Operating Costs of a Recruitment Company

Why do recruitment firms charge so much? Today we will take a look behind the veil and analyse the costs of a standard recruitment firm. This is the first of a 3 part series of posts that will cover (or uncover) whats behind the veil of recruitment companies.

Behind the veil

For the last 30 yrs. I have been running medium sized recruitment companies and have been fortunate to experience all sorts of recruitment from industrial recruitment firms through to search firms.

The purpose of this post is to explain the cost structure of these businesses, which in turn will help you understand why some things happen, and more to the point, why a lot of things don’t.

What is a Recruitment Firm?

A recruitment firm is a sales based company, and when I say sales, I mean hard core sales.

Some organisations are very ethical and unfortunately, there are many who don’t know the meaning of ethical let alone being able to spell it.

Some firms do permanent recruitment whilst some do casual/contract/temp and then there are some that do all types of recruitment.

In most cases the only differing factor within a recruitment firm is the people. After all, the process of finding candidates and placing them in roles is not that different from firm to firm, despite what the leaders of the firm may say. However the passion, gusto, imagination and pig headedness of a great recruiter, is what makes them great; because they think differently, and won’t give up.

The structure of a recruitment firm

In general, there are 4 main sections of a recruitment firm.

  1. Operations – which consists of the do’ers – the consultants and line management as sometimes they will carry a budget*
  2. Administration – which consists of the consultant coordinators, administrators, reception, PA’s etc.
  3. Finance – which houses the payroll and accounting functions
  4. Management – which usually has the senior management (CEO/MD etc)

*Individual budgets are used to set expectations for consultants and managers. As a rule of thumb, a consultants budget is 3 times their employment costs, e.g. at a $60,000 TEC, the annual budget would be $180,000.

What is interesting is that all but 1 of the above are cost centres.

The only profit centre is the Operations team.

I made mention of Line Management in the operations section. This varies as in some organisations, managers of teams of consultants have billing responsibility and some organisations don’t.

The costs associated with running a recruitment firm

A lot of people complain about the fees that a recruitment firm charges and in many cases, those complaints are justified. However when you look behind the veil of a recruitment company you will not find a lot of fat.

There are 4 main costs associated with the recruitment firm, People, Rent, Advertising and Insurance, usually in that order.

For example, assume a firm has the following members.

  • 15 x consultants (5 teams of 3) @ $60,000 (TEC) each = $900,000
  • 5 x coordinators/pa’s (usually 1 for every 3 consultants) @ $50,000 each = $250,000
  • 2 x Line Managers @ $100,000 = $200,000
  • 1 x CEO/MD @ $200,000 = $200,000
  • 1 x Office manager @ $70,000
  • 1 x Receptionist @ $40,000
  • 4 x people in finance (including payroll) @ $65,000 each = $260,000

NB: These costs are optimistic and I haven’t included any cost for commission/bonus and IT as assuming it is outsourced.

That is a total annual salary costs of $1,920,000

Rent – Assume there are 2 offices, one in the CBD and one in the suburbs. Therefore rent and associated costs are $300,000

Advertising – Advertising costs are increasing. Years ago an ad on the local internet job boards was around $20. Today these costs have increased and now 1 ad is around $80 (depending on volume discounts). Assume there are 3 ads per consultants (17 including line managers) per week @ $80 per ad = $212,160 per annum

Insurance – Insurance covers workers compensation, public indemnity, and professional indemnity. Insurance Costs = $200,000 per annum

Other – General overhead e.g., electricity, water, consumables, etc @ $3,000 per head per annum  = $87,000

Total expenses = 2,619,000 per annum (and that is being extremely optimistic)

We now need the operations to deliver $2,619,000 (gross profit) in the year just to cover the running costs of the business. Assuming the 2 line managers carry a budget, that is $154,000 per billing head.

Lets break this down a bit.

Assume that the organisation only does permanent work, and the average role being worked on carries a salary (TEC) of $60,000 and the average margin is 15% for the recruitment work. Therefore the average invoice value for the recruitment firm is $9,000.

The firm needs to close 291 roles in the year, (or 17 each billing person) to cover its costs. However, if the average invoice value dropped to $7,000 due to margin pressure, the number of roles required to cover costs is now 374 (or 22 each person).

And that is why, it is hard to get a consultant to drop their rates.

As can be seen from the above, the costs associated with these organisations are not elaborate. They are all made up of people who basically provide a service.

In the next post of this series, we will be exploring why recruiters (in-house/internal and agency) seem so unreliable.

 

Author: Steven Begg Twitter: @stevenbegg  @inhouserecgroup

In-House Recruitment Group Logo

 

 

Allister posted this the other day and I think it is absolutely brilliant! Congratulations to Andrew Mason. Accountability until the very end.

The Digital Recruitment Blog

This isn’t exactly on topic but I thought it was so good I had to post it!

This is the letter that the CEO of Groupon, Andrew Mason, wrote to his colleagues after being sacked.

This sort of honesty is always endearing, and I believe he is a stronger man for it:

“People of Groupon,

After four and a half intense and wonderful years as CEO of Groupon, I’ve decided that I’d like to spend more time with my family. Just kidding — I was fired today. If you’re wondering why … you haven’t been paying attention. From controversial metrics in our S1 to our material weakness to two quarters of missing our own expectations and a stock price that’s hovering around one quarter of our listing price, the events of the last year and a half speak for themselves. As CEO, I am accountable.

You are doing amazing things…

View original post 260 more words

The Hiring Managers Role in Recruitment

The recruitment industry is very interesting as there are always 2 parties that need to be considered. What complicates it more is that the 2 parties in question are PEOPLE. There are the candidates and the hiring Manager (+ the Company) . This blog is about the hiring Managers role in the recruitment process.

Yes we have KPI’s for the recruiters and there should be, but why is it not common place to have KPI’s in place for the hiring managers? In most cases it is due to them that the system falls over.

unreliable word cloud

Let me give you an example. We have a client company that we provide a In-House Recruitment function for. The organisation is a largish organisation (approximately 2900 people) and are growing at a phenomenal rate. We have 3 full time and 2 part time recruiters that work with this organisation.

Recently there was a role for a National Sales Manager which was released to the recruitment team. The brief was minimal. Find us someone who can do blah blah and blah who ideally come from these competitor companies or these client companies. We will pay them $150,000-$200,000. That 3 line brief came through on email from the hiring Manager with the closing comment, I want to interview by friday week as I am now on leave for 10 days and can’t be contacted.

Ok, we have 2 weeks, to find the perfect candidate for a 3 line job description.

So, the recruiters did the best they could and gathered a list of 15 good candidates that could all do the tasks specified in the 3 lines and met the salary expectations and either came from strong competitors or prospective client Co’s. They interviewed them all, created a weighted summary report for the hiring manager (so that he could decide who he wanted to interview quickly when he returned from leave) and had the candidates on standby for a quick call to come in for an interview.

The hiring manager returns to work on the Wednesday prior to the friday he wanted to interview. Our recruiters are sure they will get feedback by close of business (COB). COB comes and goes for Wednesday. Thursday, the recruiter in charge, drops by his office. “Jack”, can you please let me know which of the candidates you would like to meet tomorrow? “Yes, Yes! I will get that done in the next hour”. COB comes for Thursday, no information from the hiring Manager. Friday comes and goes, no information. The following week comes. COB Monday, Tuesday, Wednesday, Thursday, Friday come and go, no information despite consistent reminders. This goes on for 5 weeks!

Now keep in mind, that all these candidates are $150,000-$200,000 people, and they are all from competitive companies or end users of this organisations services. Luckily the recruiter had the foresight after week 2 to contact all of the candidates and tell them the role was on hold.

Week 6 comes, and an email turns up saying “I want to interview candidates 1,3,8,10 and 11 from 8am through to 1pm on friday next week (week 7 from when he returned from leave) for an hour each. So the recruiter tries to organise the interviews. Candidate 3 & 11 have accepted other jobs and candidate 1 isn’t interested in working with/for someone who is this disorganised. The hiring Manager is left with candidate 8 & 10, who happen to be the least qualified of the 5 candidates put forward. The recruiter advises the hiring Manager, who is now blaming the Recruiter for not managing the candidates. WHAT, its 8 weeks since we interviewed them!

End result, no appointment was made and more importantly, the damage that was done to the brand was in the market was devastating.

This is a true story. But what could of happened differently? If the management team had a set of KPI’s that they were measured on that were fed back to the CEO then maybe, just maybe they would take this a little more seriously. All they have to do is care about the people who they are trying to attract.

Its unfortunate but I can guarantee you that the hiring Manager in question will not be reading this post as recruitment is such a small part of his responsibility (in his mind). However if he did, I would like to ask a question.

arrogant

“What makes you think you are more important that the people you are hiring that allows you to treat them with such disrespect? Why would anyone want to work for you? And then consider that these candidates are competitors, past and maybe future clients you are dealing with! Seriously?”

There are very few “excellent” candidates out there. You never know when you will come across one. So treat them all with the respect they deserve. At the end of every recruitment process, even if they have missed out on the role, you want them to be saying, “I want to work with her/him!”

IHRG Logo 600 DPI

Author: Steve Begg, MD The In-House Recruitment Group

Great post Tabitha.

tabitha flack

Caged Animal

You have a phone call, it’s an unlisted number. Who could this be? You answer your phone, curiosity getting the best of you: “Hello?”

“Hi, this is ____ from ____ Recruitment Agency, are you able to speak?”

Oh gosh the dreaded recruiter call, what do you do now? “Can you hold the line a sec?” If you are surrounded by colleagues I would suggest nonchalantly strolling somewhere else in the building. Preferably the broom closet if this is available. Then you fire back, “Ok I’m free to speak”.

But are you really? Part of the job selection and refining process of whittling down a short list to present to a client involves a lot of questioning. We need to find out what your skills are, where your previous experiences lie, what your strong points, and not so strong points are, what are your aspirations, and most importantly your salary expectations?…

View original post 384 more words

KPI’s – An In-House Recruiters Friend or Foe?

Thirty years ago the recruitment industry was being run exactly the same as today, however back then there was no such thing as the internet, databases, iPhones, SMS notifications, emails, Skype, Twitter, Facebook, LinkedIn or even ATS/Database. There was no such thing as internal or In-House Recruiters, we were all agency recruiters.

Index Cards

We had 2 sets of cards on a desk, a shared facsimile a telephone book, and of course, the telephone. One set of cards had our clients and prospects in it and the other set of cards had your candidates, and you never mixed the two.

Good recruiters kept close to their clients but more importantly they knew their candidates’ every move. They knew what roles they were going for, through which agency and even had a list called the Traitor List, which consisted of candidates who had deflected to another agency – how dare they.

The good consultants knew their numbers.

  • They knew that if they put 5 people in front of decision makers, they would get a placement.
  • They knew that if they had 50 candidates and knew exactly what they were looking for, they could find jobs for them; so they stayed close and built relationships with the people. (see this great post building relationships)
  • They knew that if their candidate went to another agency, then they [the other agency] would probably place them
  • They knew that  each ad would bring in a certain number of candidates.
  • They knew the cost of getting a candidate and valued that cost
  • They knew that you don’t advertise on a long/holiday weekend as no one looks for jobs on holiday weekends and it was a waste of money.
  • They knew that if you didnt get back to applicants in 3-5 days, the applicant was gone.

Back then, the more people you spoke to, and the more people you introduced to hiring managers, the more placements you made.

Today, nothing has changed. The more people you introduce to hiring managers, the more placements you will make. However, one major change has occurred, recruiters now have all the tools you could possibly imagine and, unfortunately, they have become lazy.

Thats right, lazy. “How dare you” I can hear coming from readers, “I am not lazy!” Yes you are……..in comparison to the good consultants of 1983.Lazy Consultant

In a massive generalisation (which I am leaving myself open with), In-House, Internal or Corporate recruiters today have it easy. They throw an ad on an internet job board, have a look on LinkedIn and wait. How many of them know what the cost of acquisition is for a candidate, what the cost and efficiencies of the different types of internet job boards are, what their candidate utilisation rate is, how a poorly worded ad effects candidate utilisation. The answer is 2-5% of the internal (we wont even start on how many agency recruiters know) recruiters are versed in such language.

The costs of an Internal / In-house Recruitment team is massive. If a company has 5 recruiters on an average of $70k (TEC) per person, that is $350,000 in salaries alone. Couple that with advertising, LinkedIn membership, overhead, ATS/Database subscriptions, IT cost, and you have close to $700,000 worth of annual investment. So a company has a right to demand certain KPI’s be met.

Here are the KPI’s we (The In-House Recruitment Group) use with the in-house teams we run for our clients

  • Time to hire – time taken to fill the role
  • Cost of candidate acquisition – Monthly/Quarterly cost associated with candidate acquisition.
  • Cost per hire -total cost per hire including recruiter time, candidate costs, advertising etc.
  • Candidate utilisation – number of candidates in the database that are being utilised. If they are not going to be used, they shouldn’t be in the database
  • Advertising channel efficiencies – measuring the number of candidates (not applicants) that come from each ad and the costs associated
  • New hire turn-over – fall off rate of new hires
  • Applicant : Candidate ratio – how many applicants become candidates
  • Candidate : Interview ratio – how many candidates are interviewed by hiring managers
  • Interview : offer ratio – how many interviews to offer.

By using the above KPI’s we are able to ensure our recruitment teams are as efficient as possible. As they say, if you measure it, you can manage/improve it, and if you can improve it, then everyone is happy.

So, are KPI’s the In-House recruiters’ friend or foe…………….

For more information on KPI’s for recruiters, contact us at www.inhouserecruitmentgroup.com or click here to complete our contact form.

In-House Recruitment Group Logo

This post was written by Steve Begg, MD of In-House Recruitment Group. Steve can be contacted on +61 (2) 8005 6299.

Negotiate, Negotiate, Negotiate

Negotiate With Your Agencies
The purpose of our blog is to provide tips and tricks to improve the efficiency of recruitment in your organisation. The tools, tips and tricks that we share with you are taken from over 30 years in recruitment. We know our stuff and are prepared to share it with you.
Reduce your agency costs
Recruitment agencies are doing it tough. With a reported 3000 + agencies in Australia there have never been more recruitment companies in the Australian marketplace. As a comparison, there are apparently, 6000 recruitment companies in the US with a population of over 300,000,000. What was Australia’s population again?  Oh thats right, 22,000,000. That makes our recruitment market around 10 times more competitive than the US!
Couple this with the number of In-House Recruitment functions that are established and you have a rapidly diminishing market.
Therefore, negotiation is now one of the first things you should be doing with your agency of choice. Why? Because you can!
The standard rates are fixed (at least that is what they will say to you) however I guarantee you, if you asked them to take 25% off, they will.
However, I strongly suggest you give something in return; a reason for them to say yes.
Here are some suggestions.
  • Give them exclusivity for a period of time, e.g., 3 weeks. It costs you nothing and gives the recruiter a chance to tackle this role head on with no interruptions
  • Pay 20% upfront. This takes you to the top of their pile of jobs as you have already paid a component. It also shows the recruiter that you are serious.
  • Refer them to other parts of your organisation; obviously after they have finished the assignment and proven themselves. This once again costs nothing but is priceless from a recruiters perspective

Obviously, the other option on reducing costs is to establish your own in-house recruitment function which is easier than you can imagine. To find out how, simply call 02 8005 6299 or click here to visit our website and complete the form and we will call you.

In-House Recruitment Group Logo