Here is another response to my blog “Should a placement firm tell you what they are billing the client?” (the first response was Billing rates – other side of the fence).  My purpose of these blogs is to give more understanding as to what determines the margin that a placement firm or consulting company needs to make a profit, the margin being the difference between the clients bill rate and what the consultant/contractor is paid.

Placement companies (staffing firm, recruiting firm, consulting firm…they go by many names) are needed.  I have used them many times to find projects.  They deserve a cut of the margin, as a lot of unseen work goes into them finding that open position at a company and contacting you about it.  It is a question of how much of a margin is fair?  And how much do they really need to “break even”?  I have seen independent recruiters happy with $15/hr margins, and I have seen consultants getting taking advantage of (i.e. making a salary equivalent of $50/hr and the client bill rate is $250/hr and in addition the consultant has to travel 100%).  And I can never understand why some placement companies use a percentage for mark up.  After all, 68% of $50/hr and 68% of $150/hr is a $68/hr difference in margin.  Most of the big placement companies say they need around $40/hr off of W2 rates to break even.  The last placement company I talked to said to break even they need 4% of 1099/C2C and 17% for W2.  I asked a veteran recruiter who has worked for many placement firms and now runs his own small firm about this:

Short answer:

$40/hr seems a little much to “break even” and I’d question it.  Having said that, there is a lot of hidden cost in running a big firm, so that number isn’t a far off as you’d think.  I’ll try to detail it as best I can in the “long answer” below.  On the other end of the spectrum, where the little guy doesn’t have nearly the overhead (personally my overhead cost isn’t in the big guy’s stratosphere) but the little guy has a lot more at risk.  A bad deal (read: bad client) or a series of late payments, etc – those are killers.  If you have a small placement company, you can probably appreciate the pain of paying your teammates on time and a NET 30 day payment stretching out to a NET 90 day payment and beyond.  You become a bank and that isn’t fun.  So the little guy doesn’t need the same mark-up, but there are some variables that impact them differently.

Long answer:

These thoughts are based on 19 years of personal experience in which I’ve worked for a big firm (multi-billion dollar) a few small firms (obviously myself, but I’ve also worked for two other small firms) and the middle guy ($400 million or so).

(1) From my experience with the big/middles guys (from working with (a) ConsultingCompanyA at the time I was there it was a $17 Billion dollar company and from working with (b) ConsultingCompanyB, which went through an IPO and was in the $400 Million space when I was there.  Here are the things that influenced mark-up:

• Office space/physical infrastructure
• Internal office employees (sales, recruiting, managers, regional VPs, payroll, support staff, executives, etc)
• Insurance, payroll tax, FICA, unemployment costs (for W2 people)
• Legal/internal fees for H1-B candidates (visas, filings, support)
• Advertising
• Tools/software
• Cost of being a preferred vendor.  Some large companies actually make you kick-back money, in the range of 3.5%.  Plus, in some industries there are “rate cards” which put max rates on certain skill sets which forces all the vendors to bid against one another and makes the business a commodity play.  It negatively affects the big guy because their max rate is set, they cannot go higher than the maximum rate on the card, and then a candidate can play one firm against the other for the best deal and it becomes a game of chicken between the big firms on who will take the lowest margin

(2) From my experience of working with smaller firms, and from where it really hits home – working for myself – here are the things that influence mark-up:

• Some of the above (insurance and advertising for example)
• Banking/Loans
• Payroll: this is a killer if your clients don’t pay in a timely fashion.  As I mentioned in my “short answer”, you realize that you’re a bank and the “Banking” point above becomes a larger influence.  The current people you have billing fund future people billing.  If that cycle gets disturbed, it is an issue
• Risk: if a client has had delayed payments in the past, I’ll mark up my next deal to them higher to account for that risk
• Skill set: if a skill set takes a long time to staff, that mark-up will be higher
• Rarity of a skill set: in some cities, Java talent is impossible to find.  I’m not going to give that away at a lesser mark-up as an easier skill set to find like a Business Analyst
• Level of skill set: I am working with a client to staff their CIO position.  There are very few people in this talent pool and they are coming from my personal Rolodex – something which I hold near & dear to my heart.  That calls for a much different mark-up (and this segues in to a conversation about perm/direct placement vs. contract vs. contract to hire).  You can see where the subject of “mark-ups” covers a lot of stuff and can get confusing/complicated
• Is your candidate on someone else’s payroll: I have a few partners where I get talent from.  When they take care of the payroll responsibility, some of the points above are eliminated
• The cost of the resource: Does the candidate cost $125/hr?  Is the person a $40/hr resource?  One ties up more payroll, incurs greater risk if the client doesn’t pay on time, etc
• The duration of the opportunity: Is it a 3-month assignment or a 12-month assignment?  The shorter the gig, the higher the mark-up
• Benefits: does the candidate require them?  Is it for one person or a family?

When a consultant brings the solution to the staffing firm, the rules change.  For example, when you already know the end client/hiring manager and they will pick you without an interview and you just need to select a firm on a preferred vendor list, a majority of the stuff on the “big guy” mark-up list drops off.  You didn’t need their offices in other cities to land this position, you didn’t need their recruiting/sales/VPs/etc, you didn’t need their H1-B process, all that cost gets dropped from the equation in my opinion.

If you are that person that the end-client wants to hire and you need to go through a preferred vendor, I’d go to the end-client and ask their purchasing dept who is the smallest of the big guys (or the easiest ones to work with).  Sometimes a boutique firm is on the list, not a high volume churn company.  Some large companies have to have a certain minority spend, so sometimes there is a little guy in the form of a minority vendor.  They’d love to have a deal fall in their lap, it is found money and they’d be very willing to work with you on a lesser mark-up.  If you came to me and said “CompanyA has this position, I know the manager and he already said he’d take me, I just need to find a preferred vendor” – we’d have a very open dialogue where I’d point out my fixed costs (I have a 3.5% rebate I need to account for, I have internal finance people who have to run your paychecks, etc) and we’d weed out all the stuff that doesn’t impact you.