Welcome to WIN at IT contracting: A FREE guide showing YOU How to get the most out of Recruitment Agent Relationships. My name is Gethyn Ellis I have been running a SQL Server consulting and training practice for the last ten years. You can check out my website and blog gethynellis.com and feel free to connect with me on twitter and LinkedIn – we follow back.
How do Recruitment agents generate revenue?In this post we will look at the recruitment agent business model. If you understand how your business partners generate revenue from your business relationship. Understanding that relationship and that business model, will help you get the most of that relationship.
From various conversations, blogs, articles and forum posts I have read over the years I fully appreciate that this can sometimes be a point of contention in that relationship. The purpose of this post if to try and help you understand the process, allow you get the most of out it and realise that it should be a win-win relationship. All parties benefits from it.
There are a couple of revenue models that I’m aware that contract agents use when setting up a contract:
- Fixed price – the agent earn a fixed rate regardless of the contract value. For example, they will agree with the client that their fee for finding and pacing a contractor will be say £20 a day regardless of the value of the contract. So they get x regardless of the rate of the contractor. I don’ think the fixed price model is very common, at least in my experience. The most common model I have found is…
- On margin – Recruitment agents usually make their money on the spread of the contract value. You could and probably should argue they are re-sellers of IT services. They buy for £x and sell at £y
Recruitment Agents Margin
When you contract using an third party or an agent there will be at least two contracts between you and the end client.
There will be one contract between the end client and the agent – who agree to supply a contractor or consultant at £x day rate
The second is between the contract agent and you the contracting supplier – the supplier agrees to provide the services for £y day rate
The agent is effectively sub-contracting the work to your company. Therefore we can work out the agent fee by calculating £x - £y = Agent revenue
For example, the figures here are contrived and used only for illustration purposes. You as the contractor might have a contract that says you’ll provide a consultant on time and materials basis for the upgrade of a database platform to the latest and greatest version.
- The agent has an agreement with the end client to provide services for £120 (£x)
- You agree to provide services £100 (£y)
- Agent Revenue = £x - £y = £20 so they have margin of just 17%
- Contract value is £120 – cost to the end client (100%)
- Contractor receives £100 – 83.33 % of the contract value
- Agent receives £20 – 16.66% of the contract value
It’s typical for an agent fee to be in 20% region. There is no hard and fast rule around this though and the margin rate can vary depending on the skills and services that are being supplied. The percentage margin could be as low as 5% or as high as 40%
Lets at another example, if the agent agrees to find a contractor for a customer at say a day rate of £600 a day and they make an agreement with you the contractor to provide the services for £300 a day, the agent’s margin is then £300/day or 50%.
The important point for the contractor here is to know your market day rate. So you don’t end up in this situation where you are resenting the agent for making and achieving a good deal for themselves at what you perceive as a cost to you.
Early on in my business, I may have made the mistake of not negotiating my day rate properly possibly not as severe as the above scenario but the agent did out maneuver me in the negotiations so I ended making less than I could have done if I had more nous about me the process and the agent had a healthier margin for them– but that’s business and at the time I was happy with the rate I achieved so I was never bitter about it.
Contractor contention about agent margin
This margin can sometimes be a bone of contention for some contractors particularly if the situation above arises. The contractor can feel that agent is taking their share of what the contractor belives to be their revenue. This is not the case. For a contractor businesses the agent margin represents the cost of sale. But you don’t have to part with any money. The situation I described above is a maybe a little contrived …but not an impossible situation to find yourself in. However as long as you know the true market value of your services, and you think through the whole situation from end to end and appreciate that there is always a cost to doing business.
If you want to increase your share of the margin then you need to improve your negotiating skills and negotiate with the agent to get the best rate possible.
That brings us to the end of the second post – looking at the recruitment agent business model. My name is Gethyn Ellis, check out our website at gethynellis.com follow on twitter @gethyn_ellis and connect with us on LinkedIn too.
Check out the first post in the series What do recruitment Agents do for Contractors