How Does a Vendor Management System Work (And Why)?

A classic case of the chicken or the egg conundrum: growth in adoption of Vendor Management Systems (VMS) technology continues apace with the growth of worker classification types and the volume of organizations engaging these new workers. So, which came first? The expansion of worker types beyond full time employees and temps? Or the use of VMS tech tools enabling the successful management of the complex compliance and risk-mitigation challenges posed by the use of these worker types? The truth is, it doesn’t really matter if the tech spawned the diversification of the modern workforce or vice versa. In either case, it is critically important to understand what the VMS does and how it works. This post will provide the primer for anyone in workforce management who intuits the need for such a solution to help them grow and nurture their organization’s workforce.

Industry analyst group Aberdeen reports 72% of US companies currently use a single technology program to manage contract labor and professional services sourcing and procurement. For a technology less than two decades old, this is an amazing statistic. It proves that these solutions are mission-critical to success for almost every industry in a rapidly evolving workplace environment. So how does a VMS work?

VMS tools are designed to capture and store all workforce management rules, data and metrics in a single, centrally-located and universally-accessible location. Typically accessed via the Internet (in the cloud) or for older versions, via connection to centralized servers), these systems ensure that all workforce management and procurement stakeholders are operating according to the standardized business rules/practices informed by the same underlying information.

These tools virtually eliminate the errors inherent in managing a geographically diverse workforce using divergent strategies and data, and in multiple locations. All the traditional functions of HR and procurement are standardized from requisition through settlement. Moreover, the standardization is key to recording complex compliance protocols and ensuring they’re observed across the entire enterprise, thereby mitigating significant risk.

Some of the more tedious and labor intensive processes formerly accomplished manually are automated for increased efficiency. For example, the VMS is configured at the point of deployment to automate bill rates and management as well as consolidated invoicing for settlement. This alone saves countless man-hours formerly spent managing bill rates and processing invoices. This is especially useful to a workforce that has disparate worker classifications, each with their own tax reporting, withholding and other regulatory requirements.

VMS also works by codifying and enforcing workflows in areas like requisition approval and supplier optimization. The VMS provides automation for requisition approvals so that only exceptions are flagged for manual intervention whereas those requisitions that meet pre-established criteria – recorded in the VMS – are approved. Workforce managers are only required to touch those requisitions that are flagged for non-compliance with business rules.

What else does a VMS do? The centralized repository of services procurement data makes for much easier vendor management. Staffing vendors/suppliers interface with an organization’s VMS tool and must adhere to the rules put forward by the hiring organization. For example, they can be prompted to upload critical background screenings and insurance information before candidates are approved for hire. All vendor interactions can be recorded in the VMS and this data can be used to measure vendor performance. This allows an organization to reward good performers and either work with under-performers to improve or cut them loose entirely.

Perhaps the most attractive function of the VMS tool is the improved visibility and control these tools afford to the organization. With all the data captured by the system, workforce leadership can track not only vendor performance but also worker performance, compliance metrics, spend, security and asset management and a host of other important workforce-related trends.

Overall, the broad answer to the question “How does a VMS work” or “What does a VMS do” is simply this: a VMS works by providing standardized workforce management data and processes which dramatically improve control over spend and enable data-driven metrics for continuous improvement. VMS users report between 10-20% reduction in contingent labor spend, increased operational efficiency and significant risk-mitigation capabilities. Is your organization ready for VMS?