Is The Recruitment Agency Bubble About To Burst?
The Cycle
For publicly listed and private companies, increasing shareholder value is a top priority. How is this done? Companies create products and services to be sold within global consumer markets. To be successful, the products and services must satisfy a consumer want or need. They must also be of high quality. Finally, the company producing the products and services must be run efficiently. If all of these boxes have been ticked, the generation of profit is a near certainty.
Performing well in these areas attracts investors, who are looking for well run and profitable companies with which to invest. Additional investment allows companies to create new products and services or improve their existing portfolio. The cycle begins.
The Talent
Companies considering updated existing products and services or creating new ones, need technology and people to do so. Improvements to existing technology or the emergence of completely new technology, allow companies to rethink their portfolio of offerings.
As a company becomes more successful, they will tend to employ the brightest and smartest people. They do this to facilitate new thinking in regards to the application of new theories or new technologies, that will improve their products and services or assist them in building new ones.
But how do companies get these important people through their doors? One way is to use a recruitment agency. There are hundreds of thousands of agencies across the globe. They operate in all sorts of different industries, sourcing people with many different types of skills. There is one trait that all agencies across the world share and that is their approach to risk and pricing.
The Old Agency
Across the globe the approach to recruitment pricing has been the same way for a long, long time. Agencies will charge a percentage of the annual salary or hourly rate attributed to the role that they are hiring for. This can range from 10 – 40% depending on where you are and what industry and role the hiring is intended for.
Let’s use a Software Developer to run an example, with particular skills in Java. Let’s imagine the hiring company is located in Ireland and the role can be conducted remotely. On average, this type of role could attract a salary of around €74,000 per annum. Let’s say the agency fee is 20%. Upon placing this new Java Developer, the hiring company will pay the agency €14,800 for the privilege of using their service to introduce them to a new employee.
The Value
There are three important things to consider when analyzing this pricing method. Value, risk and the availability of an alternative. Let’s look at value first. How to calculate the value of something and how to decide whether that calculation represents good or bad value?
Let’s assume that the newly hired developer possesses the skills the company needs to assist with the development and production of new products or services. All things being equal, it can estimated that new products or services will increase profitability for the company. Subsequently, it’s reasonable to suggest at this point, that the introduction the agency has facilitated, between company and developer, could be considered good value.
This consideration of good value has to be measured alongside effort. Effort in this case, represents the work done by the agency to introduce this new employee to the company.
Let’s assume that it takes a recruitment consultant, from an old agency, 12 hours work to source, vet and pre-screen the candidate before they are delivered to the company. Once the company has decided they would like to speak with the candidate, there’ll be a little more time required to schedule meetings and prepare the candidate for the interview.
With our focus still heavily on the determination of value associated with a specific price, effort is a huge factor in this calculation. So let’s take the price being charged to the company, that being €14,800 and divide that by 12 hours. This will give us the cost of each hour of effort in regard to the recruitment consultant that has been assigned to work on this particular recruitment requirement.
To find a Java Developer within 12 hours, the hourly rate would be €1,233 per hour. Let’s factor in some costs for the old agency like real estate, people and technology. Let’s be generous and imagine a very high cost base of say 60% of turnover. This would mean that profit from each hour of effort would be €493.20. Let’s remain focused on the customer, the €493.20 is irrelevant to them, it’s the €1,233 per hour that they have to pay.
The ‘good value’ we had surmised from the relationship between the skills of the employee and the development of new products and services now begins to dissipate.
How to tell if someone is getting a good value? This is where comparisons come in. Recruitment consultancy is a professional service. Comparing other professional services that use an hourly rate may provide some clues.
A legal firm carrying out commercial activities for a client could charge between €500 and €700 per hour. Our old agency is starting to look at home in the ‘bad value’ category. An accountancy firm may charge between €180 – €300 per hour to sort out the company’s tax affairs.
Though not a professional service, the POTUS earns roughly $86 per hour. Frequently referred to as the most difficult job in the world. Our agency fee of €1,233 per hour is now starting to look completely ridiculous in terms of value.
The Risk
Have you ever thought about asking the current recruitment agent why their fees are terribly bad value and so incredibly high?
This is probably what they’ll tell. ‘We source highly skilled talent for strategic roles within the company. These people will increase profits and drive exponential growth.’
That’s not why the fees are so high. A large part of the problem is the act of hedging. Old recruitment agencies rarely operate exclusively for their customers, they are nearly always up against other agencies, as this benefits companies by increasing candidate coverage, or so they think.
Being up against other agencies for placements means that securing the right candidate first may not happen all of the time. This is the risk the old agencies are trying to mitigate against by charging astronomical fees. Let’s use our fee for the Java Developer once again, €14,800.
Let’s imagine that the old agency had worked on three prior placements, without securing a candidate. On the fourth attempt they manage to find a suitable candidate first. Their fee has to cover one successful placement and three unsuccessful placements, where they didn’t get paid for their work, €14,800 ÷ 4 = €3,700.
Let’s again imagine that each candidate search took 12 hours of effort. The hourly rate across the four recruitment requirements is €3,700 ÷ 12 = €308 per hour. Whilst this hourly rate seems a little more palatable, this is not the hourly rate that the customers are seeing, that is €1,233.
Customers are unaware of unpaid and unsuccessful placements. All the customers see is an hourly rate of €1,233, using the example above.
Hedging against not placing candidates delivers no value at all for customers. It only facilitates old agencies clawing back revenue for time spent on recruitment projects that don’t yield any revenue.
Another part of the issue with gigantic and irrelevant recruitment fees is the commission structure that has plagued the industry for decades. Graduates are lured into recruitment with promises of €100,000 per year salaries. This issue will be covered in another article later this month.
The TINA Effect
TINA — There Is No Alternative — is a popular Wall Street acronym describing a key reason why equities remain so popular.[1] This basically means that investors are choosing something not because of its value, but because there is actually no other option. The recruitment industry is suffering from a TINA moment right now and it’s fueling the recruitment bubble.
Customers understand everything outlined above. They understand that old agency fees carry some of the most inflated profit margins of any product or service within any industry, ever.
Companies pay these fees because THERE IS NO ALTERNATIVE. They need highly skilled people to join their companies to fulfill objectives. When they don’t have the resources or time to source these candidates themselves, they are forced to engage with old agencies and face crippling fees.
Recruitment as a Service (RaaS)
TINA’s time is up. Recruitment as a Service (RaaS) from Schwarz & Vogel has been developed to remove the risk associated with recruitment, both on the agency side and the customer side.
A professional service that is priced fairly. A professional service that is based purely on consumption. Having removed the risk suffered by old agencies. This means that it has been priced out of our hourly rate.
Because the risk has been removed, the value of Recruitment as a Service has increased exponentially in comparison to old agency services. Customers no longer have to pay for old agencies hedging against not finding the right candidate many times in a row.
Schwarz & Vogel treats each recruitment requirement like a project. The company works on recruitment projects for our customers and charge for every hour of work done. There is no relationship between the annual salary of the role we’re placing for and the price charged.
The role now becomes the sole focus of the project brief. It has no bearing on the price charged or whether or not the company gets paid.
This means that because Schwarz & Vogel always gets paid, the costs associated with using a recruitment agency have been reduced considerably. In 2020, our customers saved between 50 – 75% on traditional recruitment fees.
Recruitment as a Service benefits customers in terms of the type of candidates being presented. Whilst old agencies focus on salary, the higher the salary, the more they get paid. The salary has no bearing for consultants at Schwarz & Vogel, meaning we’ll present candidates for the right reasons, the reasons that are 100% customer focused.
[1] https://www.barrons.com/articles/tina-is-looking-vulnerable-beware-market-group-think-5159342930
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