How do recruitment agencies make money?

The wide variety of ways recruitment agencies generate income

In traditional approaches to the recruitment industry there are some primary methods for agencies to make money. However, along with the general trend across the economy, this has been altered by the creation of newer, more innovative ways to generate income and in some cases, new business models.

Contingency

Traditionally, for placing permanent salaried workers, the Contingency model is used. This means agencies work on a no placement, no fee basis. When successful, an agency bills a percentage of the annual basic salary for the role – typically between 15-30 percent. This usually becomes due once the placement has passed a suitable probationary period, say 3 months.

This is similar to the legal profession’s no win, no fee business model and as such it carries risk for the agency in that there is no reward for the work that is undertaken should search and selection activity or placement prove unsuccessful.

Exclusive Search

Eliminating this risk is the Exclusive Search or retained model. This ties the client to staged financial commitments, typically with an upfront payment, and others on shortlist delivery and successful hire. It is a reliable way for recruitment agencies to make money and it has advantages such as providing more predictable income and a steadier cash flow.

Temp, Contract and Temp to Perm

For Temp non-permanent hiring, recruitment agencies make money by adding margin on to the hourly rate received by the freelance and contract staff that are placed. Temp to Perm is an extension of non-permanent hiring that provides bridging to a permanent hire of a suitable temp placement worker. Moving off the agency’s books onto the client’s payroll generally requires the payment of a ‘transfer fee’ by the client.

For much permanent and non-permanent hiring, these traditional business models remain in widespread use and are still ensuring that recruitment agencies make money.

Recruitment Process Outsourcing (RPO)

Applying the general principle of Business Process Outsourcing to hiring is the trend for Recruitment Process Outsourcing (RPO). An agency sets up to provide a complete search, selection and hiring service to replace the entire talent acquisition function. Typically utilised by large organisations, it is a strategic approach that gets talent acquisition off the books and allows the client to refocus on core business activities.

On-Demand Recruiting

On-Demand Recruitment is a project based approach where the client hires a recruiter on an hourly rate to bolster internal teams or provide consultancy and support to internal recruiters during periods of growth.

Smaller firms may not have an internal recruiting function and may bring in an external recruitment consultant when required. However, ‘true’ On-Demand Recruiting is strictly about adding capability to an internal team rather than replacing it, which is what RPO is designed to do.

Volume Recruitment (PSL)

Some agencies specialise in working with larger organisations and becoming rostered on their Preferred Supplier Lists (PSLs). This allows clients to bat away cold calls from speculative recruiters and focus on working with handful of reliable agencies.

Gaining presence on a PSL is pretty difficult and a lot of effort may go into it. However, it can be rewarding. Deal making is likely to require discounting standard agency rates, but the benefit of placing significant numbers of staff for each client for which the agency is rostered is likely to generate some big numbers.

Recruitment-as-a-Service (RaaS)

A more recent development is the recruitment business model known as Recruitment-as-a-Service (RaaS). RaaS is billed monthly, bringing the Service Level Agreement contract-based approach popular in IT to the recruitment field.

This turns the process of hiring in to a managed service. It removes the commission incentivised element that often undermines the ability of recruitment businesses to build solid relationships with clients.

Working closely with a RaaS agency, a client gets access to a large talent pool and rapid search and selection services. The monthly income provides stability and cashflow certainty and is an excellent platform for growing an agency.

Job Boards

While not acting as recruitment agencies, job board websites and platforms provide recruiters and employers with another way to search for potential candidates. Utilising Google’s PPC based approach, recruiters and employers can advertise jobs and pay for the privilege of placing roles nearer to the top of the results page, enabling jobseekers to discover those jobs more easily.

This type of technology can be readily ported and adapted for the purpose of a recruitment agency that may wish to bolt on one or, a combination of the business models outlined above.

Recruitment agencies make more money and maximise profitability with ETZ

With all recruitment business models, the inescapable fact of today’s world is that technology is pivotal and plays a hugely influential part. Efficiency is the key to maximising the return on technology investment and reducing costs to maximise profitability.

ETZ timesheet processing and invoicing solution is super-efficient and integrates with accounting and other key elements of the RecTech software stack that are critical to today’s recruitment businesses. To find out more about how we support recruitment agencies with the technology expertise to streamline back office operations, book a demo.