“It’s not in our budget right now.”
“I spent $50k in the last 6 months on recruiting fees to hire 3 people.”
“We could hire 2 people for the cost of a contractor from a staffing agency.”
“I can’t justify a $16k fee to hire for this one, mid-level position.”
In my 10 years of working in sales within the traditional recruiting industry, these are the objections I’d often hear from customers on whether to utilize our services. Most of them had to do with cost. We’d hear it often. Cost objections are normal for a salesperson, though, right?
Over a 10 year period, I didn’t think about it that much. It was the nature of the business I was in. It’s simply more cost-effective to perform these recruiting functions in-house despite the benefit of expertise and bandwidth an outsourced service provider would offer. “That’s what the market rate is” I’d say. Or something to the effect of “All my other customers are paying these rates. Let me know if you change your mind.” It wasn’t until I left the industry that I saw that there were a massive flaw and inefficiency in the engagement model that most recruiting firms operated in.
The Contingent Basis
Most of the recruiting industry operates the same way that we did – on what’s called a ‘contingent’ basis. The firm’s clients didn’t have to pay anything upfront. Firms would only charge clients they placed a qualified candidate successfully. The fee was ‘contingent’ on the successful placement of a qualified employee.
Typically, recruiting firms would charge 20-30% fees, based on newly hired employees’ first-year salary.
For example, let’s say a recruiting firm charged a 25% fee on a placed Staff Accountant. The company hires that Staff Accountant at an $80,000 per year salary. Therefore, the subsequent fee would equal $20,000 or 25% x $80,000. $20,000 seems like a steep price to pay for one resource that may or may not make it after a few months, doesn’t it? Especially if you have multiple hiring needs.
For those that think recruiting firms are making out like bandits and that $20k fee goes directly in the pockets of the recruiters, salespeople, or just directly to the owners – think again. The industry is extremely competitive. 3-7% is the average net income % for recruiting & staffing companies – strikingly low for professional services firms. Where does all the money go then? Why does the industry charge so much for their services?
Breaking Down the Model
The answer lies in the engagement model in which these firms operate. The fact that the industry still operates on a contingency basis is what causes massive inefficiencies. Inefficiencies primarily in the recruiting department and sales department’s time – the 2 biggest costs of the industry. Recruiting is one of the only businesses (out of any industry) where you do 95% of the work upfront and HOPE that you get paid for the work you put in.
If you look at any recruiting firm – there are countless situations where the client, for free:
- Had a firm work on a position for weeks, only to change their mind that they didn’t need to fill the position at all
- Hired someone through the competition after a several weeks search
- Hired someone on their own, from a job posting, internal referral, etc. after several weeks of searching
- Was only using a recruiting firm to ‘see what they came up with’ and wouldn’t only consider hiring if they found that needle in a haystack
This isn’t the client’s fault. It’s 100% within their right to do all these things. Recruiting firms choose to take on all the risk and engage in this contingent fashion (and charge high fees). Whereas, clients are left to protect themselves as much as possible and avoid the fees at all costs. I would do the same exact thing if I were on the other side of the fence.
Because of this, when you look at any recruiting and sales department at a traditional, contingent recruiting firm – you’ll likely find that anywhere between 40-80% of their time is spent working with clients that don’t ultimately end up paying for their services. This is a massive amount of underutilized or monetized time for any business. How do these companies stay afloat and squeak by with even a modest profit?
The Answer: Charge the companies THAT DO END UP PAYING, higher rates to accommodate and make up for the inefficiencies of the engagement model in general, and all the un-monetized time. That’s it. The company’s that end up paying – aren’t just paying for the recruiting time that went into their successful search – they are having to pay for all that other time that went to searches that didn’t amount to anything for the firm.
Since the early years of the recruitment business (dating back to the 1940s when recruiting leaders founded Kelly Services and Robert Half International), the company has been operating primarily in the same, contingent fashion. This is archaic – most industries have seen formal change and disruption to address some of the massive inefficiencies either through the way they engage with customers or technology.
What We Do
Therefore, I founded Lucas James Talent Partners: to address this major inefficiency and offer clients a cost-effective, flexible, dedicated, and high-quality solution. We offer what’s called Fractional RPO (Recruitment Process Outsourcing). We operate on a week-to-week, fractional time and material basis. Essentially, our team of Sr. Recruiters and Sourcing Specialists dedicate 100% of their time to our clients’ business. They can fill multiple openings exactly how your in-house team would operate. This allows our team to offer a high quality, white-glove, offering at a more appropriate cost, typically 40-60% more cost-effective than the traditional firms – whereas our team acts as an extension of clients’ Talent Acquisition Departments or in some cases, acts as an outsourced Talent Acquisition Department for our clients on a fractional, flexible basis.
If you’re interested in learning more, please contact us at firstname.lastname@example.org.
This article was originally published on October 1, 2018 by Founder, President Tim Schumm ; it has since been updated and republished on August 9, 2023.