It is a Mistake to Choose a Staffing Company Because their Margin is Low
Quite often when clients are evaluating potentials staffing companies to create a shortlist of suppliers, there is a big focus on the margin of the supplier. Intuitively the client feels that if they are getting the suppliers who charge the least margin then they are getting the most cost effective deal!
There are a number of reasons why that approach is flawed:
1. Clients should really be focused on the price they pay for a consultant, not what they are paying the agency.
2. In my experience the only winner is the contractor who ends up getting paid above market value for their services, the client saves nothing.
3. Many suppliers will bid the low prices needed to “get on the list”, however practically speaking the client becomes a tier “B” client. If it is an easy “fill” the supplier does it, if they can get more at one of their other clients for the same contractor then the other client gets them.
4. If the “low price” supplier can better use their recruiting “horsepower” on higher margin business at other clients, then they will. Meanwhile they will “talk up” just how important the low price client is to them!
5. In order to close business, when nothing else is cooking, the supplier will pay more for the contractor than they need to … there is no incentive to get the best price. In one current Eagle scenario our margin percentage is higher than our competitors, and they just offer our contractors an extra dollar or two to go through them .. the client gets no gain.
6. Do a little bit of math … a supplier at 20% margin (25% markup) versus a supplier at 18% margin (21.95% markup). If the lower margin supplier finds a candidate who wants $50 in their pocket, the client pays $61. If the higher margin company is able to find an equally skilled candidate who wants $49 in their pocket the client will pay $61.25. A difference of 25 cents! So if the higher margin company is better at recruiting, then it will likely always get a better price for the client that the lower margin supplier.
7. The agency margin is always the smaller part of the equation … it is the contractor rate that will determine the end price.
8. If you get the right agencies you will get intense competition for each order that will drive the best price. If you supplement that competition with a ceiling price rate card you have the best solution!
9. Contractors are not pencils, they differ in a million different ways and therefore even candidates with very similar skills may have a rate difference that is significant! That is does not take into account the quality differences and what may take one programmer 12 weeks to do may take another 8 weeks to complete!
Yes … this approach is good for my company because we get to continually demonstrate our ability to recruit great candidates at a competitive price. I don’t apologise for that, but it certainly doesn’t help my case when I try to convince buyers they are looking at the wrong thing! Then, after it is too late, they wonder why their spend did not reduce they way they thought it would, and their clients in the IT department wonder why they are not getting great candidates any more!