This is the second in a 3-part blog series encapsulating the fractured nature of IT Recruiting, in general, and IT Staffing, in particular. Part II illustrates the true reason IT Staffing firms routinely suffer shockingly low profit margins – and NONE of the firms even recognize the problem.
By Mark Knowlton
IT Staffing firms are big outliers among service industry providers.
Service industries typically have robust profit margins. Stock/Commodity Exchanges and Commercial Leasing both make slightly over 51% margins, so you might assume that it requires advanced degrees and complex knowledge to attain such levels of profitability. If so, why does the category of Nannies, Maids and Gardeners beat both of those industries by a whisker?
Statista says IT Staffing did about $100B in revenue in the US in 2023, so how it is possible the industry has delivered 4-5% profit margins for the 60+ years of its existence? This low profitability is typical in Retail and Logistics, industries with massive overhead because of physical goods. Where is IT Staffing missing the boat?
The answer is incredibly simple, but industry leadership either hasn’t noticed or accept it as an immutable reality. Option C doesn’t exist.
Submittal single point of failure for revenue
IT Staffing firms have 100% of their revenue relying on one thing: A Manager reading a resume. Firms have no way to predict or control what a manager thinks of their submittal, but the decision happens in seconds and in the vacuum of their thoughts. Many firms boast of having ‘rock star’ sales people who build phenomenal relationships. That may be true, but it means nothing if they can’t influence a manager’s interpretation of a static document. ‘Thanks for dinner, but I am passing on your guy.”
When a manager reviews a resume, their objective is to move to the next resume as quickly as possible. Three resumes among a pile of six dozen may be from the firm with the rock star salesperson. The manager is just scanning content in rapid-fire mode, so if they don’t see ‘API integration’ or ‘microservices architecture’ in the right context, their brain says ‘NEXT’. Sorry, rock star.
Yield Deficit Staffing’s new KPI
That may seem harsh, but what evidence do we have to make such a concrete assertion? The evidence comes with a new KPI we discovered about a month ago. We have named it the Yield Deficit, which is the other side of the Sub-to-Start coin and it will be the key to driving robust double-digit profits in IT Staffing.
The Yield Deficit measures the hard cost of time spent on subs that produce no revenue. The Yield Deficit illustrates WHY profits are so low and attrition is so high in IT Staffing. The Yield Deficit chart shown above is based on 3 TechServe Alliance staples and one estimate of mine:
- A Sr. Recruiter makes 40 subs and 4 placements per month
- A deal brings in an average of $122,500 in revenue
- Gross Margin target is between $500-750K
- A recruiter spends 3 hours per month with a candidate all-in until there is an outcome
The first thing we have to do is to establish how much active time is spent performing the round-trip activities (sourcing, engaging, screening, submittals, follow-ups, etc.) within the Candidate lifecycle. This model assumes a target of 40 subs per month and 3 hours per candidate.
Then, we need to consider the Gross Margin target the shop has for each person. In a recent TechServe Alliance regional gathering, TechServe CEO Mark Roberts referenced a Gross Margin range between $500,000 and $750,000 being set at member firms. So, now we need to calculate the actual productivity time value for a shop that has a GM target between $500,000 and $750,000:
Now that we have the Average Hourly Time Value, we need to identify how much time was spent that didn’t produce revenue, simply called Wasted Time. We have to consider the number of submittals minus the number placements:
So, now we have the amount of time a recruiter spends actively working candidates and the productivity time value of the time being consumed. Now the third leg of the stool is to calculate the hard cost of the time spent that produces no revenue: The Yield Deficit.
Here is an exercise for every IT Staffing executive whose bonus is tied to profits. Find your shop’s Sub-to-start ratio in the chart above and then go to the far right to the Yield Deficit column. Take that number and multiply it by the number of recruiters in your shop. Multiply that number by 12 and you have your annual Yield Deficit.
Unless you have a sub-to-start of 5:1 or lower and you have just 2 or fewer recruiters, your annual Yield Deficit has two commas in it. Let that sink in.
The TechServe Alliance, the leading research organization focusing on IT and Engineering Staffing, produces an annual operational report that shows detailed production numbers for its hundreds of members. The yellow highlighted row in the chart above reflects an average sub-to-start ratio for its members. Let’s say we have a mid-sized staffing firm that has a 12-1 sub-to-start and they have eight recruiters. Their annual Yield Deficit is $4.5M.
Just as an experiment, I randomly selected 2 of the last 8 years of TechServe reports. One year showed a sub-to-start average of 11.5 and another one was 13. Let’s take that second year and compare it against another event that has an identical mathematical certainty of happening:
There is only one way to look at this comparison. A Staffing firm could arm its team with the latest and greatest HR Tech platforms, including powerful sourcing tools that cost 5-figures per seat, per year. If all of that time and money spent leads up to sending a resume and having a manager decide if they want to phone screen or reject the candidate, you are banking on odds no better than drawing an Ace from a deck of cards.
Nothing will derail this profit-bleeding attrition train until there is a true reckoning that throwing resumes alone will never change these numbers. IT Staffing firms are torching their recruiters’ time by having a manager interpret the resume without having additional insight or data. A shop with a 12:1 sub-to-start ratio will burn almost 92% of the Recruiters’ time to find, screen, present and follow up with the 11 candidates who didn’t get placed. Saying your firm is different will not change the numbers.
The Staffing Industry got traction in the US after WWII with firms like H.L. Yoh (1940), Kelly Services (1946), Robert Half and Manpower (both 1948). Randstad (1960) marked the beginning of staffing firms focused on supporting companies who were bringing advanced technology called mainframes to help run their operations, the birth if IT Staffing. Part I of this series points out the fact that recruiters could play connect the dots between Job descriptions and a resume in the pre-computer era. A Cost Account for a Textile firm or a Project Manager for constructing ship-building plants were qualified on paper by default. The keyword matching methodology was a binary connection point.
A resume is not a divining rod, but IT Staffing firms have acted as if it is was the sole source of truth that illustrated a candidate’s worthiness. Computer technology turned what was reliably a point-to-point connection to a spider web that is blowing in the wind. The Staffing industry never changed the methodology to determine the match. They must change or they will permanently receive the receipts of drawing an Ace from a deck of cards.
The final piece of this trilogy will illustrate the solution to this myopia that has gone undiagnosed by an industry about to enter its 65th year. It is not a piece of technology; it is a methodology called Dynamic Engagement, so stay tuned.
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