Proposal to encourage the use of open rate recruiting


(Jon) #1

Introduction

As some folks here might know, I am looking for contracting engineering work at present. I am therefore presently intrigued by how the recruitment process works. With this theme on my mind, I recently had a conversation with a friend about recruiters, how their cut is calculated, and what percentages are reasonable for recruiters to take.

One of the dilemmas in this industry goes like this. A recruiter is given a budget (e.g. £500 a day) to supply a software engineer (or whatever other day-rate role). They advertise a role for £300-£400 a day, and will tend to prefer candidates in the lower part of their range, since that means they’ll take £200/day (66%) rather than £100/day (25%). In theory, the client does not know what the candidate is getting, and the candidate does not know what the client is paying, so the recruiter will try to maximise their cut.

That means, unfortunately, that recruitment agents generally have a duty to their employer to obtain the worst possible deal that the candidate will tolerate. Furthermore, agents are inadvertently encouraged to create a “race to the bottom” in which candidates are secretly pitted against each other in order to produce the best revenue for the recruiter.

Recruiter value

So, what are the recruiter doing for their money? Well, it’s mostly a fixed amount of work at the start - they are the “dating agency” that bring two sides together. It requires some soft skills, such as judgement and diplomacy. Recruiters usually apply an initial filter to candidates, so that clients do not have to waste time on scores of completely unsuitable CVs. Thus, to clients, they are a sort of “no win no fee” arrangement, which can protect against mounting DIY advertising costs (which are not always successful, of course).

Recruiters tend also to supply invoicing and fee-chasing services, so that candidates are protected from bad payers. Clients will sometimes try to delay paying a worker/supplier in a direct relationship, but are less likely to with recruiters, because recruiters have legal departments.

For those services, I would suggest that up to 20% would be a good rate. However, as my realistic figures above show, an agency can be making 30-40%, for essentially doing no more work, on an ongoing basis. Of course, the client pays this fee, but I do not accept that the worker ought not care about it. The reason for this is simple: if a worker generates an income, he or she should get the whole value of it, minus anything that can be justified in the supply chain, brought about by open negotiation.

Recruiters who are choosing their own fee, by virtue of a paucity of information, are encouraged to be exploitative (i.e. knowingly taking from a supply chain more value than their labour is worth on the open market).

Industry solution

Some recruiters have recognised the conflict of interest in this traditional arrangement, and so let it be known that they use “open book” accounting. That means they take a fixed percentage, and so there is no need for the candidate to worry about carrying a freeloader - they can take or leave the work, at least in a buoyant market, based on whether they think the recruiter is providing value for money. The candidate might say that the recruiter is good value at 20%, but not at 40%, or whatever other judgement.

Furthermore, this approach encourages the recruiter to get the best possible rate for their workers, since the recruiter’s rate goes up when the worker’s rate goes up.

I have touched upon a few such recruiters (Senitor, Real IT and Michael Page) as I noted in another thread on this board. However, I don’t know how common it is, so when I deal with a recruiter these days, I try to remember to ask.

Thesis

So, here are my thoughts. Some of these are my assumptions, and I’d be happy to hear reflections and corrections from readers (recruiters are most welcome - we have some hereabouts).

  • workers offering any skill for a day-rate would always prefer a fixed/open recruiter fee
  • given the choice, workers would rather not generate an ongoing revenue for any other suppliers unless that sum can be justified, especially if this would create a corresponding increase in their day rate
  • given the choice, workers would rather not generate an ongoing revenue for any other suppliers unless that sum can be justified, even if the worker would not see a corresponding increase in their day rate
  • thus, recruiters need to be encouraged to be open book

I confess I don’t know what the split of the industry is, between open and closed. A couple of weeks ago, I had an interesting discussion with one recruiter whose company sported a great deal of “ethical” branding, and he admitted that his permanent recruitment arm worked on an open fee, but their contracting approach did not. He was at pains to insist though that he usually worked for “less than 25%”, which was the figure I quoted from another firm.

What are folks thoughts here? Are closed book systems more effective in filling roles? Is there a general feeling they are unethical? Do contractors - who are very well remunerated anyway - care about skimming? Should they, or is it “none of their business”?

If a recruiter reveals they work for, say, 15%, is this genuinely public information, or would a recruiter be grumpy if this were to be rudely broadcast to the world?

Is my general theme unfair on recruiters/agencies? I don’t mean to tar them all with the same brush, and indeed I don’t think all of them are bad, unethical or exploitative. With that caution expressed, should I be valuing them more highly?

Encouragement

So, here’s a little idea I’ve been kicking around. I wondered if I could build a database of recruiters, together with a way of recording their open-book percentage, or whether they are closed, etc. This would help draw a picture of how prevalent each open/closed type is in the industry, and where rates are known, what their spread/mean is, etc.

From a crowd-sourcing perspective, I thought GitHub would be great for this - anyone who has information could fork, create a parcel of info on an agency, and raise a PR for merging.

What do you think? Is this valuable? If an open-book approach is worth encouraging, would this approach work?

Related reading

We’ve discussed recruitment before here, here and here (and probably some others I missed).

And, since I have been here long enough to be cheeky, I am pinging some recruiters who were very game last time around — @FusionAndy and @chatterleyp — and indeed more may have since joined us.


(Peter Chatterley) #2

Happy to be open,

We do not charge any margin!

A couple of points though, recruiters have to fund the cost of borrowing money to fund the contractor, who can be paid weekly and clients may take 3 months to pay. Funding can be anywhere between 7-14%

They also manage issues, renewals and billing, all of which has a cost with it.

I am not a fan of closed book contracting, having seen some outrageous margins in my day and I think the proposal is a good one.

Be interested to see how many agencies would do it though, and how really open they are?

Peter Chatterley
Babbage Lovelace

01299 833980

MD Thetalenthackers.com


(Jon) #3

Thanks Peter, appreciated. This is a good point:

This is something that had not thought of. However, I think it is up to the recruiter to justify their rate - if they need a mean of say 10% across their portfolio to just fund their borrowing bill, then they can be open about that too. If that means they need to charge 25% to be profitable, so be it.

I am conscious that while I would ideally like to see a rough breakdown of figures, per open-book recruiter, I may be asking recruiters to publicly reveal their “secret sauce” that gives them a competitive edge. Perhaps then, some things need to be taken on trust? Even getting all/most/more recruiters to move to open book on its own would be a great thing, even if there is reluctance to reveal more than that.

One could argue, in relation to funding the contractor’s invoices, that recruiters should just have a slush fund for the purpose. However, I would argue that this would unfairly benefit established recruiters, and make it harder (more expensive) for new or disruptive firms to enter the market.


(Marc Cooper) #4

This is basically risk management. That’s a heck of cost of business to carry that could be minimised by negotiation. Regardless, does the contractor see the upside of a quick paying customer? <rhetorical> It’s another reason things should be open. I’d actually be far more willing to talk to recruiters if I knew their stakes.

It seems harsh on the contractor to be paying, say, 10% of their earnings to fund the recruiter’s cash flow.

I mostly go direct and almost always ask for one week payment terms, perhaps two. No-one’s refused.


(Andy Wootton) #5

At 'BigCo’s I’ve worked for, you’re lucky to turn around an invoice in 3 months <tries not to mention SAP again but doesn’t quite manage it>. There was a period we couldn’t deal with a new supplier for months because the database was frozen for a version upgrade. My name was on the purchase order for some software from a small company that couldn’t get paid. They held me personally responsible but Finance had stopped answering their phones. I had the influencing power of a gnat.


(Marc Cooper) #6

That’s not been my experience with BigCo’s. Someone might have to go away and ask, but it’s always worked out. After all, it’s just accountants wanting to manage their 30-day cash flow. Accountants hate surprises, but if you ask them, then they’re fine, since it’s no longer a surprise.