The Eagle Blog

The Finances of the Staffing Industry

I have written a number of blog entries designed to educate people about our industry, its value and some of the misunderstandings people have. Recently I have been asked about the costs associated with operating a staffing agency and have actually seen supposed “experts” providing erroneous data to their clients.

One of our potential clients was incredulous that our margins were “exorbitantly high”. They were of the opinion, based upon input from their “experts” that we had no cost base and that our margins equated to profits. Unlike may industries the staffing industry operates with very low profits, both Statistics Canada and Staffing Industry Analysts have published papers showing that Staffing industry profits are in the 3 to 5% range.

So … if we have such exorbitant gross margins, how do we end up down at those kind of profits? First and foremost the “Cost of Sales” in the agency business is the cost of the contractor. Typically there is a mix of business between “regular” margin business and very low margin “payrolling” business, together they can drive overall company margins down into the mid teens. So 85% or more of revenues gets paid out to the consultants BEFORE the agency even receives payment from the client.

Keeping things very simple, working with 15% or so of revenues we now have Sales, General and Administrative costs to deal with followed by taxes.

1. Salaries … by far the largest cost to any agency is the salaries and bonuses of the staff. this includes sales people, recruiting staff, accounting staff, technology people, marketing, proposals, HR and administrative help. Anybody who runs a company today will tell you that salary costs go up every year, even when the client squeeze on margins gets tighter!
2. Infrastructure … like any company we need office space, technology, networks, phones, marketing costs, costs associated with proposals etc.
3. Financing … the agencies have a large “payroll” of consultants/temporary employees to fund each month and as we know clients have been pushing out payments such that net 45 day payments are becoming the norm and even 60 day payments are not rare. This requires the agency to finance the payroll costs.

Typical S,G&A costs might approximate between 10 and 15% of revenues depending upon the size and nature of the agency.

If we use 12% SG&A then our fictitious staffing agency has a net income before taxes of 3% of revenues. The taxman always like to get his piece of the pie and hence the end result to the shareholder is very skinny indeed!

Increases in interest rates, a recession, a lawsuit (frivolous or not) or loss of a key client can cause big issues when the profits are so slim. The staffing company owners are entrepreneurs who take on these risks and every time there is a recession we see many companies disappear.

If you are evaluating staffing companies and looking for best “value” then the best advice I can give you is to focus on what you pay for the contractors and temps, not on the margins of the staffing company. If you are paying the best price in the market why would you care about the agency markup, there are certainly no major agencies making out like bandits!


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16 thoughts on “The Finances of the Staffing Industry

  1. Kevin,

    I feel like I know you from reading your frequent blogs which are all written with positive good cheer and with your generous personality overflowing with desire to provide good information and advice.

    So as one of your regular readers, I say, “thank you” – and I hope the inquiry about “exorbitantly high” margins is history. There is plenty of competition in the IT staffing industry. It’s one of 9,500 industries we have analyzed; and it’s clearly a competitive marketplace. There are so many competitors; the barriers to entry are relatively low; and substitute power is great in terms of companies able to higher directly. It’s great that your industry can, on average, maintain a profit.

    From a strategic point of view, I also believe it would be better for your clients if you were making a hefty profit, rather than just a slim margin. A healthy or even fat profit would ensure your ability to stay in business, to remain independent, and not having to cut corners. For example, the value I receive from using Google products grows with their profits because I know the products will be around next year.

    Cheers,
    Alan S. Michaels, Co-founder, eCompetitors.com

  2. Kevin,

    I feel like I know you from reading your frequent blogs which are all written with positive good cheer and with your generous personality overflowing with desire to provide good information and advice.

    So as one of your regular readers, I say, “thank you” – and I hope the inquiry about “exorbitantly high” margins is history. There is plenty of competition in the IT staffing industry. It’s one of 9,500 industries we have analyzed; and it’s clearly a competitive marketplace. There are so many competitors; the barriers to entry are relatively low; and substitute power is great in terms of companies able to higher directly. It’s great that your industry can, on average, maintain a profit.

    From a strategic point of view, I also believe it would be better for your clients if you were making a hefty profit, rather than just a slim margin. A healthy or even fat profit would ensure your ability to stay in business, to remain independent, and not having to cut corners. For example, the value I receive from using Google products grows with their profits because I know the products will be around next year.

    Cheers,
    Alan S. Michaels, Co-founder, eCompetitors.com

  3. Kevin,
    I run a small sales and marketing recruitment firm in Montreal and while I agree with most of what you said, I found SG&A of 12% quite low. Do you include your salary in that number? My experience has been in the range of 40%. Your comments?

  4. Kevin,
    I run a small sales and marketing recruitment firm in Montreal and while I agree with most of what you said, I found SG&A of 12% quite low. Do you include your salary in that number? My experience has been in the range of 40%. Your comments?

  5. Re: Low number for SG&A.

    The numbers I show in this blog are a percentage of revenues and based upon a contract or temporary agency model. In this type of business often 85% (or more) of revenues are paid out to the temporary worker (contract or temp employee) as a direct cost of sale.

    I’m guessing most, or all, of your business is in placement, where you are paid a fee for finding employees for your clients. In that business model you have different financial challenges, but you do not have the “cost of sale” associated with the contract or “temp” business. For instance it is typical in your world to pay your consultants a high commission on each sale and you then also have your other costs to consider (the G&A in SG&A). I would imagine that 40% SG&A costs would be very low for this type of business.

    In any business the cost structure needs to include all of the costs including owner-managers, so yes my salary is included.

  6. Re: Low number for SG&A.

    The numbers I show in this blog are a percentage of revenues and based upon a contract or temporary agency model. In this type of business often 85% (or more) of revenues are paid out to the temporary worker (contract or temp employee) as a direct cost of sale.

    I’m guessing most, or all, of your business is in placement, where you are paid a fee for finding employees for your clients. In that business model you have different financial challenges, but you do not have the “cost of sale” associated with the contract or “temp” business. For instance it is typical in your world to pay your consultants a high commission on each sale and you then also have your other costs to consider (the G&A in SG&A). I would imagine that 40% SG&A costs would be very low for this type of business.

    In any business the cost structure needs to include all of the costs including owner-managers, so yes my salary is included.

  7. In my description of SG&A costs I should be clear that I did not try to be all-inclusive in the description. There are many other costs that are not mentioned but which add up. legal costs associated with processing hundreds of contracts each year; industry association memberships to ensure that we stay current with the issues in our industry; training costs for our people; costs associated with ISO registration; involvement with and contributions to charities and communities; the cost in time of our management and staff in contributing to committees, task forces, government organizations etc etc etc.

    Like any business if you are a good corporate citizen you incur costs, you provide employment and you provide secondary employment. I believe in this industry, but I don’t think we get the respect that we deserve. More company leaders in our industry need to stand up and provide industry leadership, tell the world what a great job we do and educate people about our contributions.

  8. In my description of SG&A costs I should be clear that I did not try to be all-inclusive in the description. There are many other costs that are not mentioned but which add up. legal costs associated with processing hundreds of contracts each year; industry association memberships to ensure that we stay current with the issues in our industry; training costs for our people; costs associated with ISO registration; involvement with and contributions to charities and communities; the cost in time of our management and staff in contributing to committees, task forces, government organizations etc etc etc.

    Like any business if you are a good corporate citizen you incur costs, you provide employment and you provide secondary employment. I believe in this industry, but I don’t think we get the respect that we deserve. More company leaders in our industry need to stand up and provide industry leadership, tell the world what a great job we do and educate people about our contributions.

  9. “So 85% or more of revenues gets paid out to the consultants BEFORE the agency even receives payment from the client. “

    Really? Most of my colleagues report that their agents’ take is between 15-20%. Margins lower than 15% are very rare.

    I have heard stories of 30% or more.

    Perahps those are the agencies that the clients are grumbling about?

  10. “So 85% or more of revenues gets paid out to the consultants BEFORE the agency even receives payment from the client. “

    Really? Most of my colleagues report that their agents’ take is between 15-20%. Margins lower than 15% are very rare.

    I have heard stories of 30% or more.

    Perahps those are the agencies that the clients are grumbling about?

  11. As a company Eagle would like to make 20% margins for regular business. However, even if we achieve that goal the overall margin at the client gets diluted for a variety of reasons … payrolling is always at a much lower rate, special situations where the client “needs a favour” (seems to happen VERY often), special situations where the contractor demands a raise and the client feels caught but can’t pay more etc.

    The large clients will negotiate lower “regular” margins from the start so 20% becomes something less. On top of that each individual hiring manager will negotiate hard for their own “special deals”.

    When all of this is blended together at the corporate level gross margins end up in the 15% range. The SG&A costs do not decrease with the decreasing margins hence the skinny profits.

    The only agencies I know that make 30% margins are the niche players and somehow clients don’t seem to mind paying them more … when 90% of the time they could get the same people from general staffing companies for less.

  12. As a company Eagle would like to make 20% margins for regular business. However, even if we achieve that goal the overall margin at the client gets diluted for a variety of reasons … payrolling is always at a much lower rate, special situations where the client “needs a favour” (seems to happen VERY often), special situations where the contractor demands a raise and the client feels caught but can’t pay more etc.

    The large clients will negotiate lower “regular” margins from the start so 20% becomes something less. On top of that each individual hiring manager will negotiate hard for their own “special deals”.

    When all of this is blended together at the corporate level gross margins end up in the 15% range. The SG&A costs do not decrease with the decreasing margins hence the skinny profits.

    The only agencies I know that make 30% margins are the niche players and somehow clients don’t seem to mind paying them more … when 90% of the time they could get the same people from general staffing companies for less.

  13. ok.. tying to get some clairity. I know this blog is old but… I recruit in the direct hire and temporary space and staff prmarily finance, accounting, administrative and legal. My questions are:

    1)what goes into calulating a net margin and a gross margin?

    2)what is the diffeence between gross and net margins?

    3) what % of the net margin should consultants( who are 100% commission)receive?

    what are typical mark-ups for professional (not light indistrial)staffing?

    If anyone can answer thse questions, I would appreciate it!

    Thanks

  14. ok.. tying to get some clairity. I know this blog is old but… I recruit in the direct hire and temporary space and staff prmarily finance, accounting, administrative and legal. My questions are:

    1)what goes into calulating a net margin and a gross margin?

    2)what is the diffeence between gross and net margins?

    3) what % of the net margin should consultants( who are 100% commission)receive?

    what are typical mark-ups for professional (not light indistrial)staffing?

    If anyone can answer thse questions, I would appreciate it!

    Thanks

  15. Kim, let me try to answer your questions as best I can …

    You work in direct hire as opposed to contract or temp staffing, so your cost model is very different from “our” world.

    Questions 1 and 2.

    In a direct hire world you are paid a fee for a placement and generally speaking your “cost of sale” is low and many companies don’t even show a cost of sale. Therefore your fee is both your revenue and your “gross margin”. (I do understand that is not always the case, some companies might show the consultant’s commission or advertising costs as a cost of sale).

    Net margin or net income before taxes is calculated by taking your SG&A (sales, general and administrative) costs from your gross margin. So … salaries of staff, office space, advertising, technology etc.

    Question 3.

    This is another difficult question without more details. The % commission paid is very dependant upon a lot of factors. If you have a base salary then your commission percentage will be less. If your company gives you mature territory and existing client relationships then it is less. If you have resources available to provide candidates, an existing database, researchers etc. then it will \be less. At the other end of the scale if all you have is a business card and association with a company, but you “eat what you kill” then you can expect a greater cut of the commission. I have seen commission palns that range from 20% to 60% … but you have to remember all of the other factors. The math can look very appealing, but if you don’t have a good support infrastructure then it can be a very tough road!

    Question 4.

    As indicated in some of the above discussion these can vary greatly. So … many big clients are squeezing markups below 25% (20% margin). [Please don’t get confused between “markup” and “margin”]. If you are in the US then your world is different than in Canada. If you are dealing with incorporated entities it is different than sole proprietors or temporary employees … mostly because of the different burden rates. At the end of the day if your gross margins on a deal are in the 20% range (25% markup on your cost) then you are doing very well.

    Hope that helps!

  16. Kim, let me try to answer your questions as best I can …

    You work in direct hire as opposed to contract or temp staffing, so your cost model is very different from “our” world.

    Questions 1 and 2.

    In a direct hire world you are paid a fee for a placement and generally speaking your “cost of sale” is low and many companies don’t even show a cost of sale. Therefore your fee is both your revenue and your “gross margin”. (I do understand that is not always the case, some companies might show the consultant’s commission or advertising costs as a cost of sale).

    Net margin or net income before taxes is calculated by taking your SG&A (sales, general and administrative) costs from your gross margin. So … salaries of staff, office space, advertising, technology etc.

    Question 3.

    This is another difficult question without more details. The % commission paid is very dependant upon a lot of factors. If you have a base salary then your commission percentage will be less. If your company gives you mature territory and existing client relationships then it is less. If you have resources available to provide candidates, an existing database, researchers etc. then it will \be less. At the other end of the scale if all you have is a business card and association with a company, but you “eat what you kill” then you can expect a greater cut of the commission. I have seen commission palns that range from 20% to 60% … but you have to remember all of the other factors. The math can look very appealing, but if you don’t have a good support infrastructure then it can be a very tough road!

    Question 4.

    As indicated in some of the above discussion these can vary greatly. So … many big clients are squeezing markups below 25% (20% margin). [Please don’t get confused between “markup” and “margin”]. If you are in the US then your world is different than in Canada. If you are dealing with incorporated entities it is different than sole proprietors or temporary employees … mostly because of the different burden rates. At the end of the day if your gross margins on a deal are in the 20% range (25% markup on your cost) then you are doing very well.

    Hope that helps!

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