System (VMS) seems to offer. However, “all that glitters is NOT gold.”

Top Echelon has been helping recruiters make placements for more than 30 years, and what follows is a cautionary tale. If you are contemplating working with a VMS in an attempt to fill job orders and make placements, then you should be aware of the situation into which you are treading. You may find, as other recruiters have, that it is simply NOT worth the effort.

As with all stories, we must start at the beginning. A VMS can refer to two different things, either separately or together. First, it can be a Web-based application or SaaS platform that allows businesses to manage their contingent (or temporary) workforce. Second, it can refer to an organization that uses the application or platform, and the organization acts as a middleman (or gatekeeper) between the recruiter and the end client.

(For the purposes of this blog post, when we refer to VMS, we’re referring to an organization that uses both a Web-based application and also acts as a “middle man.”)

So why do some employers (client companies) work with a VMS? Well, there are several benefits (or perceived benefits) for them. Those benefits can include:

  • It limits mark-ups and decreases cost.
  • It streamlines the candidate submittal process.
  • It’s easier for the employer to work with one central vendor.

However, what is beneficial for the employer is not necessarily beneficial for recruiters who are attempting to work with the employer. It’s at this point where we must mention that FoxHire has worked with a number of VMS organizations during the past 20+ years. Our experience during that time serves as the basis for this blog post, as well as the reference point for much of the information contained therein.

There are a couple of different ways that a recruiter can cross paths with a VMS, but two common ways are:

  1. The recruiter has been working with a client company for a while, maybe even as long as a few years. Then, all of a sudden, a representative from a VMS or the hiring manager informs them there has been a change and they will have to go through the VMS in order to submit candidates and continue working with the client company.
  2. A representative from a VMS reaches out to the recruiter about filling a number of job orders for an organization that the recruiter has not worked with before. Or perhaps a recruiter notices a large volume of job postings in his/her niche.

In the first scenario, the recruiter typically works with the VMS because they do not want to lose their client. In the second scenario, the recruiter typically works with the VMS because they’re attracted by the allure of both new job orders and a new client!

But once again, “all that glitters is NOT gold.”

Based upon our experience (and the experience of recruiters with whom we’ve worked), below are ten pitfalls of working with a VMS:

#1—You’re competing with a lot of other recruiting agencies.

First, these are not exclusive search assignments and you could be sharing the job orders with scores of other recruiters. It’s not like you’re competing against two or three other agencies. In fact, who knows how many other agencies there are? And rarely will the VMS tell you how many “preferred vendors” they have “accepted.”

And second, the emphasis is on the speed of the candidates being submitted, not necessarily the quality. So quite often the first candidates submitted are the ones presented to the hiring manager or Human Resources, regardless of how many other candidates trickle in.

#2—The VMS has a large master agreement (contract) that must be signed and rarely will the VMS allow changes or modifications.

Normally the first step for anybody interested in working with a VMS is to fill out a vendor profile. However, filling out the profile does not grant you access to any job orders. For that, you must sign the VMS’s master agreement. This master agreement is one-sided in favor of the VMS. Not only that, but they’re also huge, sometimes as big as 60 to 70 pages in length, chock full of clauses that need to be carefully studied. As we explore the rest of these pitfalls, you’ll see just how one-sided the agreement can be in favor of the VMS.

#3—A recruiter does not have direct contact with the end client (hiring manager) and the VMS builds the relationship because they are the middleman.

Believe it or not, this is the case even if the recruiter was working directly with the hiring manager previously, before the organization started using a VMS. Remember the two scenarios we mentioned earlier in the blog post? If not, here’s a recap:

The recruiter has been working with a client company for a while, maybe even as long as a few years. Then, all of a sudden, a representative from a VMS informs them that they will have to go through the VMS in order to continue working with the client.

In that scenario, the recruiter would no longer have direct contact with the hiring manager. All of their correspondence (and candidate submittals) would be handled by the VMS.

And in the other scenario where you are trying to fill job orders with a new client that you have never worked with in the first place, you can forget about branding your agency. No matter how many candidates you submit, the client will not even know that you or your agency exists because it is all branded with the VMS logo and contact information.

#4—VMS contracts have stringent requirements that could impact your future business with the current client in question or future clients.

Due to language contained in the master agreement (or contract), the VMS may prohibit you from working with certain organizations. This could include organizations that you already work with on a direct or contract basis. This underscores the importance of looking through the master agreement carefully. You can NOT just blindly sign a master agreement or contract with a VMS. All it takes is one overlooked clause to hamper your business.

#5—The VMS takes a percent of the profit off the top, decreasing the recruiter income, and they limit conversion fees.

On top of everything else, the VMS takes a chunk of the profit in the form a a VMS fee. Sometimes it is a flat rate, sometimes it is a percentage of the bill rate or pay rate. But it definitely cuts into the profit of the recruiter when the recruiter does make a placement with the client company. Once again, the master agreement stipulates this fee and it is non-negotiable. So the placements you make through the VMS—and the time you spend making them—will ultimately be for significantly less profit.

But wait, there’s more. Let’s say that you place a candidate on contract with a client company through a VMS. What happens if the client wants to hire the candidate on a direct basis. Well the VMS contract normally restricts the amount of the Conversion Fee or decreases the time to convert to direct and on top of that they have also been known to take a cut of your conversion fee. Bottom line, you earned less on this candidate than you would have in any other contract-to-direct hire situation that would be outside of a VMS model. In some cases you are basically just giving the candidate away!

#6—The VMS does not pay the recruiting or staffing agency until they are paid by the end client.

If you are placing contractors and have a weekly payroll cycle, this is probably one of the worst clauses in the VMS agreement. You, as the recruiter (or back-office), will not receive your money for all of the payroll you are floating until the VMS receives its invoice payment money from the end client. The VMS is not going to “float” the money to you when the end client has not paid the invoice for that specific weeks’ payroll. In fact, payment terms may be out as far as Net 45 or 60. This is a classic example of being at the mercy of the Vendor Management System. You will only be paid by the VMS when the VMS is paid by the end client. Therefore you are continually floating all the payroll dollars for the open invoices.

#7—If the end client does NOT pay the VMS, the VMS has no obligation to pay the recruiting or staffing agency.

This is a continuation of #6 on our list and it can get worse. Let’s say that the VMS stops getting paid by the end client for a contract placement. That means you will no longer get paid for that placement, regardless of the fact that you could have been running payroll for this contractor for weeks or months… or even multiple contractors. But in some VMS agreements it stipulates that if an end client declares bankruptcy, you as the recruiter or staffing agency must pay back any money that you received from the VMS for placements you made through the VMS at the end client prior to the bankruptcy. (You can fight this in litigation because it is for wages, but that becomes time consuming if you participate in the bankruptcy proceedings.)

#8—The VMS can take control (ownership) of the candidate.

Great candidates can be one of the keys to a recruiter’s success. But in the VMS model, you submit the candidates for the end client’s job order through the VMS system. Now the VMS is aware of that candidate, as well as any others that you’ve submitted to them. Do you think they’ll leave that candidate alone in the future, honoring your “ownership” of said candidate? It is important to note that many Vendor Management Systems have their own database of candidates. That means not only are you competing against a gaggle of other recruiters, but you’re also competing against the VMS itself! (And the icing on the cake, if the end client accepts your great candidate, the end client is not even aware of you or your recruiting agency, they just know that the VMS provided a great candidate.)

#9—Your internal processes often have to mirror those of the VMS.

In many instances, the recruiter is forced to use the software that the VMS is using. This includes timesheets, invoicing, and other processes. Now let’s say you have your own system and process for doing these things. Regardless, you’ll be forced to double your efforts, entering data into both your system and also the software that the VMS is using. This often becomes a payroll and invoicing nightmare when your pay period (timesheet) does not match what the VMS provider dictates as the mandatory pay period.

However, it can go even further than that. You probably have your own vendor for both background checks and drug screenings. Even if that’s the case, the VMS might force you to use its background check and drug screening vendors, and often those vendors charge more for their services. Since the VMS wants complete access to the results, you’ll have to forego your usual channels in favor of their preferred vendors.

#10—Recruiters are rated (like a report card) and if you don’t perform, you lose out and will be eliminated as a supplier.

Once again, the master agreement stipulates this is the case. If you sign the master agreement, and the VMS gives you job orders, then you’re subject to evaluation. The VMS will rate you based upon a set of criteria, specifically metrics that it considers to be of importance. One of these metrics includes how many candidates you’ve submitted, and the time frame associated with the submittal. Some VMS’s send recruiters a quarterly report card. A recruiter can only receive so many failing grades before the VMS breaks ties with that recruiter.

As mentioned earlier, FoxHire has extensive knowledge of Vendor Management Systems and experience dealing with them. We first saw them arrive on the scene during the late 1990s. We worked with them numerous times with little incident from 2000 to 2010. However, since then, the contractual restrictions imposed by Vendor Management Systems have become increasingly more severe.

Because of our experience, we’ve also noticed certain scenarios with regards to Vendor Management Systems’ involvement with employers and recruiters. For example:

  • The people involved with the hiring and firing of employees at the end client often became dissatisfied with the candidates being presented by the VMS since the emphasis is on speed and not quality.
  • The end client becomes dissatisfied with the high level of turnover of the VMS candidates. The theory on this fact is the rates and markups were lower (and a cost savings to the end client) but the candidates would change jobs in an effort to earn more money somewhere else.
  • In another example, we were working directly with a large national client. All of a sudden, we were informed that we’d have to work through a VMS. After we realized that the margins were going to be unusually tight and they needed extremely hard to find people, we had to walk away from the end client. Eventually, though, the client “fired” the VMS and wanted to come back to work with us and the recruiter directly.

At the end of the day, a recruiting agency needs to decide who they want to work with and under what terms are they willing to work. VMS are definitely a trend, but we’ve worked with many recruiters who refuse to deal with VMS’s. They do not want to deal with excessive contract terms, earn less money on candidates or submit candidates to a “competitor” that may utilize that candidate again in the future.

The bottom line is that when it comes to working with a VMS: they can cost you time, energy, and money…and what are those three things worth to you.