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
Brad Pitt didn’t invent the theory behind the movie ‘Moneyball’, but he brought the concepts to the non-baseball world with the pop culture hit.
He played the role of Oakland A’s General Manger Billy Beane, who applied the visionary analytical Sabremetrics theories of stats junkie Bill James. It led the A’s to 5 playoff appearances in 7 years with a payroll a tiny fraction of big market competitors like Boston and New York.
Moneyball theory uncovered the factors that led to “buying runs and wins”. Our Yield Deficit KPI will unveil the opportunity cost black hole that explains why the $100B US IT Staffing industry runs at a 4-6% profit margin.
Submittal single point of failure for revenue
Staffing firms have 100% of their revenue relying on one thing: A Manager reading a resume. They have no way to predict or control what a manager thinks of their submittals, but the decision happens in seconds and in the vacuum of their thoughts.
When a manager reviews a resume, their objective is to say NO as fast as possible. We ran a LinkedIn poll asking hiring managers how long they read a resume before saying NEXT. Half of them said they won’t go past 10 seconds and another 25% said between 10 and 30 seconds.
They treat resumes like a blackjack dealer flipping cards. There should be a giant equation symbol between the words Resume and Revenue. Staffing executives who remain myopic about this truth are allowing a manager’s caprice to shred their teams’ earning upside.
Here is a blunt dose of truth for Staffing executives. You have two hard caps on your earning potential:
- The manager rules on a resume faster than they take two breaths
- Recruiters have finite output ability to make submittals
Yield Deficit Staffing’s new KPI
That may seem harsh, but what evidence do we have to make such a concrete assertion? The Yield Deficit is the other side of the Sub-to-Start coin and it will be the key to driving robust double-digit profits in 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 Staffing. The chart shown above is based on 3 TechServe Alliance staples and one estimate of mine:
- A Sr. IT Recruiter makes 40 subs and 4 placements per month
- A deal brings in an average of $150,000 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:
Does Staffing track lost Opportunity Cost?
So, now we have the amount of time a recruiter spends actively working candidates and the productivity time value 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.
We have heard the rhetorical question: “Does a falling tree make a sound if no one is there to hear it?” An appropriate question for a Staffing owner would: “If you paid for activity that produced no revenue, does it count as a loss if you don’t track it?”
If Staffing firms knew how much money they were torching, they would be more motivated to stop it.
The Yield Deficit shows the mind-numbing volume of empty effort that cost time and money with nothing to show for it. Staffing tracks its wins (sub-to-start, time-to fil, etc.), but it doesn’t quantify the cost incurred when effort produced no revenue.
Digging into the data
Identifyting the Yield Deficit felt like a huge discovery, but the math was based on unrealistically pristine conditions: EVERY RECRUITER HIT THEIR NUMBERS. There is a reason that performance-based attrition is 2.5X higher in Staffing than other knowledge field. When a Staffing firm owner makes an offer to a rookie, they know there is a 67% chance that person will be out of the industry within four years.
When I dug into six years of TechServe Alliance operational data to see what patterns were hiding in plain sight, my jaw hit the floor.
TechServe represents roughly 300 member firms where a $500K gross margin per recruiter is considered the bare minimum production just to pay for themselves. Up to this point, our modeling generously assumed best-case performance, that every one of their estimated 2,180 recruiters was hitting their numbers. Firms typically have a recruiter-to-AE ratio somewhere between 1.5:1 to 2:1.
The baseline Yield Deficit already proves how much money is lit on fire when recruiters are performing well, but what happens to a firm’s bottom line when they don’t hit their targets?
The math is horrific when you think about the lost productivity and project it over those 6 years:
Step 1: The Six-Year Performance Audit (Per Recruiter)
(Baseline Minimal Required Target: $500,000 / Year)
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Year 1: $500K Target: $391K Actual = $109,000 Deficit
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Year 2: $500K Target: $347K Actual = $153,000 Deficit
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Year 3: $500K Target: $462K Actual = $38,000 Deficit
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Year 4: $500K Target: $361K Actual = $139,000 Deficit
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Year 5 (Surplus Year): $500K Target: $561K Actual = $61,000 Surplus
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Year 6: $500K Target: $487K Actual = $13,000 Deficit
This gives us a total under-performing Gross Margin median of $391,000
Step 2: Load-Balancing the Six-Year Average
By factoring in the $61,000 overperformance in Year 5, the net deficit across all six years is -$391,000 per recruiter. Averaging this true net figure over the entire six-year span establishes the honest, load-balanced annual reality:
Step 3: Calculating the Compounding Annual Blowout
Now we combine the honest annual attainment deficit ($65,167) with the established annual time-value cost of unplaced submittals ($46,875/mo X 12 months = $562,500/yr).
- Annual Lost Productivity Cost (Wasted Time): $562,500
- Net Annual Attainment Deficit (Missing Revenue): $65,167
Step 4: The Final 6-Year Industry Autopsy (2,180 Recruiters)
Projecting these honest, load-balanced numbers across the estimated 2,180 recruiters over the entire six-year span yields the sobering financial verdict.
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Net Attainment Loss (Missing Margin): $65,167 Annual Net Deficit x 2,180 Recruiters x 6 Years = $852,384,360
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Total Wasted Productivity Cost (Burned Time): $562,500 Wasted Time/Year x 2,180 Recruiters x 6 Years = $7,357,500,000
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The Combined 6-Year P&L Cataclysm: $852,384,360 (Missing Margin) + $7,357,500,000 (Wasted Time) = $8,209,884,360
The Industry Verdict
Even after giving full credit for the banner year, the stewardship of member firms allowed a net $852 Million in required margin to evaporate, while burning through $7.3 Billion in wasted recruiter time.
Total 6-Year P&L Destruction: $8.2 Billion.
This seems like a bad news blizzard of statistics, but it is critical that Staffing company owners and executives embrace the truth that underperforming employees have a crippling opportunity cost that is being largely ignored. There is a cliché about opportunity cost related to the unsold plane ticket or hotel room. I would bet every dime I have ever made that hotel chains and airlines document those opportunity costs down to the penny.
I would make a parlay bet that not one staffing company owner tracks the opportunity cost of submittals that were rejected in seconds in the vacuum of a manager’s thoughts. If all of that dire financial forecasting didn’t ruin your day, let’s make a 40-foot tall, motor oil-fueled tire fire on your front lawn.
Remember: All of this P&L carnage is driven by a bloated 12:1 sub-to-start ratio. Imagine the impact on your balance sheet if your firm operated at a surgical 4:1 instead. You would immediately wipe out $4.9 Billion in wasted time and convert millions of lost effort directly into realized gross margin.
Ready to stop the bleed and engineer a 4:1 team? Read Part III to learn how.
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