Leaders, let’s talk:
Emergence of the MSP (managed service provider)
What’s the difference between VMS and MSP?
What happened with Microsoft and how did that change our industry?
How has the freelance economy changed from a contingent worker economy to a chosen independent economy?
Loss of tax revenue is a major driver of government NOT wanting freelancers…
What is the risk for companies?
What will the be the impact of a recession?
Where do talent marketplaces fit?
Why SHOULDN’T people become freelancers?
What can we expect the next 5-10 years?
Honestly, it took me 3 listens to truly understand the power of what Jason discussed with us. Hopefully this cheat sheet will accelerate your learnings :)
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Emergence of the MSP (managed service provider)
The biggest companies in America have always used contract workers. From using tons of engineers to lots of marketing people to the people filling the cafeterias, all of these people are third party workers, right? Whether they are a 1099, or a W-2.
At the large enterprise it's always been fairly structured. HR owns employees. But at the large enterprise, they literally don't own an employment relationship with contractors. And so that relationship has typically been managed through procurement. And it's a different type of relationship.
It's very vertically integrated, right? So they would have these suppliers, right? Oh, you need QA testers for games, let's go and find a supplier who can really help us with that at that time, or you need lots of engineers, and we need engineering supplies, actually, that's the biggest use. So we probably don't want to rely on one engineering, but we probably need loads.
And so essentially, they came up with these very big supply chains. And our procurement person or team don't really have the internal expertise to efficiently manage that type of supply chain. And so they will have third party vendors come in and manage that and managed service providers.
What changed?
It used to be fairly informal. And over the last 20-30 years, the way that they have looked at contingent workforce, all extended workers of every category has become more formalized, and more strategic rather than just tactical.
Companies passed the risk of compliance/security down the chain to MSP’s/VMS’s, who passed the risk down the chain to staffing companies
What’s the difference between VMS and MSP?
MSP = People
The MSP plays the role in between the supplier and the manager who has a need
VMS = Software to software
Usually either SAP Fieldglass or Beeline
*Most companies handle this in a hybrid way, using both
What happened with Microsoft and how did that change our industry?
Late 90s, high growth company, hiring tons of engineers can kind of could be generic, right? Just happened to be Microsoft.
They were hiring tons of engineers, and they would essentially offer people a role. And say to them, we can pay you as a freelancer, we can pay you as an employee, if you come in as an employee, let's say we'll pay you 100 bucks an hour, or 1000 bucks a week. But we'll also give you benefits you can like have and stock options, and you can come into the cafeteria. And for other people that will be like, Oh, we can just pay you 120 bucks, or let's say 1200 bucks a week, whatever it was, and you're not gonna get any benefits, but we'll pay you 20% more. And by the way, you you're not going to pay tax either probably on most of your income.
Now these rules around who was an independent contractor and who's an employee have always existed, but they really weren't enforced.
What happened here was that post IPO, all the people who got paid a little bit less became millionaires and all those freelancers were like, oh my goodness, that was probably the worst decision ever. And they sued Microsoft.
And Microsoft settled for like, $100 million.
They sued saying we were employees, essentially, we did the site work. And we were misclassified.
And this misclassification rule is like, companies and workers don't have a choice. The assumption is you're an employee, unless you can prove otherwise, like that's, that's the one line summary of of the risk there.
And so every procurement person at the fortune 500 was like, whoa, independent contractors, well, I don't want to lose my job over all they freelancers or not.
Microsoft exposed the existing code that existed but wasn’t enforced when the contractors that chose higher pay without benefits and stock options missed out on the IPO.
How did this change our industry?
So what they did is they made all their staffing vendors employ them and insure them make sure they got workers comp insurance, and so on.
All companies turned to W-2’ing everyone, and MSP’s and VMS’s handle all the risk involved with staffing the right people.
Managers still needed talent, so then they went ‘rogue’ spend, where they don’t go through the approved internal procurement process.
How has the freelance economy changed from a contingent worker economy to a chosen independent economy?
those people working back 20 years ago and a contingent workforce program, for the most part, most of those people, it was a stepping stone. So maybe I want a full time job. I think I'll take a contract role at Microsoft, as an engineer, but ultimately, I'd really like to get hired there full time.
Loss of tax revenue is a major driver of government NOT wanting freelancers…
One major trend is the increase in enforcement of independent contractor roles. What do I mean by that? It's not just about the worker saying, I want to be independent, I want to be a 1099 GUP. The basis of how government collects tax revenues is from income tax, right? If you pay someone as an independent, contractor, they're not paying income tax.
So government has an incentive for people to be an employees.
“If you pay someone as an independent, contractor, they're not paying income tax.”
What is the risk for companies?
You’ve been working 40 hours a week for a company then meet a lawyer…lawyer will say, “Oh, you worked all these hours as a freelancer, by the way, they probably should have employed you. And they probably are you a ton of like, overtime. And they probably should have paid your Social Security and all this other stuff. And by the way, oh, that growing? Probably we can get you options and all of this other stuff, right”?
What will the be the impact of a recession?
Data showed that the use of particularly Engineering and IT folks have doubled.
You're talking about programs that are already spending hundreds of millions of dollars a year on their contract workers.
We're gonna see, that means that they're going to hire more contract, there's gonna be more layoffs, and they're going to bring back more contractors, right.
So now there's a lot of pressure again, increasingly on this procurement departments who are like, what's better than VMS, MSP.
Where do talent marketplaces fit?
[From above]…And what you've got is talent marketplaces.
What does that mean? They are doing recruitment, right, whatever their flavor is, right? So whether they're vertically integrated, these companies now are going back to the roots of we can find you the best people, the best prices quickest, whatever that variable is.
If you want to get the best marketing folk, the old vendors are not where the best talent got, right?
Why SHOULDN’T people become freelancers?
If you're an employee, you don't have to do anything.
Secondly, not everyone is an entrepreneur. And not everyone has that ability.
Those things are becoming better, but it's still quite fragmented.
What can we expect in the next 5-10 years?
I think that we're gonna see more people having choices wanting to grab more control over their own lives, which means in many cases being independent.
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