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.
Kris Dunn is a Partner and CHRO at Kinetix, a national RPO firm for growth companies headquartered in Atlanta. He’s also the founder Fistful of Talent (founded in 2008) and The HR Capitalist (2007) – and has written over 70 feature columns at Workforce Management magazine. Prior to his investment at Kinetix, Kris served in HR leadership roles at DAXKO, Charter and Cingular. In his spare time, KD hits the road as a speaker and gives the world what it needs – pop culture references linked to Human Capital street smarts.