Welcome to this issue of The Contingent Compass. Each week, I send two essays to help you navigate the complex world of the Contingent Workforce. If you need support on your journey, upgrade to a paid subscription where you’ll instantly be able to interact with the community through group chat, live Q&A’s, gain access practical program tools and useful how-to guides.
Here’s a paradox for you.
Most organizations bring in an MSP to reduce contingent workforce spend. Yet the standard way MSPs are paid means the less you spend, the less they earn.
So let’s ask the obvious question: why would any MSP aggressively chase cost savings when their own revenue shrinks every time you succeed?
That’s not partnership. That’s a commercial conundrum.
The Standard Model: Simple, but Flawed
Most MSPs get paid a percentage of spend under management. If your contingent labor program is worth $100M, the MSP might earn 1-2% of that.
It looks neat on paper. Procurement likes it because the fee flexes with program size. Finance likes it because it ties cost to volume. And MSPs like it because the bigger the program, the bigger the payday.
But here’s the rub: that model doesn’t incentivize cost reduction. In fact, it punishes it.
The Perverse Incentive
Say your MSP negotiates lower rates across your supply base and reduces program spend by 15%. That’s a win for you. But for the MSP? Their fee just dropped by 15% too.
💡 Reflection time: Would you hire a cost consultant whose pay went down every time they saved you money?
This is why most MSP programs hit a cost-saving plateau. Once the easy wins are gone, every additional dollar saved makes the provider poorer. At best, they manage spend. At worst, they quietly benefit when costs creep back up.
The Other Side of the Coin
To make matters worse, many clients bar the MSP’s staffing arm from supplying talent into the program to “avoid conflicts of interest.”
On the surface, that makes sense. In practice, it strips out one of the few levers MSPs have to make their model sustainable. Now you have a fee model that penalizes savings and eliminates margin opportunities.
What’s left? Programs that spin their wheels.
Wheel-Spinning Programs
Here’s the pattern I see again and again:
Year one: savings from basic rate standardization and process control.
Year two: incremental tweaks, maybe some supplier rationalization.
Year three: the wheels slow. Innovation stalls. Savings flatten. Business units lose interest.
Not because MSPs don’t care. But because the commercial model traps both sides. The client wants savings. The MSP needs spend. Neither gets what they truly want.
Case in point: One global tech client proudly reported $30M in “savings” in year one of their MSP program. By year three, annualized savings had fallen to less than $2M. The reason? Their MSP had no incentive to push harder. And the business paid the price with inflated costs and missed innovation opportunities.
The Broader Risk Exposure
This conundrum isn’t just financial. It undermines strategy in other ways:
Supplier diversity: Programs stall when there’s no incentive to drive new partnerships that could shift spend.
Talent quality: Rate-cut models often incentivize low-cost, high-volume supply instead of the best-fit candidates.
Innovation adoption: Why would an MSP push a new technology that reduces volume (and therefore their fee)?
The wrong commercial model doesn’t just limit savings. It quietly erodes long-term competitiveness.
What Could Work Better
There are other ways to structure this. Models that actually align incentives rather than fight them.
Fixed Fee for Service: Pay for the program like you pay for software or consulting - based on scope, not spend.
Outcome-Based Pricing: Tie fees to measurable results: time-to-fill, hiring manager satisfaction, compliance, supplier diversity, or true cost savings.
Hybrid Models: A base fee plus bonuses for innovation, quality improvements, or accelerated delivery.
Shared Risk & Reward: The MSP earns a percentage of the actual, verified cost savings delivered. If they save you $10M, they get a piece of it. If they don’t, they don’t. Both sides win - or lose - together.
💡 Reflection time: If your MSP had skin in the game and only earned more when you saved more, how different would their behavior look?
The C-Suite Angle
For CEOs and CFOs, this isn’t just a procurement quirk. It’s a shareholder value issue.
EBITDA erosion: Opportunity costs from slow programs and missed savings quietly bleed profitability.
Investor confidence: Markets punish companies that overpromise “efficiency” and underdeliver on margin.
Agility risk: Rigid fee models slow workforce responses to market shifts, leaving competitors to move faster.
If your MSP’s commercial model disincentivizes cost savings, you don’t have a partner. You have a process manager. And process management doesn’t move markets.
The Future-Proofing Question
Contingent workforce spend is forecast to double over the next decade.
If you keep the same broken fee model in place, you’ll pay more, save less, and still watch your MSP’s revenue rise even as innovation stalls. That’s not sustainable.
The Challenge
MSPs aren’t going away. The model isn’t going away. But leaders don’t have to accept the commercial status quo.
Next time you review your MSP, ask:
What incentive do they really have to reduce my costs?
How much innovation are they bringing if it hurts their own margin?
If they were rewarded for driving outcomes instead of protecting spend, what would change?
Until the model changes, MSPs will remain administrators of spend - not drivers of value. And leaders who accept that will keep mistaking motion for progress.
💡 Final reflection: If your MSP was rewarded for saving you money instead of penalized for it, how much more value would your program create?
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If you need support on your journey, upgrade to a paid subscription where you’ll instantly be able to interact with the community through group chat, live Q&A’s, gain access practical program tools and useful how-to guides.