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The IT Staffing Agency Value Proposition

As a “middleman”, the Staffing Industry was written off, because the internet was going to replace us … well the staffing industry is alive and well. I have also heard the comment from clients … “you have made your money now so you should drop your margin!” I have heard the same from contractors. I hear from some people that agencies bring “no value”. All interesting perspectives so I thought I’d address the value proposition that an IT (since that is my specialty) staffing agency brings.

1. IT staffing agencies offer clients a “just in time” staffing solution, with direct access to more qualified IT people than any large employer!
2. The agencies can offer these resources at very aggressive prices.
3. The agencies find these resources when you need them!
4. When clients use an agency to bring in contract resources there are many benefits that come with that solution:
Flexibility, to scale up and down and supplement employees to meet demand;
Resources that generally hit the ground running;
Resources that are ONLY there while there is work to be done;
Resources that demand NO HR time … no issue management, no training, no career management, no benefits package;
Resources that are ONLY paid while working … no vacation pay, no maternity leave pay, no sick pay;
Resources that can be let go without fuss … no severance, no legal issues etc.
5. The agencies bring their clients protection from the very real risks associated with employer/employee relationships;
6. The agencies typically bear the brunt of collection issues. We pay the contractors quickly and deal with the vagaries of invoicing large clients that have increasingly longer payment terms.
7. Agencies provide contractual protection from Intellectual Property (IP) issues, non-competes, non-solicitations etc.

The way the industry works is that the client pays a “bill rate” that includes an amount for the contractor (“pay rate”) and an amount for the agency. Agencies express their component as either margin (a percentage of the “bill rate”) or markup (a percentage of the “pay rate”).

So, why can’t an agency just drop its margin after a certain amount of time? There are a few reasons:

1. Agencies only get paid for the very small percentage of contractors that are actually on contract. Typically this will be less than 1% of their total database.
2. The cost of running an agency is not just about managing the current contractors that happen to be on contract. The agency incurs ongoing costs associated with maintaining that large database of screened professionals.
3. Every company needs to maintain at least a minimum level of profitability in order to remain in business. If you were to look at the EBITDA associated with the publicly traded staffing companies you would see they average in the 3 to 5% range. This is not a highly profitable industry.
4. Clients tend to look at the revenue line and assume there is lots of profit in there to cut. Typical agency margins can range from 15 to 25% of the bill rate to the client, the other 75 to 85% going directly to the contractor. Out of the remaining margin an agency needs to pay for all of its company costs … the largest being pay for the staff (management, sales, recruiters, proposal writers, admin, finance, technology, marketing etc.). In addition there is the cost of the infrastructure (offices, technology, communications, furniture etc.) Then there is the general operating costs (training, financing, insurance, legal, travel, entertainment, job boards, charities, sponsorships, memberships etc.) There are other costs that agencies incur through involvement with industry associations, through which we protect the industry and our clients from legislative issues and political issues. Agencies also incur costs through the many and sundry issues that arise in the day to day business of dealing with people.

The staffing industry provides a tremendous value to the economy,(a) by providing employment for many thousands of temporary and contract workers; and (b) by providing companies with on demand access to a huge pool of qualified resources.

That is a powerful Value Proposition! We earn our margins!