The “Hidden” Cost of Using a Staffing Agency: The Importance of Identifying the Profit Margin

The cost of unfilled tech jobs is significant, with American companies seeing a $20.1 billion dollar per year ding to their collective bottom line. That’s according to a 2017 study performed by Glassdoor, which hints at major opportunity costs and other financial implications that affect top line revenue and profitability as a result of insufficient staffing resources.

So while it’s costly to leave tech jobs unfilled, you also know how time-consuming and challenging the IT and tech staffing process can be — particularly when it comes to temporary positions. To be successful, you must invest significant time into developing project specs so, in turn, you can draft an accurate and detailed job description. Then there’s the additional cost of time and money that goes into advertising the position, along with reviewing applicant CVs, checking references and interviewing prospective candidates. And don’t forget those essential test projects that are used to evaluate a candidate’s skill set.

This hiring process is taxing not only on your HR staff, but your tech team as well. You need, at minimum, a tech team leader who has the knowledge required to ask the right questions and evaluate the candidates in an insightful, meaningful way. So it’s understandable that your company may be compelled to hire an IT/tech staffing services provider to oversee this process.

However, the issue of IT staff and software developer procurement can be tricky. Many companies unwittingly find themselves in a bad situation when they turn to a procurement and staffing firm. The reality is that by hiring a firm to oversee procurement, you may be seeing higher costs and far less value than you would expect to see, combined with a lower quality of staff.

Are You Getting What You Pay For?: The Often-Hidden Costs of Procurement

Let’s say you’re evaluating software developers from two different agencies. Agency A bills at $100 per hour, while Agency B bills at $110 per hour — we’ll refer to this as the “price.” But here’s where it gets tricky. While charging a price of $100 per hour, Agency A may be paying the talent — a mid-level resource — a market rate of $40 per hour, while the agency keeps the remaining $60 per hour. So with these figures, you’re seeing a true value of $40 per hour, despite the fact that the “price” is two and a half times that rate.

There’s also Agency B, which charges an hourly rate of $110 per hour. The talent, who delivers expert-level services rightfully earns $80 per hour, while the staffing agency earns $30 per hour. With this more reasonable price break-down, your company enjoys twice the value at a price that’s just ten percent greater than Agency A.

Staffing agencies are, of course, rather hesitant to broadcast precisely what percentage they hand to the employee and what percentage they keep. This is especially true for firms that tend to take a larger percentage, providing less value to you, the client. Unfortunately, many managers and company leaders overlook their staffing service provider’s profit margin, believing that it would be intrusive or out of line to enquire on this topic. But it’s a very important question to ask; one that can have a great impact on the quality and skill level of the talent that arrives on your company’s doorstep. There is a significant difference between the skill and experience level of the tech expert who works for $40 per hour and the tech professional who works for $80 per hour.

If your staffing agency has a significant profit margin, then you’re getting far less value for your dollar — and if you don’t ask the hard questions, you’ll never realize the true cost to your company.

Many companies unwittingly find themselves in a difficult position because they believe they’re paying a competitive rate, yet the talent may only be receiving a fairly small percentage of that hourly wage. This can lead to a scenario where the talent lacks the ideal level of skill and experience you need. Or you could even have resources who leave mid-project because they’ve found a more lucrative-paying job elsewhere. That can have disastrous effects on your tech project and your bottom line. These all too common situations may leave company leaders and project managers perplexed, as they assume the staff is receiving a fair, competitive wage. Although that isn’t always the case, as Wharton Management professor Peter Cappelli points out that it boils down to “whether employees believe the amount you are paying them, all things considered, is unfair relative to what you’re asking them to do and relative to what [type of job] they could get somewhere else.”

“Procurement often focuses on just the price, rather than the overall cost to the company. Price is a defined figure that can be easily relatable, whereas cost is far more complex,” explained iTech CEO Kishore Khandavalli. But even price can be deceptive and therein lies the challenge.

Solutions to These Procurement Challenges

There are a few measures that you, as a company, can take to ensure that you don’t unwittingly fall into this costly procurement trap. Consider the following:

• Ask the Tough Questions — The percentage of the hourly fee that goes to the staffing firm will impact the value that you receive and ultimately, your company’s bottom line. So don’t be afraid to ask about the breakdown. What percentage of the hourly fee does the talent receive?
• Ensure the Talent Earns More Over Time — Recruiting and procurement is costly, so you want to maximize the chances that your resources will stay on-staff for the duration of your project, particularly in the case of those more complex long-term endeavors. One way to achieve this is by ensuring that their pay rate increases over time. It’s fairly standard practice for a procurement firm to gradually decrease their profit margin, freeing up a bit more money for the talent. Staff are more likely to remain on the job for the duration of the project if the contract states that their earnings will gradually increase over time.
• Identify and Minimize the Use of Middlemen — Enquire about the firm’s use of secondary (or tertiary) agencies or contractors. Does your staffing firm handle everything in-house? Or do they subcontract some or all tasks out to other service providers? This is an important question because this translates into a reduction in value, since every service provider wants a slice of the pie. If any secondary or tertiary agencies are utilized, this should be detailed in your contract.

At iTech, we specialize in IT and tech staffing services, providing exceptional value to our clients, while simultaneously compensating our staff in a competitive manner. We believe that this fair, honest approach is critical to maintaining both our talent pool and our clients, who turn to iTech time and time again for assistance sourcing supplementary tech teams on a per-project basis. In fact, as a testament to our fair treatment of our talent, approximately half of our new team members are referred by our current team members.

Founded in 2003, our firm is based in Burlington, Vermont and serves all US clients with offices in New Jersey, Texas, Virginia, and California. With offices in Canada and a global delivery center in India, our tech talent is situated across the globe, working on-site for the most respected companies in the business world. No matter your location, we invite you to contact iTech today to discuss your staffing needs. Whether you have a project in the works or something planned in the future, let us help improve your bottom line with the perfect talent.

Ready to find out if our IT and tech staffing services are right for your company’s needs?

Get Started with iTech

[activecampaign form=5 css=1]

[activecampaign form=5 css=1]