Why Do Companies Use Agencies When They Have Their Own Recruiters?
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Why did US Based companies spend $150B in 2016 on staffing agencies when they have their own internal recruiters? To better answer this question it makes sense to understand why companies hire in the first place. For simplicity, there are two main reasons, attrition (replacing people who have left) and growth (adding to the team based on increased business needs or an upswing in project load). Next, they need to decide whether this is long-term attrition/growth or short-term attrition/growth. Easy so far, right? Well, then comes a laundry list of logistical questions: Can my department get headcount approval? Can I find someone quickly enough to make sure the project meets our deadlines? Does this person even exist in our geographic? What are our competitors paying for a similar skillset (dancing the line between being competitive in compensation, but not overpaying)? This exercise of Q&A can go on and on, but more time spent planning usually leads to less time executing.
Depending on the answers there has to be a decision whether to hire someone perm, temp to perm, or to utilize a contractor.
Hiring on a Direct-Hire or Permanent Basis
Most companies manage their hiring process through HR. Sometimes they have a HR Generalist that is responsible for all aspects of HR which include: making sure employees are following company and departmental policies, employee relations, training and development, benefits, compensation, organizational development, and of course employment. Notice recruitment is mentioned last as staffing tends to be done on an “as needed” basis. On a side note, if you want to hear genuine fear in someone’s voice, talk to a HR Manager who just got 40 new positions assigned to them on top of their other day to day duties. Oh, and of course, they all need to be filled ASAP.
Larger companies that hire on a more frequent basis will either have a dedicated recruiter or a recruiting team. The rule of thumb is that the size of the recruiting department should be just big enough support a “normal” business needs, large enough to backfill those who leave along with add during times of consistent growth. However, what happens when there is an increase in vacancies (like the example above, having 40 new requirements dropped at time) that need to be filled ASAP, hard to fill positions that have been open for a long time and nowhere else to turn for additional candidates, or a sudden, yet temporary, growth spurt?
Hiring more recruiters may not be the best solution because you run the risk of having someone on payroll that is going to be twiddling their thumbs in 6 months. Another option is to hire a contract recruiter to jump in for a couple of months, but it takes time to get them ramped up, learn your systems, etc. Plus, if your ramp up and cool down periods are sporadic, like most companies, a contract recruiter can’t be “on call” the same way an agency can be. Do you need help with one hard position? Agencies can handle it. Is there a new project that needs to be fully staffed over the next 6 months? Agencies can handle that too. Sometimes agencies have clients with consistent needs, sometimes the vacancies are more sporadic or cyclical, and that’s OK. Staffing agencies exist to augment the efforts of HR and internal staffing departments and their services can be scaled up and scaled down as business needs ebb and flow.
Benefits of Utilizing Staffing Agencies to Hire Permanent Employees
1. Finger on the Pulse
Agency recruiters have their finger on the pulse and are experts in their specialized markets. They know industry trends, who is hiring, who is laying off, who has new leadership that is making people crazy, and can navigate the market more efficiently as they focus on their respective field ALL day, EVERY day. Looking for a niche candidate? Make sure you have a relationship with a recruiter that works in your nice space. Have two openings in different niche areas? Bring on two niche staffing agencies. The cost is still the same and you are usually only paying a fee once they deliver.
2. Expanded Network
Expand your network of applicants by introducing passive candidates to the mix. Passive candidates are those who aren’t necessarily looking, but if given the right opportunity which could be a promotion, room for future growth, compensation, or a better work/home life balance they would make a move. These are people who are not applying all over the place and are strategically “open” if, and only if, there is an opportunity that truly meets their career goals. They generally don’t apply to jobs and don’t really spend time looking for jobs because they are both busy and relatively happy. However, most recruiters have a network of passive candidates and when their “dream job” becomes available, they will see the opportunity through. Passive candidates are generally more sought after, tend to have more stable job histories (which means less attrition), and have better job performance. If they decide to join your team it is because there is truly a mutually beneficial relationship to be had, not just a means for a paycheck.
3. Reduce Time to Hire!
Time is money. The old adage of “90% of sales comes from 10% of efforts” can be 100% true when it comes to hiring. There are countless advertisements, messages, emails, and phone calls all of which lead to nothing. It all starts with sourcing, or identifying potential talent, which could mean reaching out to hundreds of people to market the vacancy. Then comes the arduous task of sorting through responses of people who aren’t qualified, and others who decide the position is not for them after an initial call. Next there are one or two (or more) additional interviews with hiring managers who are taking time from their busy days to talk to people, the majority of which, they are not going to hire.
As a great example, I had a client who filled their position with the first person we had submitted. Doesn’t sound all that impressive, right? I mean, that is our job after all. Well what I didn’t tell you was that internal staffing team had gone through 116 candidates on their own…yes 116 CVs reviewed, multiple first round interviews followed by multiple second round interviews all for goose eggs. Now, we had to screen out a ton of people and made sure the person we submitted checked off all of the qualifications, but at the end of the day the first person we submitted was prequalified, interested in the position and the company, made it through the entire process, and accepted the offer. Talk about a time saver. Staffing agencies weed through all of the “not interested” or “not a fit” to hand delivering pre-qualified and interested candidates to your doorstep meaning less time to review, less interviews, less rejection so you and the rest of your team can be more productive.
This leads to the next problem: beating your competition. In reality if your industry is growing and you are looking to hire someone there is a pretty good chance that your competitors are in the same situation. When there is a war on talent, and we are definitely in a candidate driven market, the first offer is usually the one accepted. An offer is a powerful motivator. It shows the candidate their skillset is valued by others and it is a one way ticket out of their current position. Stack the deck in your favor. If you find a candidate that will be an asset to your team, be the first offer on the table. I can guarantee your acceptance rate will increase.
4. Power in numbers
Having extra manpower, or womanpower, means beating out your competition who is struggling to attract the same talent. As mentioned above, time to hire is important, but it all starts with outreach. No one can apply to a job they don’t know exists. More staffing support means more outreach to potential hires, more networking, and more branding (more on this next).
Let’s say you and your competitors are both looking to hire a sales rep as your industry is booming and you want to take advantage of bringing in new business. Your competitor has one dedicated recruiter who is working on four positions, one of which is the sales rep position. On the other hand, you are partnered with an agency that has 10 recruiters that specialize in placing sales reps. Who do you think is going to win that battle for talent? My money is on the bigger army.
Agencies help expand your branding. Companies spent countless resources on branding, whether it be online or print. A “side effect” of working with staffing agency is free branding support. A staffing partner knows all of the reasons why your company is awesome, what it is like to work there, benefits and career growth, corporate culture, among other nuances. Agencies can market your company better than any job description or job posting. This also leads to a better pre-qualification process which results in decreasing time to hire.
Hiring on a Temporary or Contract Basis
There are many benefits of utilizing contractors. Contractors add a flexible resourcing solutions to short term, part time, or risky projects (including ones that, if they fail, will end). They can be used to augment current projects that need a little extra help or are a necessity if there is a cap on headcount when additional staff is needed. They allow a low risk, try before you buy model to test out new employees and can add access to industry leaders who have no interest in working on a permanent basis.
Benefits of Hiring Contractors through Staffing Agencies
When dealing with public or even private equity owned companies there are stricter guidelines to increase revenue by decreasing operating costs. Public companies need to prove to their investors that they are reaching maximum production with the least amount of employees, otherwise they are inefficient and therefore need to “cut the fat” to increase efficiency. Contractors are not included in headcount which keeps fixed operating costs low. Not to mention, if a project is ramping up and headcount is capped, the only option for support is to add a contractor (or a team of contractors) to preserve deadlines.
2. Get the Job Done Now and Pay Later
What is better than getting the job done now and not having to pay for it until later? There are some exceptions to this rule, but agencies will generally pay their contractors on a fixed schedule, whether it is monthly, bimonthly, biweekly, or weekly. A paid contractor is a happy contractor; however, agencies don’t generally get paid until 45 to 90 days later and most contractors won’t (or can’t) wait 90 days to get paid. So what happens?
To walk through an example, let’s say an agency pays their contractors every 2 weeks. At the end of the pay period the contractor sends their manager approved invoice for payment which is paid a week or two later. Each agency has a different pay schedule pending their size and ability to collect all timesheets and resolve/approve issues. Back to the example, the same approved invoice is sent from the agency to their client’s billing department where the bill is paid 90 days later. We are now talking about a two and half to three month lag between the contractor getting paid by the agency and the agency getting paid from their client. Where this becomes mind-blowing is when you consider how many contractors an agency has on billing at any given time. Even small agencies can easily be floating $1M in contractor payroll with larger companies exponentially over that figure. Google “staffing agency payroll funding” and you will find a laundry list of funding companies taking advantage of this market.
There are clear advantages to a) freeing up today’s budget for more pressing needs and b) getting work done today and have two to three months to pay for it.
Mergers and acquisitions are a reality in most industries. M&A allows companies to expand their business, partner with their competitors to deeper penetrate their market, and to diversify their service offerings. Having outsourced staff shows lower headcount and operating costs, can be used to work on temporary pre or post-merger projects and allows companies (generally post-merger) to sell off certain assets that they no longer plan to keep. The best part is they can make these changes all without affecting their permanent employees allowing for a future reduction in workforce without the negative publicity of a layoff.
It can be devastatingly difficult to attract talent post layoff when the rebuilding or restructuring phase begins. On one hand your company publicly announced laying off 1,000 employees while on the other hand they are saying, “Hey, come join us. Leave your nice, stable job, and join our company where everyone if freaking out that they are next on the chopping block.” Doesn’t sound very appealing, does it? On the flip side, what happens if a team of contractors are let go after finishing their assignment? Absolutely nothing.
4. Co-employment Law
Back in 2000, Microsoft was involved in a precedent setting lawsuit that eventually reached a settlement of $97M after contractors sued the company by arguing that they were actually permanent employees and therefore deserved the same benefits as regular employees. This was the largest lawsuit of its kind and is still a lesson that companies today have learned vicariously through Microsoft. In current times co-employment law (and interpretation of co-employment law) is a hot topic. Each legal counsel has their own interpretation based on a set of criteria that the government uses to determine whether someone is properly classified as a contractor and in turn protect themselves from potential lawsuits.
Staffing agencies are (or at least should be) experts in co-employment law to protect themselves and their clients. In addition, utilizing an agency adds another layer to the argument that “these are not our employees”. Two other options are a) outsource projects rather than hiring contractors with the risk of not having direct oversight of the project or b) hiring independent consultants who are set up as small business to work on a corp-to-corp basis. The latter option has a plethora of potential risks including the fact that there are many “independent” consultants who do not have their businesses set up in a way that eliminates any gray room of distinguishing their services as being classified as an independent consultant instead of an employee.
Staffing agencies are experts in making sure that each consultant is up to “code” to limit risk for all parties. Google “co-employment law” if you are concerned that your company may be in noncompliance.
5. Try before you buy
Everyone loves a low-cost trial period. Hiring on a temp to perm basis allows a low cost trial period to identify long term fit. If the employee doesn’t work out, then either party can end the contract without a long term negative impacts. For the employer, they didn’t invest headcount in someone that wasn’t a fit. For the employee the CV will reflect a short term contract assignment. From a hiring manager’s perspective it looks much better to have fulfilled a 3 month contract than get fired after 3 months from a permanent position.
A temp to perm arrangement also gives the contractor a goal to shoot for. IF they do a good job, THEN they become a part of the team. Think of it as a “professional tryout” for the team. When working toward a goal of being “chosen” people tend to be quicker to pick things up and are more apt to step in on special projects to prove themselves to “win” the permanent conversion.
6. Cheaper Alternative to Direct Hire
There is an argument to be made that contract employees are fiscally cheaper than their permanent headcount counterparts. Not only are you paying their salary, but then you have Healthcare coverage, Paid Time Off (including holidays), bonuses, commissions if applicable, 401k and of course TAXES.
There are both federal and state taxes including Social Security (6.2%), Medicare (1.45%), Federal Unemployment (06%), State Unemployment (varies per state, but let’s just estimate 3-4%) and worker’s compensation (also varies per state from $0.75 to $2.74 per $100 of payroll). Long story short, this all adds up quickly.
7. Open the Door to Additional Talent
There are many contractors who don’t want to go perm. They are experts in their field and can make more money working as a consultant, they like working on multiple projects and solving multiple problems. They have diverse backgrounds and have worked at many of your competitors so they can bring in a unique perspective to solve problems in an “out of the box” way, or push the team in a new direction that they haven’t considered in the past. Some contractors are semi-retired or only want to work part time. Some are the most senior and influential leaders in the space and decide to be their own one-person business. There are many times where short term or part time support can be difference of a successful or failed project. If you are struggling with a staffing solution, adding contractors may be the golden ticket.
Staffing agencies are not here to replace what hard working, dedicated HR Managers and internal staffing department accomplish. They are here to add help when and where needed. Whether it be helping scale up during times of growth, beat out the competition by having more manpower, utilizing their network to fill hard to find talent, or reduce the time to hire, the client-agency relationship is a true partnership and sharing of one another’s strengths to be stronger as a whole.
When it comes to hiring contractors an agency can help ensure project delivery is upheld when headcount is frozen, can supply talent for short term or part time projects, will make sure that all employment laws are being followed and will let you test drive potential staff before committing to hiring them on a full time basis.
Stay tuned each Wednesday for a new topic.
Next Week’s Topic: Mapping out the Recruitment Process.