Something we haven’t talked a lot about at FOT is contractors, and the agencies that provide these services on demand. To define what I’m talking about, I’m NOT talking about a temp agency. I’m talking about high-end shops that provide contractors to fill a need in your organization, usually in the tech world. Since I work for a software company, I’ve become familiar with the industry and have a feel for what’s going on.
Think 3rd Party Recruiters are expensive? Here’s the back of the napkin math in the tech contracting
world. In the tech space, it’s not uncommon for the markup (defined as the % of the pay rate the contracting company will charge you for it’s services) to exceed 100%. That means a contracting agency will bill you double what they are paying the talent for their services. I’m no MIT guy, but if the average contract to perm agreement is six months (my view of the industry standard), then you just paid the equivalent of a 50% 3rd party placement fee if you went the contractor route and then transitioned them to full-time. WOW.
Some corporate recruiters have done the math and are appalled. From Beth Minter at ERE.net:
"It used to be that once a contractor requisition was approved, it was automatically distributed to our vendors. We chose these vendors based on information they provided that they (a) could provide us the best rates while (b) guaranteeing excellent quality ( c) from their “unique” databases where they’d have access to people no one else could find. Cool. Except that we spent $7M last year on contractors. Not cool.
Markups (% over pay rate) on contract labor are insane. Particularly in the IT market, we saw our markups sometimes upward of 110%. We began to ask questions of our contractors, like how they decided which agency to sign up with, how much they were paid, and how their interview process went. Even whether they had actually submitted references and background checks. Imagine my surprise!
What I learned is that unique databases are like snipe hunting. The cool kids know they don’t really exist, but they get a kick out of telling people they do. I, apparently, was not one of the cool kids. With a few exceptions, contractors sign up with a variety of agencies. Some contractors never even meet their agency recruiters. They are often submitted without even knowing it. They are not paid nearly as high as you might think, based on the exorbitant cost for their service. Also, for you non~agency folks like me, there is something called a “time stamp.”. When one of my vendors and I found the same candidate for a high end project-management role, he actually challenged whether I had found her “first” and asked for an email with a time stamp on it. Seriously."?
LOL. I live in a nice test tube market, about 1 million in the metro area. We’ve seen the scramble that occurs and seen the same 3-4 candidates submitted for contractor consideration from multiple agencies for a tough skill set. That’s OK, the agencies are just trying to make a living. But 110%. Wow.
Better to play it smart and ask for referrals from employees, and build your own database of folks with skillsets you can "payroll service" or pay via a 1099.
110%. She’s not joking, it’s real. It’s a market economy baby. If we’ll pay it, they’ll charge it.
yup. it isn’t pretty, i totally concur!
in the DC metro area, this issue is super common for finance contractors, and specifically, finance folks who are SOX savvy. you have multiple companies in this area going through major restatements + everyone still scrambling to become SOX compliant + private sector folks working towards becoming SOX compliant because it’s inevitable that something like SOX will roll their way + fed agencies responsible for monitoring SOX compliance + consulting firms who advise on SOX… everyone wants SOX savvy individuals which equates to a big, hot mess. a lot of agencies know it too, and will take your money and run because they can.
was that coherent? too tired to go back and read through it. you get my drift…
My firm has been in technical and professional recruiting and staffing for over 30 years (contract, contract-to-hire and permanenet staffing). If companies are paying 100% or more markup, they are overpaying. The same thing happened during Y2K when plenty of contracting firms gouged. There are many reputable, talented contract and perm recruting firms (including ours) that work on 25-30% markup on a regualar basis-it is just a shame that we get lumped in with the ones that take advantage of a situation instead of providing real value. Rarer skill sets and limited candidate pools can drive up costs, but 100% markup is excessive for staffing (project or outsourcing models are different).
from a reader who didn’t want to post, so he emailed me:
“I read your latest article on Fistful of Talent and that is a good write up. Just for your info, in the past the firms I worked with always shot for a 50-70% markup. Granted, if a company came to me that was used to working with a IBM or even a smaller “consulting firm” then I knew I would be able to get a better markup because IBM will charge 180 to 220 an hour for their guy that is on the bench and I might find an ex- IBM independent contractor and be able to charge 120 and get a higher % markup but still save the client money… Got that happening now, client in Mobile tells me IBM is going to charge 220/hr for a guy for 3 months, I found a guy and will bill 130…….They save a ton of money and I end up with a 130% mark up…. Now if that firm had 3 firms working on that same position, my rate would probably end up around 100/hr due to competition…….. The wonderful world of recruiting…”
Kris, I appreciate your post and know the contracting game quite well. 110% markups are certainly real – the goal is to sell clients high and candidates low. At the same time firms aims to ‘maximize the spread’ (or “The Rip” if you’ve seen Boiler Room), they push their contractors to 1099 instead of W-2. So what happens at that point? Well, two things — 1. The margin goes up well above 110% (because you avoid FICA, etc.), 2.
You (yes, you as the client) then eat the risk of co-employment. If you want to see this in action, you don’t have to look at IT – just look at the contract recruiting and contract sourcing world! ***Find any contract recruiter or sourcer and ask them if they’re 1099 or W-2. 99/100 will say 1099, meaning the client is eating the risk.***
There’s another issue here, Kris, and it’s a tough one. It’s the issue of globalization, and here is what I mean — Contracting firms have an advantage when owned by a protected class due to supplier diversity efforts. So firms owned and operated by those with India-descent then can file RFPs’ with diversity advantage . . . however here is where it gets good:
a. The diversity firm bids at very low rates and typically wins the contract as companies want to keep the billable rate per hour down.
b. The diversity firm sets up recruiting operations in India (yes, although the contract was won here, the recruiting jobs are created there.)
b. The diversity firm then brings over hoardes of H1-B candidates who sign contracts to work at $30k for yr 1, $35k for yr 2, and $40k for yr 3. (Ah, the “American Dream” still exists . . . and so the diversity firms bring over stocked planes of eager IT talent happy to ‘have a shot at the big time’.)
c. The domestic firm cannot compete with the diversity firm’s bottom basement rates. At $75/hr perhaps their margin is 20% . . . while the diversity firm can bill $65/hr and still achieve 400%+ markup because they had an H1-B candidate sign a contractual agreement to work at $15/hr for yr 1.
d. The diversity firms wins a “Supplier Diversity” award and the large client company gets written up in the local newspaper for being a “Supplier-Diversity-Friendly Company”.
The conclusion? Owners of diversity firms are getting rich beating the system, many times with what used to be called ‘America’s Blue Chip Organizations’ . . . and believe it or not, even with our defense contractors. How do I know? Because I’m a former vet who can’t compete
Anyway, just some food for thought . . .
Hmm, I don’t have a lot to add except that I think this is ridiculous. Not sure if it’s because I work in a small town or if Omaha is just cheap but 40% is MAX here. The contractors I work with are smart enough to know what they are worth and I;m smart enough to charge a fair margin to cover my time. I guess I’m not greedy enough . . .
If a company is actually paying over 100% markups for contractors, it’s nobody’s fault but their own. It’s not hard to find salary averages for positions so they should know ahead of time what type of markups a firm is charging. There are plenty of staffing firms that would be happy to supply contractors for much less than 100%.