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Axiums Collapse Raises Vendor Management Questions

February 7, 2008
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Related Topics: Human Resources Management Systems (HRMS/HRIS), Contingent Staffing, Featured Article, Recruitment
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The bankruptcy in January of one of the world’s largest providers of vendor management services has sent shock waves through the staffing industry as companies scrambled to collect outstanding bills that have been estimated to total $100 million to $300 million.

The collapse of Axium International of Los Angeles and its subsidiary, Ensemble Chimes Global, raised broad questions about the concentration of staffing management control in third-party companies, particularly technology-based providers like Ensemble Chimes, which oversaw hundreds of vendors on behalf of client companies.

Vendor management systems—or VMS for short—rate staffing vendors based on client criteria, track their performance, handle payments from clients to vendors and perform a host of other functions through a centralized platform.

"The big concern that we have as an industry going forward is the financial viability of these VMS suppliers," said Ed Lenz, general counsel of the American Staffing Association. Lenz has monitored the bankruptcy proceeding on behalf of staffing companies that have unpaid bills from Ensemble Chimes.

"We have members who are worried about amounts owed to them," Lenz said. "But so far we have not heard of any staffing firms in dire straits."

Axium, which started out as a payroll services vendor to the entertainment industry, expanded into the broader business of managing the vendors that provide contingent and contract staffing and related services to clients. VMS providers have grown rapidly over the past decade, thanks to their promise of reducing labor contracting costs and improving vendor selection through the use of sophisticated software programs.

Axium abruptly ran out of money in January and filed for Chapter 7 bankruptcy, which is liquidation rather than reorganization. That resulted in a swift dismantling of the company. What remained of Ensemble Chimes was sold out of bankruptcy on January 23, followed by the rest of the Axium business on January 31.

Much of the initial attention surrounding the bankruptcy focused on movie and television production contract workers who did not get paid when the company collapsed. But the impact was much broader, reaching around the nation and globe into numerous large corporations.

Lenz says hundreds of staffing companies around the U.S. provided contingent labor to clients through the Ensemble Chimes VMS. Bills went from staffing companies to Ensemble Chimes to client companies, and the payments came back through the same channels. The Axium bankruptcy effectively cut off the billing and payment pipeline.

In Minneapolis, insurer UnitedHealth Group had ties severed to around 100 suppliers of contract and contingent labor services who were managed through Ensemble Chimes. In some cases, the relationships involved individual contractors performing project work. But in other cases, groups of up to 40 workers engaged on a contract or contingent basis were affected.

To prevent disruptions, UnitedHealth immediately hired about a dozen Ensemble Chimes employees who constituted the team that managed the UnitedHealth vendors. The move helped minimize problems as a result of the bankruptcy. But despite hiring the workers, UnitedHealth has yet to decide how it will manage its staffing services vendors in the future.

"The long-term solution hasn’t been determined yet," said Karl Oestreich, a UnitedHealth spokesperson. "We are weighing all the options."

The uncertainty on the part of many client companies about how to deal with the Axium bankruptcy spawned a rush by other staffing services companies to offer help and take over Axium/Chimes contracts. Adecco, the Zurich, Switzerland-based staffing company that has its own VMS, was among those offering to pitch in to help affected Axium/Chimes clients—and perhaps pick up some additional business.

"I think that this disruption has certainly created some opportunities," said Steve Baruch, Adecco’s senior vice president of business development in North America. "There is a void that needs to be filled. But at same time, it has created caution. Clients aren’t going to race to pick the next solution. They will be digging deeper, asking more probing questions than they asked before."

Lenz says that staffing companies, which are the ones that actually provide workers to clients, have become increasingly concerned about the growing power of VMS companies to control large numbers of vendors. Prior to the Axium bankruptcy, ASA established a special committee to examine the operation and impact of VMS companies on the staffing industry.

"It has taken on a new urgency because of the bankruptcy," Lenz said.

ASA has taken no position on the use of vendor management services, partly because staffing companies hold varying views. Many staffing companies complain that third-party vendors like VMS providers erect barriers that block access to clients. Meanwhile, other staffing companies have not only embraced the VMS model, but have launched their own versions to better compete.

The ASA is trying to develop several reforms that might help protect staffing companies and clients from disruptions like the ones caused by the recent bankruptcy. The ASA plans to publish its conclusions as a best-practices guide—perhaps as early as the end of February.

Among the top issues under discussion are ways to help ensure the integrity of financial arrangements managed through a VMS. One suggestion is to have client payments placed in trust or escrow accounts separate from other funds controlled by a VMS. Another suggestion is that staffing vendors be paid directly by clients instead of having the payments routed through the VMS. The VMS could continue to monitor, track and direct vendor usage and spending without actually handling service payments that go to the vendors.

Jason Posel, senior vice president at Albany Group, a company that manages contingent worker services, says one way for clients to protect themselves is to avoid grouping all vendor contracts under one manager like a VMS. Having some vendor services managed separately provides a check and balance to the authority of a single manager.

For payroll services, Posel advises clients to include contract clauses allowing audits of vendor accounts to ensure proper handling of funds and payment of relevant payroll taxes.

Jeff Phelps, president and founder of Secure Talent, which provides contract worker services, says the collapse of Ensemble Chimes will probably affect the confidence clients and staffing vendors have in VMS providers for some time to come.

"I do think it is going to cause companies to take a look at the whole VMS industry," Phelps said. "I think many suppliers will be hesitant to engage with a VMS."

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