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April 13, 2005


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Sam Patrick

Glad to hear about the RPO forum. I've recently started reading your work and am enjoying the dialogue. I've been wondering about the relationship between automating a function and the tendency to outsource it. Whether or not there's a causal link, I'm not sure. But there is a correlation. We've seen it happen in payroll and benefits; perhaps the proliferation of ATS implies recruiting is the next big outsourcing opportunity?

I've also added your blog address to my links sidebar - hope you don't mind.

Canadian Headhunter (Michael)

I hope you include a little intro on on RPO. I'm not that familiar with it and perhaps some other readers are also lagging and are looking to you for guidance.

Jon Holden

RPO, Consolidating Markets, Booming Opportunity

Managed Services is a both a great market opportunity and a great threat to many recruitment businesses. Few recruiters can ignore the evolution of Managed Services as the ownership of your customers is at stake. Historically the most common form of Managed Service has been Master Vendor agreements, where added value services are provided as part of a supply agreement, where the motivation of a supply-side business is to either protect or increase the penetration and revenues generated from a customer. Vendor Neutral services separate the administration of the recruitment function from the supply side, and hence incurs an additional charge. The justification for Vendor Neutral propositions is usually to drive down direct costs from suppliers, and improve service, and hence we are seeing the emergence of Shared Risk propositions where the Managed Service supplier is rewarded based on the savings achieved by the customer.

Whether the business model is based on contingency volumes, fees, or shared savings, the growth of recruitment process outsourcing is set to dominate the landscape of the majority of your major account negotiations for years to come. Research undertaken in the USA by the highly regarded Aberdeen Group indicates that in 4 years time 80% of US Corporations will be operating a service that controls expenditure on Staffing Services. Many tenders in the UK are already including demands for the provision of streamlined administration services. Procurement managers cannot achieve further savings from reduction to rates and margins – indeed they have probably been squeezed too hard in recent years to a point where they now jeopardise fulfilment in an expanding market - but instead, they will attack the indirect costs of administering recruitment.

The procurement fraternity are now being encouraged to take control of all services spend within their organisations, as this often represents approximately 30% of total spend and has been perceived as a ‘black hole’ that has been unregulated by formal procurement practice. The involvement of the procurement department to-date has usually been limited to an occasional review of the PSL, but usually with little data on spend levels, contract compliance or supplier performance. In particular, there is usually very high levels of rogue spend within many organisations that are not being conducted on contract rates. Many recruitment businesses target this ‘spot rate’ business. This will probably dry up as procurement seeks to gain complete visibility and then control of all spends on Staffing Services.

If the recruitment industry does not seize this opportunity to provide the systems necessary to control expenditure in your customers’ Staffing Services supply chain, then the e-procurement suppliers will. This will mean that supply-side recruitment businesses will not only lose control of their customers, but also have to work with a diverse range of incompatible systems, many of which are not designed for Staffing procurement. This would be a nightmare scenario for the industry as administration costs will increase greatly. Whereas by providing your own Managed Services technology, integration from order entry through the end-to-end fulfilment and payment systems can be implemented, thereby reducing costs, and increasing speed of fulfilment. One of our customers has the objective of fulfilling orders within 30 minutes as this will ensure they beat their competition and fulfil 80%+ of all the requirements. And instead of being a Tier One supplier, become the de facto sole supplier.

The decision therefore that most recruitment businesses will need to make is whether to remain a supply-side contingency business, and try to live off the scraps from the table left by the Managed Services provider. In growth markets, focusing on supply side is a feasible strategy as resources are scarce, but in recessions, owning the customer is vital to survival, as most recruitment businesses have recently been reminded during the last few difficult years. Consequently we will see a ‘land grab’ for customers during the next 4 years, either to protect existing key accounts from predatory RPO / Master Vendor attacks, or as part of a business development programme to win new accounts.

But is this pursuit of high growth at the expense of the bottom line ? For many agencies, especially the large general Temps agencies, RPO and Managed Services has been perceived as an expensive loss leader due to the labour intensive nature of on-site administrative staff that have been increasingly difficult to cost justify in a market where margins have been squeezed to the bone.

Software such as MrTedTalentlink technology solves this problem. RPO Managed Services can now be delivered cost-effectively using web-based systems that streamline the processes from end-to-end, enabling recruiters to focus on service, not administration. And it is no longer the preserve of large agencies, as we are now delivering niche market systems for mid-range agencies to help them grow their market share, usually at the expense of the large generalist agencies.

And the effect on shareholder value is dramatic. A RPO or Master Vendor service can double a supply agency’s turnover in a very short period of time. This increase in volume can be achieved without dilution of margin due to the significant value-add offered to the customer. Hence the gross profit can also be doubled, and with little addition to the cost base, most of this drops down to the bottom line. Consequently an agency with a net margin that has been reduced by 2%-3% in recent years can recover their margins through Managed Services. The shareholder value is consequently increased in three ways:
• size matters, and the larger the turnover the more attractive the business
• profits are increased and values are expressed as a multiplier of profits
• multipliers are higher as profits are being generated from long term contracts
So your shareholders can recover the values lost in recent years by delivering cost-effective RPO Managed Services, as by doubling turnover, shareholder value can be increased by a factor of 5 times. What other business development initiative can achieve this kind of growth ? So when you plan to get involved in Managed Services then plan on becoming a shareholder as well!

If Managed Services is so financially attractive why are more recruitment businesses not offering this service, and why are there so few successful profitable contracts ? There have been two primary reasons for this:

1. By definition it is a service business not a sales business and the staff, culture, and payment schemes need to be very different to supply-side businesses.
2. One system does not fit all customers. In practice, every customer is different and a system needs to be configured to meet the diverse processes in each sector. MrTedTalentlink’s unique flexible system is being used worldwide by some 80,000 users

And it’s not just for the big agencies with deep pockets and large IT departments. All agencies can start small but think big. Existing customers can be ring-fenced from predatory attacks from competitors in stages, with costs phased over the length of the contract, to provide a return on investment in months not years. And the provision of the system can be outsourced to MrTed without the need for in-house IT skills.

The difficulty for many recruitment businesses now is to know who your customer is. In recent years we have seen the Procurement Managers take ownership and drive down costs. However, we are now seeing the HR department get back involved as the need to address the myriad of legislative, health and safety, and taxation compliance issues becomes increasingly important. And the Financial Director has an accounts payable problem with three-way matching of orders, timesheets and invoices, typically processing thousands of low value transactions. A Managed Service can solve the problems in all these areas:
• provide visibility and control on spend to the procurement department
• mitigate risk of non-compliance, where the consequential costs are escalating
• consolidate invoices to reduce the number to 52 (or 12) per annum

MrTed can provide proven software and implementation services, to provide a no-risk service to the recruitment businesses who want to grab as much land as possible – before their competitors do.

Kind Regards

Jon Holden
[email protected]

Errol van Staden

I am keen to access benchmark data about the master vendor model.

We have employed this model successfully. I also fully agree with the sentiments expressed by Jon Holden.

However, we have given our own flavour to this model, which is why I would like to talk to other implementers of this model.

I am especially keen to talk to suppliers who have used this model in the context of a green field project.

Thank you

Errol van Staden
I/O Psychologist

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