The Real Deal Behind The Agency’s Mark-Up
As you know, I like to cover the most controversial career topics in my blog and I haven’t written for a while… because I couldn’t find anything worth writing about, until recently. A friend of a friend who is working as a contractor on a long-term assignment reached out with a question that I know a lot of you care about, so I want to do my best to answer it here.
So one day this ambitious young lady (let’s call her Jennie) found the bill rate her staffing agency was charging for her services at the bottom of an email thread she got to see due to someone’s negligence. Suddenly, she became aware of the fact that her staffing agency was paying her EXACTLY HALF of what the client was paying them. She thought, with such an obnoxious markup, they certainly owe her a raise and she reached out to me to see how she should approach it. Interesting so far?
The Inside Look
Although it may look that way, simply subtracting a pay rate from a bill rate isn’t an answer to how much the staffing agency is pocketing on the deal. If only it were this lucrative, yours truly wouldn’t be writing articles to lure you to our website, but rather sipping a margarita on some beautiful island.
In reality, soliciting business is very expensive. It may seem like your recruiter didn’t invest much of an effort into finding you, but their office collectively on average went through a few hundred resumes, 60+ calls and 25+ internal and/or external interviews until their client (your onsite manager) decided to offer you the role. That means that 5-10 people got paid for 4-6 weeks doing all this, plus the cost of job board membership fees, advertisement and typical office overhead. Keep in mind that most staffing agencies have to maintain their fees contingent on placement in order to stay competitive, so on average they collect fees on ONLY 20% of all of the positions they work on.
However, staffing has a double platform business model, so that is only a half of it! Of course, the toughest part of the game is the sales piece. Before your recruiter could even pick up the phone to call you, the agency’s account rep had to spend on average 6-8 months knocking on doors at the company you are currently working at to obtain (and maintain) the relationship which resulted in your current assignment. All those hours of research, cold calling and entertaining decision makers at all levels add up to a serious amount of cash and present no guarantees.
Behind The Scenes
Aside from these general costs, there are specifics surrounding every deal. First of all, W2 contractors cost their hosting company anywhere between 16-22% on top of their pay rate (in taxes, benefits and payroll expenses). The more accurate number would depend on what each agency offers and which benefits the contractor elects to take advantage of. However, even on corp-to-corp (independent) contractors the markup isn’t always what it seems. Oftentimes in staffing business it’s a bit of a give and take. The client may allow the staffing company a higher margin on this particular deal, because they might have done something as a favor, possibly even lost money on the deal before that. Because corporate budgets are inflexible most of the time but project scopes change, staffing companies often show value by working with the hiring manager and adjust their bill rates to accommodate each situation. At times when it becomes possible they get a break which results in unusually high markup on one or several placements. Some contracts between staffing agencies and client organizations include a “cash back” offering based on volume, so the agency works it into their margins. With that said, there are countless behind-the-screens scenarios that may inflate the bill rate, which are not related to your awesomeness.
Risk and Reward
So should Jennie renegotiate her pay rate since she found out her staffing agency is billing double? My answer is – probably not. The truth is if she had gotten what she had initially asked for and it hasn’t been a full year since then, asking for a pay increase is risky. Chances are their markup is high for a reason, and the staffing company is counting on it. If Jennie’s skill set isn’t totally unique, the agency may choose to give her a raise (as a Band-Aid) just to buy themselves some time and find a suitable replacement for her at the client site. A few months into the assignment, the project may have taken a new turn and if she rocks the boat, the client might even welcome a candidate with a slightly different experience. Oops!
However, if Jennie is kicking ass and taking names and she is confident that the hiring manager is invested in her training, taking a risk and asking for a raise might serve her well. I would still recommend being careful in how she approaches it with her recruiter; after all, no assignment lasts forever and keeping a good relationship with them might open new doors in the future.