After launching our Recruitment Business Accelerator Program which encapsulates all our years of owning, managing and consulting to many recruitment companies – we had a financial epiphany. One of the companies participating in the program shared their P&L with us so we could analyse and advise on their temp margins.
After bringing in industry bookkeeping specialist Michael Yarrow from Digitpro to separate temp costs in Cost Of Goods Sold, it quickly became apparent the average temp gross margin was a seemingly reasonable 10% after all variable costs such as workers comp, payroll tax, payroll costs and super were taken out.
The recruitment company was happy with this margin because $3M in revenue generated $300k in Gross Profit.
But should they be happy?
This Gross Profit amount does not take into account the allocation of fixed costs to determine Net Profit such as:
- office expenses
- candidate care
- other fixed overheads
They had three people managing their temp book on an average salary of $70k plus super which alone nearly wipes out all the GP. If other staff and office costs are apportioned to the generation of this temp revenue then it became clear the temp side of this business was loss making and that it was actually perm revenues which kept the company marginally profitable. Michael Yarrow also reminded me that a temp business if much more risky in terms of employee risk such as workers compensation and unfair dismissal exposure and also temp is far more costly and complex when additional accounting, finance and compliance resources are taken into consideration.
I asked Contingent Staffing Industry Expert- Col Levander from Ratescalc for his view on temp recruitment and he offered the following ideas:
A small Temp business of $3M annual turnover can be quite profitable if the understanding of “True Margin is realised”
Given the information as raw as it was provided it is difficult for me to provide a true analysis however I’ve always lived by the rule to never provide temporary staffing services below 12-14% regardless of market vertical or rate paid to the contingent worker.
It is true that the old cliché’s of “Set and Forget” and ‘Low Maintenance”, “Low Risk environments” can greatly enhance profitability and potentially lower margins can be explored – but only on a high volume basis provided as Tony quite correctly pointed out – you have complete visibility and have your baseline costs under control and contingency around fluctuations of indirect costs associated with running the business and “Worst case scenarios” are taken into account.
Col stated that In any business model there is a tipping point on what is good and bad business. Ratescalc shows that providing a robust, compliant and resilient tool to their clients helps to educate them. All of his clients are realising exponential profit line growth by implementing controls around their business metrics at the B2B transaction level, but most importantly assurity of the maintenance of diligence on margin control and the eradication of margin erosion and human error– all of which are silent killers of all staffing businesses offering temporary service provision.
Yes, there are many arguments for building a temp business:
- an additional service for long term perm clients
- good for cash flow
- adds to business value and sale price
- diversifies revenues
These arguments are true BUT not at a 10% or even 12% GP margin especially if the temp assignments are short and resource intensive.
The profit story is very different for IT recruitment companies which require much the same infrastructure as temp but the big difference is:
- much higher GP margins on average 20-25%
- much longer assignment durations – 3 month minimums
- higher hourly rates
While permanent recruitment does not produce the same longer term advantages as temp, it can make or break the overall net profit of a recruitment company. We could controversially argue that perm revenue is actually better because it is:
- higher in revenue terms
- has a much stronger gross and net profit margin
- brings in bigger chunks of revenue
Going against everything we have learned about the benefit of contingent recruitment, many companies may be better off focusing on perm recruitment for the higher revenue and profit hit, while building strong, exclusive client and candidate relationships to increase the likelihood of repeat business.
By Tony Hall, Founder, Navigator Consulting – Inspiring Recruitment Professionals To Constantly Grow and Improve.
Please contact me for the course outline from our new, low cost Recruitment Business Accelerator Program which encapsulates 22 years of knowledge and solutions from owning, managing, researching and consulting to hundreds of recruitment companies through four downturns and recoveries.