Declining profits for your boss. No bonus for you. Here is why.

This blog is blunt.

It’s about the commercial reality of making money in recruitment. If you run a business and are making no money, or if your revenues are growing, but your profit is declining, this will probably explain why.

Or if you are a recruiter, it could explain why you can hardly scrape by on your income, or why you will get fired.

And the data suggests lots of recruiters, companies and individuals, are going backwards in terms of productivity. Many of them are managing to do that in the biggest recruiting boom we have had in over a decade!

The excellent Staffing Industry Metrics gives us the evidence. Despite market conditions being the best in recorded history, only 1 in 5 recruitment agencies increased their profit in FY19.

That means around 80% recorded a decrease in profit. That is a disaster. And the reason is simple. Gross Profit per staff member is declining, while staff costs, including salary, are increasing. And that is an ugly little combination if ever I have seen one.

Consultant productivity is at an all-time low. It’s bizarre, because sales are going up for many Australian and NZ recruiters, but profit is going down. And if anything is a sure slippery slope to recruiting hell, this is it. Profitless growth. Why is it happening?
Because individual recruiters are billing less as a percentage of their salary and on-costs than ever before.

And yet, even now, I often hear owners and managers of recruitment businesses say things like. “Oh she is not my best recruiter, but I only pay her $80,000 a year and she is billing $120,000 a year, so she is covering her cost, and more”

Wrong. Very wrong.

Let’s examine the real cost of a recruiter to your business.

Base Salary: 80,000

Direct on costs: Varies from country to country, but includes statutory pensions, superannuation, payroll tax, insurances etc. In Australia, this is comfortably 15% of salary, and maybe more.

Additional employee benefits: Could include obvious thing like a car provided, but there are other costs that can slip under the radar, such as car parking, membership fees etc. Include these in the cost of the individual if they are direct benefits to the employee that would disappear if the employee disappeared.

Cost of seat. This is the big one. This is the cost that most managers don’t truly factor in. I define it as follows, ‘The average cost of each recruiter, not including recruiter salary’. This is how you work it out. Go to your P & L. Take a period of a year, preferably. Go to the total expense line of the business, or for a branch or business unit. Subtract total consultant salaries and bonuses from that number. Leave in the salaries of the manager and the admin staff, as these are there to support the recruiter. Once you have that number, divide it by the number of consultants in the team. That number represents the cost to you for each consultant to put their delicate derriere in your seat before you have paid their salary.

And here is my shocking prediction. That number will be between $80,000 and $100,000. Normally closer to $100,000. (In Australia. £50,000 in the UK). Per consultant. Before you take into account their salary.

So now let’s add up the cost of a consultant on a basic salary of $80,000 pa.

Salary: $80,000
On costs (15%) $ 12,000
Benefits: $2,000
COS: $100,000

Total cost before the business makes a single dollar, equals $194,000.

So now we know that if this person bills anything less than $194,000, they are costing you money. That’s why we want every recruiter to bill three times his or her base salary. Typically it works like this;

• 1/3 for the consultant salary
• 1/3 to cover COS
• 1/3 for return to the business

The sad fact is that many recruitment companies are happily paying the first 2 thirds, and never seeing the final third.

The key business imperative across our industry is to improve consultant productivity. To do that we need to hire the right skills, train, coach, mentor and provide all the modern tools they need to thrive.

Carrying long-term mediocre recruiters is what is destroying profitability and escalating risk for so many recruitment businesses.

And it is risking the careers of so many of those recruiters, because, with coaching and input, many will improve, which will solve the profit issue – but also extend the recruiters careers, enhance their self-esteem, job satisfaction and bank balance.

So as my friend Nigel Harse of Staffing Industry Metrics likes to say, it’s time for agency owners to think about “getting better before they get bigger”.

Is 2020 a good time to start?

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