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

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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