Whether you are contractor or a client, an agency margin is a source of dissatisfaction common to both groups.
If you receive a compelling service, it is perfectly fine to pay an interim agency margin. However, agency margins are a fee that almost no one likes to pay!
In this blog post, we explore 4 reasons why an agency margin is typically so high, and look at the alternative to using an agency margin.
How are agencies perceived?
Regardless of industry, middlemen have never had an easy justification for the fees/margins they charge. Letting agents charge 10-15% for full property management which means a landlord should really just sit back and relax all year.
However, turn to Trustpilot or Google reviews, there is usually a sea of red. A financial intermediary managing your portfolio would only set you back by 1–5%. Yet, because it is discretionary service, people would generally balk at the cost and simply not engage. In contrast, recruitment agencies in the UK have an average margin standing at 15-25%. Given there are about 39,000 agencies, the profession represents the biggest skimming operations around.
The cost of recruitment agencies is one the main reasons for negative opinions of the sector, especially amongst candidates who don’t feel they are getting much value for money. Although recruitment agencies are not able to charge direct fees to candidates for finding jobs, they take a cut of the earnings that an interim takes home. The more the interim earns, the more they earn!
Why is an agency margin so high?
Here are 4 reasons why an agency margin is so high.
1) Sourcing and hiring
There are two main functions which are covered by agency recruitment fees. The sourcing of candidates and the ongoing administration associated with hiring contractors. This includes processing timesheets and operating the payroll service.
Although the sourcing side is a one-off process, it can be an expensive exercise – as high quality job boards, effective applicant tracking systems, passive search strategies, all consume a lot of time and money.
2) Non-exclusive basis
Recruitment agencies also tend to operate on a non-exclusive basis, which means they work with clients who are often collaborating with several other recruitment agencies. The inevitable result of this is a lot of wasted cost which must be recouped elsewhere.
3) Recruitment consultants
Agencies usually have several recruitment consultants on their payroll, who need to be paid each month, regardless of the agency revenue. With non-exclusive contracts, consultants could easily be spending hours (or even days!) sourcing candidates, only for the job to be filled by another agency.
4) Compliance activity
Agencies also have a significant and ever-increasing compliance activity. Unfortunately, the contractor is often the person who takes the brunt of the costs. In short, you and your contractor are paying the recruitment agencies extra money which is covering their other expenses!
Is a high agency margin justified?
Despite all of the above, we don’t believe it is. It is possible to outsource interim sourcing at a fixed cost between £200 and £1000 per role.
Now, if you consider that a 20% margin on a £500 a day role means a daily commission of £100, it is possible for the recruitment agency to recoup all of the sourcing fees within a couple of weeks. Processing timesheets and running a payroll are administrative services, the costs of which should be in low single digits.
Find out how Mindful can offer unique value in lieu of recruitment agencies in our blog post, Interim Agency Margin: Can it be avoided?
As a buyer of contractor services, should I care?
IT contractors are worth their weight in gold and it’s no wonder they get great rates of pay. However, by using recruitment agencies who charge high fees, the rate will be significantly reduced. If you are a client of contractor services, it means less of what you budgeted for a role flows down to the contractor.
Also, there can be funny games that agencies can play at renewals – using the opportunity to up their margins, whilst putting the contractor and your programme at risk of the assignment extending altogether.
Remember, a contractor sees an intermediary as your agent. This means that a contractor perceives the way an intermediary behaves with them, as how you would. Bad behaviour tarnishes your brand as an engager of contractor services. Think twice before you jump at the chance to work with any agency!
What’s the alternative?
It is not only possible to source candidates through agencies; candidates can also be sourced through a managed service provider. At Mindful, we are different to most other intermediaries out there. Our goal is to not just place bodies – but instead to build for you a happier extended workforce.
We don’t work on a non-exclusive basis, which means we don’t have losses that need to be recouped. With in-house commercial and contractual skills in our management team, we don’t have the same compliance issues as other agencies, which means we can keep our risk premium low.
We are also a small company and we keep it like that. This allows us not only to offer a dedicated service, but to keep costs down. This means we can ensure our margins are kept to a minimum – and fixed.
If you want to attract and retain best-in-class professionals, who aren’t just good at what they do but can also work well with each other as a cohesive unit, check out our Programme Services.