When it comes to managing external resources, working with a Managed Service Provider (MSP) offers employers unparalleled access to talent – as well as significant cost savings, particularly when recruiting at scale. However, the way that the costs for this talent are calculated is not always the same.
In the US market, there are two main external workforce pricing strategies: ‘bill rate’, and ‘markup rate’. There are pros and cons to each model, and which approach will work best for you depends on your staffing strategy and wider business objectives.
So, what are the differences between bill rate and markup pricing? And what are the advantages and disadvantages of each option? Here’s what you need to know.
What is the bill rate model?
The bill rate is essentially a standard amount that you pay to an external talent supplier, for both their services and the services of a contingent worker for any given role.
Through this model, employers have full control over the final cost through a ‘do not exceed’ rate for any particular position. This rate is based on real-time market comparisons, is reviewed regularly, and is updated as needed.
When the bill rate model works best
In my experience, bill rate is the most efficient pricing model in most scenarios for our US MSP customers. Through this approach, talent suppliers have the autonomy to determine the margin they make on any particular role, as long as the total price falls within agreed boundaries. This allows them to adjust as competition increases for highly skilled workers, which allows you to keep securing the people you need even in tight labour markets.
Bill rate, whether via ‘not to exceed’ rate cards or ‘target’ rate cards, allows suppliers to conduct their operations as they need to – and manage the ebbs and flows within the market as they see fit. They may, at any one time, make a bigger margin on one role or less on another. From the end client’s perspective, this model offers relative certainty around budgets so that businesses can plan workforces accordingly.
Potential cons of bill rate pricing
Companies should be aware that bill rate pricing can lead to pay parity imbalance, as the staffing supplier essentially sets the contractor’s pay rate. This means temporary workers could potentially take home significantly more than the permanent employees they work alongside, which can discourage them from transitioning to full time employment in the future.
In addition, it’s possible for suppliers to exploit the bill rate model to fuel competition for high-volume, low-wage roles. If a supplier in the program raises rates by say, 50 cents per hour, large numbers of contractors could be encouraged to switch employers . You may be paying the same amount for talent as you did previously, but suddenly find yourself unable to attract or retain the people you need.
In these circumstances the markup model, where all workers are paid the same for any particular role, could be more appropriate.
What is the markup model?
Under the markup model, suppliers agree to a predetermined markup percentage rate on top of the contractor’s rate, and are only able to submit candidates within certain pay ranges.
This approach is generally more complex, and the rate can fluctuate depending on factors such as:
- market demand
- assignment duration
- buyer’s knowledge
- type of workers
- volume of talent.
What are the advantages of the markup model?
While the markup model is more challenging generally, there is a place for it in high-volume hiring and when you need to rationalise pay. If all suppliers are working to a standard markup, it can also enable cost savings.
Are there downsides to the markup model?
One big potential drawback to using the markup model is that it’s quite common for more established and reputable suppliers to opt out of supplying talent this way.
If this happens, you could find yourself left only with newer and less experienced suppliers. And while they may be more eager to prove themselves, there is always the potential for a loss of quality and a reduced understanding of market conditions.
Taking into account a tight labour market
In this talent-scarce market, businesses must focus on sourcing and retaining the best people – and flexibility around pay and margins is crucial. In my experience, primarily gained in the US market, the lower the mark-up gets, and the less profit suppliers are allowed to make, the more time-to-fill increases.
It is vital that, when striving to achieve value for money, organisations consider how the loss of productivity through not having roles filled quickly would impact profits. If a particular pricing model ends up costing more in lost productivity than it saves in reduced rates, then it’s time to consider an alternative approach.
Bill rate vs markup: what’s the verdict?
The markup approach may seem the easy choice for demonstrating visible cost savings. However, my experience has shown that a bill rate strategy typically provides the most lasting positive impact and a solid foundation for controlling costs, raising quality, and ensuring timely delivery.
That said, there is no ‘one size fits all’ solution. In the UK for example, markup pricing remains the norm. If you need further guidance, we can help you understand which approach will work best for your organisation, and in which scenarios, so you can manage talent acquisition more effectively. Get in touch to discuss your needs.