The Eagle Blog

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!


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10 thoughts on “The IT Staffing Agency Value Proposition

  1. As a contractor, running my own (very) small business, all I am concerned about is how much it costs the agency to administer *my* contract.

    In my opinion, except perhaps for newcomers trying to get started in the business, anything over 10% is outrageous.

    Most of the time I find my own work, and only have to engage an agency because the client’s procurement rules require it.

  2. As a contractor, running my own (very) small business, all I am concerned about is how much it costs the agency to administer *my* contract.

    In my opinion, except perhaps for newcomers trying to get started in the business, anything over 10% is outrageous.

    Most of the time I find my own work, and only have to engage an agency because the client’s procurement rules require it.

  3. I can fully understand your point of view. From your perspective if you find your own work what value is the agency bringing to you?

    There are a lot of factors at play here. Here are just some of them …

    1. The risk of employer/employee relationships is very real and applies to all 3 parties. End client, contractor and agency. The 3-way arrangement keeps things relatively clean. If a relationship is established then the impact on the independent is significant.
    2. The agency accepts the financial risk associated with this transaction and often pays the contractor well before they get paid.
    3. Many companies are reducing their supplier lists to keep administration costs down and to have leverage with suppliers. As a one person company you will need to go through an agency to work at those clients.
    4. If you are in Ontario or BC then you should be charging your client retail sales tax. Agencies are exempt from this charge, so really the client will not be paying much more to access your services either way.
    5. If a client asks Eagle to payroll a contractor, then our fee to the client is significantly reduced. We have also proven that this is very often the most expensive way for them to staff positions. See my blog from November 16th.

    None of this is much comfort to the independent contractor who just wants to deal with his own client base and not have agency fees in the picture. The world is changing, clients need to protect themselves, want the best price and are doing that using strategic sourcing initiatives. I would encourage you to determine what your rate is in the market and to focus on that amount, not on what an agency might get for its work. At the end of the day if you are being paid at market value then you should not worry about what other’s make.

  4. I can fully understand your point of view. From your perspective if you find your own work what value is the agency bringing to you?

    There are a lot of factors at play here. Here are just some of them …

    1. The risk of employer/employee relationships is very real and applies to all 3 parties. End client, contractor and agency. The 3-way arrangement keeps things relatively clean. If a relationship is established then the impact on the independent is significant.
    2. The agency accepts the financial risk associated with this transaction and often pays the contractor well before they get paid.
    3. Many companies are reducing their supplier lists to keep administration costs down and to have leverage with suppliers. As a one person company you will need to go through an agency to work at those clients.
    4. If you are in Ontario or BC then you should be charging your client retail sales tax. Agencies are exempt from this charge, so really the client will not be paying much more to access your services either way.
    5. If a client asks Eagle to payroll a contractor, then our fee to the client is significantly reduced. We have also proven that this is very often the most expensive way for them to staff positions. See my blog from November 16th.

    None of this is much comfort to the independent contractor who just wants to deal with his own client base and not have agency fees in the picture. The world is changing, clients need to protect themselves, want the best price and are doing that using strategic sourcing initiatives. I would encourage you to determine what your rate is in the market and to focus on that amount, not on what an agency might get for its work. At the end of the day if you are being paid at market value then you should not worry about what other’s make.

  5. I advise my colleagues that the necessity of third party involvement is a regrettable but inevitable part of the cost of doing business. In the end, the rules are made by the client and if we want to stay in business we have to play the game their way.

    However, I also encourage them to be aggressive when the time comes to negotiating their rates with the third party, especially in those cases where they’ve found the work themselves. To be fair, the agencies I have worked with have always given some consideration in that regard. Those that haven’t, well, I try not to work with them.

    I have some questions about the points you raised:

    1. I understand the theoretical exposure, but I have never heard of an actual case. There is still the risk that CRA might regard the contractor as an employee of the agency. The 3 way arrangement may protect the *client* from exposure, but does little for the agency and the contractor.

    2. Yes, that is a benefit, as long as you are dealing with a reputable agency. I have a couple of unfortunate colleagues who are trapped (due to non-compete clauses) in a relationship with an agency of the “you get paid when I get paid” type.

    3. I am presently working at a client who uses a “Vendor of Record” list. I am not happy about this because it binds me to my present agency even though my contract with the agency has no non-compete clause.

    To explain: the “binding” is political rather than legal. The last time the VOR agreement was renewed I was very unhappy with the rate that my agency bid for my position. (They came in too low). That of course had a direct impact on the rate they would offer me on the next contract.

    When my contract was coming to an end and a new tender was in the works, I decided to seek out another agency. (I had found the original contract myself). There was no non-compete clause in effect, so why not try to find a better deal?

    However, when I advised my current agency of my plans, they threatened to involve the client in our dispute.

    Since I value the relationship with the client, I decided to stay with the same agency.

    In the end, I was able to squeeze the agency’s margin and secure a better deal for myself than what was originally offered. Still, it was significantly less than my previous contract.

    4. I don’t agree with your math. In my case it is almost true because I was able to drive my agency’s margin (see the story above) into the single digit range. That wouldn’t be true in most cases.

  6. I advise my colleagues that the necessity of third party involvement is a regrettable but inevitable part of the cost of doing business. In the end, the rules are made by the client and if we want to stay in business we have to play the game their way.

    However, I also encourage them to be aggressive when the time comes to negotiating their rates with the third party, especially in those cases where they’ve found the work themselves. To be fair, the agencies I have worked with have always given some consideration in that regard. Those that haven’t, well, I try not to work with them.

    I have some questions about the points you raised:

    1. I understand the theoretical exposure, but I have never heard of an actual case. There is still the risk that CRA might regard the contractor as an employee of the agency. The 3 way arrangement may protect the *client* from exposure, but does little for the agency and the contractor.

    2. Yes, that is a benefit, as long as you are dealing with a reputable agency. I have a couple of unfortunate colleagues who are trapped (due to non-compete clauses) in a relationship with an agency of the “you get paid when I get paid” type.

    3. I am presently working at a client who uses a “Vendor of Record” list. I am not happy about this because it binds me to my present agency even though my contract with the agency has no non-compete clause.

    To explain: the “binding” is political rather than legal. The last time the VOR agreement was renewed I was very unhappy with the rate that my agency bid for my position. (They came in too low). That of course had a direct impact on the rate they would offer me on the next contract.

    When my contract was coming to an end and a new tender was in the works, I decided to seek out another agency. (I had found the original contract myself). There was no non-compete clause in effect, so why not try to find a better deal?

    However, when I advised my current agency of my plans, they threatened to involve the client in our dispute.

    Since I value the relationship with the client, I decided to stay with the same agency.

    In the end, I was able to squeeze the agency’s margin and secure a better deal for myself than what was originally offered. Still, it was significantly less than my previous contract.

    4. I don’t agree with your math. In my case it is almost true because I was able to drive my agency’s margin (see the story above) into the single digit range. That wouldn’t be true in most cases.

  7. Thanks for the input. I’m sure we could have long debates on these subjects …

    1. There are numerous cases of individuals and companies being found “off-side” by CRA and other regulatory bodies. They would not have increased the size of the compliance team if there were not a “return on investment”. Most cases are “settled” because certainlyu companies don’t wqant the exposure. The latest case that went to trial, that I know about, was in Quebec.
    2. Contractors are only typically “trapped” by a non-compete if they want to go back into the same client area. If the work at a specific client is going on for years then why is a contractor doing it?
    3. There are many ways to look at the VOR agreement. The client should be going to the market to find the best resources for a job, not out to procure a specific individual. Eagle would not be happy with a contractor bidding back into the same job through a competitor either.
    4. My math is based upon the fact that clients going to market can find many qualified resources at competitive prices. When they want one particular person they lose their ability to reduce costs. The savings in squeezing the agency margin are minimal.

  8. Thanks for the input. I’m sure we could have long debates on these subjects …

    1. There are numerous cases of individuals and companies being found “off-side” by CRA and other regulatory bodies. They would not have increased the size of the compliance team if there were not a “return on investment”. Most cases are “settled” because certainlyu companies don’t wqant the exposure. The latest case that went to trial, that I know about, was in Quebec.
    2. Contractors are only typically “trapped” by a non-compete if they want to go back into the same client area. If the work at a specific client is going on for years then why is a contractor doing it?
    3. There are many ways to look at the VOR agreement. The client should be going to the market to find the best resources for a job, not out to procure a specific individual. Eagle would not be happy with a contractor bidding back into the same job through a competitor either.
    4. My math is based upon the fact that clients going to market can find many qualified resources at competitive prices. When they want one particular person they lose their ability to reduce costs. The savings in squeezing the agency margin are minimal.

  9. I agree that we could debate these points indefinitely, so I will just answer one of them.

    2. Long term relationships are not that uncommon, in my experience anyway. I know of several individuals who have been with a client for 10 or more consecutive years.

    I have been with my present client for nearly 5 years now, and I am by no means the longest serving contractor in the shop.

    Some clients *do* recruit for certain individuals because they are interested in maintaining continuity. They aren’t interested in hiring ‘heads down’ coders, they want contractors who understand their business and can work independently.

    A ‘heads down’ guy may come at a cheaper rate, but he requires a lot more of the client’s time to train and supervise.

  10. I agree that we could debate these points indefinitely, so I will just answer one of them.

    2. Long term relationships are not that uncommon, in my experience anyway. I know of several individuals who have been with a client for 10 or more consecutive years.

    I have been with my present client for nearly 5 years now, and I am by no means the longest serving contractor in the shop.

    Some clients *do* recruit for certain individuals because they are interested in maintaining continuity. They aren’t interested in hiring ‘heads down’ coders, they want contractors who understand their business and can work independently.

    A ‘heads down’ guy may come at a cheaper rate, but he requires a lot more of the client’s time to train and supervise.

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