Vendor Management System

A vendor management system, or VMS, is a software platform used to manage the external workforce: contractors, temporary staff, consultants and statement-of-work services. It handles the process of requesting workers, distributing requests to staffing suppliers, comparing candidates, onboarding, tracking time and expenses, approving invoices and reporting on spending. Well-known platforms include SAP Fieldglass and Beeline, among others.

The term can be confusing, since vendor management also refers to the broader practice of managing supplier relationships. In procurement, however, a VMS specifically means software for contingent labor and services. For technology organizations, which often rely heavily on contractors and consultants, a VMS provides control and visibility over a large and often fragmented area of spending.

Definition of Vendor Management System

A vendor management system is a web-based application that enables organizations to manage and procure staffing services, both temporary and permanent placements, as well as outside contract or contingent labor. It typically covers the full cycle from requisition to payment.

A VMS is distinct from the practice of IT vendor management, which covers relationships with all technology suppliers. A VMS is a tool focused on one category of spending: external labor and services.

Core Functions

Core functions, which are similar across most platforms, include creating and approving requisitions for contingent workers, distributing them to approved suppliers, collecting and comparing candidate submissions, managing onboarding and offboarding, recording timesheets and expenses, and consolidating invoices for payment.

Many platforms also manage statement-of-work engagements, where suppliers deliver defined outcomes rather than individual workers, tracking milestones, deliverables and payments against each engagement.

Some platforms also support direct sourcing, where organizations build their own pools of contractors, such as former employees, and engage them without a staffing agency.

VMS and Managed Service Providers

Many organizations combine a VMS with a managed service provider (MSP) for contingent labor. The MSP runs the program day to day, working with hiring managers and suppliers, while the VMS provides the technology platform.

Some organizations run their VMS programs in house, particularly when their contingent workforce is small or concentrated in a few areas, such as IT and engineering.

The MSP is often paid a percentage of spending, which should be considered when evaluating the total cost of the program.

Importance of a Vendor Management System in IT Financial Management

Contractors and consultants are a large part of technology spending in many organizations, often supplementing internal teams for projects, specialist skills and peaks in demand. Without a system, this spending is hard to see and control.

A VMS brings it into a single, consistent process that every hiring manager follows.

It also produces the data needed to make better decisions about when to use contractors and when to hire.

Cost Control and Rate Management

A VMS enforces approved rate cards, preventing hiring managers from agreeing higher rates with individual suppliers. It ensures that only approved suppliers are used and that timesheets are approved before payment.

Data from the VMS shows rates by role, supplier and location, allowing organizations to benchmark rates and negotiate better terms. It also shows how long contractors stay, highlighting cases where long-term contractors might be more cheaply replaced by employees.

Consolidated invoicing reduces the administrative effort of processing many small invoices from different suppliers, and makes it easier to check charges against approved time.

Visibility and Compliance

A VMS provides a complete view of the contingent workforce: how many contractors there are, where they work, what they cost and which projects they support. This visibility supports budgeting and workforce planning, and makes it possible to include contractor costs accurately in labor costs and project costing.

It also supports compliance with employment regulations, such as rules on worker classification and tenure limits, and with security requirements, ensuring that contractors' system access is removed when engagements end.

Tracking contractor costs by project also helps identify qualifying development work for software capitalization, since contractor time on such work can often be capitalized.