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The importance of... sustainable rates - Part 1

Posted on 02/02/2017 by Jon Milton in Category Managed Services
In the second of our series of articles on contingent resourcing in 2017, we look at how to maintain competitive margins where demand is significantly outstripping supply, and how to ensure that the quality of worker does not suffer. In this first part we consider two challenges: working with a single agency supplier and understanding how margins work.

A cursory look at REC jobs market figures show that turnover in the recruitment industry for 2014/2015 was £31.5bn, the highest since records began in 2001/2002.

Permanent recruitment revenues, which equate for about 10% of total turnover have increased by 58.4% from the recessionary lows of 2010/2011. ​Temporary/contract revenues are up by 60.1% over the same period. Unemployment is exceptionally low.

What all this means is;

  • demand for workers is accelerating rapidly
  • thousands of organisations are turning to recruitment agencies to help them meet it
  • the pool from which to draw workers from is receding.

Logically, any situation where demand outstrips supply results in higher costs. These costs may be reflected in margin, pay rate, expenses or even resource commitment as your organisation searches to find the right worker fit. 

The challenge with this however is that we have not long come out of a recession; a situation where we got used to paying workers at a certain level; were able to secure low margins from agencies who were grateful for the business; and found that actually finding people in the first place was relatively straightforward.     

So how do you deal with this challenge without racking up a whole load of extra cost? Not as you perhaps think – and it’s probably worth addressing that particular elephant in the room first.

The Urban Myth: Exchanging volume with a single agency supplier will solve all my problems

There are 19,000 recruitment agencies operating in the UK, employing about 102,000 recruitment consultants. It doesn’t take a genius to work out that a lot of those companies are either one man bands or SMEs who have easily entered the market and are successfully plying their trade through exploiting the inherent inability of the larger agencies to provide a one size fits all solution that meets every customer's needs. It’s a massively fragmented supply market that has never responded well where customers with diverse needs have attempted to exchange volume in this way. 

In the managed service world, some providers have responded to the challenge of keeping margins low with brute force, transferring any incumbent workers supplied by incumbent agencies to their own books at implementation, and attempting to fill every requirement that comes along. This is however not a sustainable solution, as this approach heavily relies on the provider having the supply capacity to replace those agencies that they have appropriated workers from (because let’s face it, as a 2nd tier supplier, why in a recovering economy would you supply again and risk your workers being transferred again?), and as we’ve explained in the national picture above, that has never been proven to work. Long term this approach inevitably drives off contract buying and/or significantly reduced quality, which will obviously impact organisational output and competitiveness.

Keeping rates sustainable – making it worthwhile for the agency

In very simple terms, the rate paid to an agency is sustainable if it covers their cost of sale and generates a reasonable profit. Cost of sale is important here; agencies typically pay their temporary workers at the end of the previous week worked and get paid by the customer in arrears, so prompt and efficient payment is crucial; agencies only get paid once they have filled a role successfully so providing a decent level of opportunity on a level playing field is extremely important;  agencies spend a lot of resource cost on pitching for business, so the automatic allocation of opportunity helps to reduce this; and they are a vital component in delivering the temporary workforce so it is important to allow them to be heard (and not just through e-mail) and responded to.

In terms of profit, it’s important to pitch rates at the right level. Instinctively you may distrust agencies if you have been stung by high spot fees in the past, but there are boundaries beyond which margins simply don’t work and render the fee payable non-profitable. Clearly it’s important to push these boundaries where the market dictates, but you will need to develop a strong understanding of the market to do so.

In our own managed service model suppler relationship management is a key component of our service and one that has helped us to address these issues. If you’re considering the managed service route, do talk to your agencies and ask them to give their views on different managed service providers – it will be an interesting conversation and one that should form part of your market approach.

In part 2 of this blog find out how a worker's decision on where to work is led by a number of factors, not only pay rate and how to manage expectations from the different stakeholders.