12 April 2010

Why PSAs suck

One of the more humiliating recent events within the recruitment industry was Chandler Macleod’s withdrawal from the $400 million Australian Defence Force recruitment contract it had won from incumbent provider, Manpower.

At the time of the contract win in July 2008, Stephen Cartwright, the CEO at that time of Chandler Macleod, described it as a ‘landmark contract’. And so it proved to be a ‘landmark’ in how quickly a contract ‘win’ could turn into a morale-sapping, PR and financial disaster.

The post-wedding glow lasted a mere 7 months and 16 days before an official statement was released on 16 September 2009 confirming that an amicable divorce was being undertaken, ‘irreconcilable differences’ suspected as the motivator.

Within 3 months, the long-rumoured reconciliation between jilted first husband, Manpower and the blushing ADF bride, was confirmed. The two year ‘interim’ arrangement was the obvious path to take given the bruised egos and red faces seen everywhere from Canberra to Sydney.

It’s tough being a public company. You have to disclose all information that is regarded as ‘material’. In other words any good or bad news that may impact the view investors have of your share price must be announced to the market as soon as possible. All the financial ugliness of the ADF/Chandler Macleod contract was duly posted by industry news service, ShortList, for all subscribers to see.

Like 40% of marriages, many other PSAs start out the same way - full of promise, high spirits and huge expectations and sadly, end up the same way as those marriages - desperately disappointing, sometimes humiliating and always costly.

PSAs are the recruitment sector’s equivalent of the Promised Land. The lure is strong, the rewards seem vast but for most seekers, things never quite pan out as expected.

I suspect it is a lot to do with the very optimistic and competitive nature of recruiters. We want to win and we think that no matter what we inherit, we can turn a sow’s ear into a silk purse, so to speak.

Here’s a word of warning – most PSAs suck. Not all of them but many of them, as Chandler Macleod found out for themselves, the hard way. Here’s why:

1. They take a heap of time and resources to win
It sucks completing all those loathsome tender documents, requiring every piece of information about your company and financial status that the client would never reveal about their own organisation.

2. It’s rarely an even playing field
It sucks when you put in all the effort to submit a tender when (secretly) all the client wanted was to screw the existing supplier on price.

3. You have to discount heavily to win
It sucks when you have to (metaphorically) drop you pants and grin and bear it as the client suggestively whispers to you ‘just a little bit lower, you’re almost there’ while at the same time you dreamily remember that the original RFT document cooed ‘quality of service is our highest priority’ and ‘the lowest priced suppliers won’t necessarily be selected’

4. They rarely deliver the volume of work that is suggested, hinted or promised
It sucks when you offer your very best price and turn your company’s processes upside down to then experience the promised torrent of jobs is nothing more than a trickle.

5. They want your best consultants to do the recruitment
It sucks when your top $1/2 million billing consultants are forced to fill jobs at 7.5%.

6. They require extensive reporting
It sucks when you spend more time filling out 17 reports each month to satisfy your client’s procurement and QA Nazis, than you spend on taking and filling jobs from that client’s PSA.

7. You still have to compete to fill each job with other ‘winners’ on the PSA
It sucks that even after you have dropped your pants on fees and margins, you still have to undertake a resume race to win the puny placement fee.

8. The classic ‘we reserve the right to use suppliers outside this agreement as and when necessary’ clause appears on the final page of the contract
It sucks that after all the loyalty and effort you have put in (at your very best price) that your PSA clients think nothing of sleeping around on you, whenever they like.

9. Once you win a PSA, you can’t afford to exit it  even after you have made little, if any, profit
It sucks that after everything you have done over two years for the client you still haven’t made any decent money, yet if you do not re-tender for a further contract period, you will probably have to fire staff and live with the tag of having ‘lost’ the PSA.

It’s easy to see the upside of a PSA win and I don’t wish to discourage you from seeing the good in a PSA win. What keeps coming back to me is a little phrase from my first year economics subject, Introduction to Microeconomics  ‘opportunity cost’.

Opportunity cost is the potential value for what you have forgone when you choose one alternative over another.

As Wikipedia goes on to say: ‘The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently. Thus, opportunity costs are not restricted to monetary or financial costs: the real costs of output forgone, lost time, swag, pleasure or any other benefit that provides utility should also be considered opportunity costs.’

PSAs are full of hidden opportunity costs – that’s why most of them suck.

Do agree or do you have a different view on PSAs? Make your views known. Please leave a comment. Diametrically opposed views welcome.

14 comments:

  1. I couldn't agree more Ross.

    Our business strategy is to pick up the pieces when PSA/Panel providers can't deliver. And we do so at the right price.

    We would enter into a PSA providing benefit to all is a depth of relationship that facilitates true buy in to the client company and delivers higher success rates and accountability.

    Unfortunately, this counts out most new business with government departments/owned corporations who seem to be interested only in price and 'making life easy' by being able to have as few suppliers as possible(despite the rhetoric about supporting regional business and the true VALUE proposition).

    Your article outlines the results of this approach and you're right, you don't have to go much farther than 1st year economics to understand opportunity cost. Are the corporate executives in our industry under educated or just mad? Better their problem than mine.

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  2. Amen brother - I agree 100%. The amount of time that I have spent over the years preparing tenders that ask all of what you have stated above, to then feel right royally screwed at the end, are all painful memories. Will that stop us all from going after them ? Probably not, but a great degree of due dilegence needs to be performed on the PSA before allocating so many resources to bid.

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  3. Nick Borthwick from Alpha People13/4/10 2:04 PM

    Ross,

    I couldn't agree more! There seems to be little correlation between being the proud parent of a healthy bouncing baby PSA and a healthy bank account.

    Effort vs Income is rarely a balanced equation under most PSA's.

    To me the major issue is point 8, competing with companies outside the PSA. A line manager who is working 70 hours a week couldn't give a toss who fills the role, just as long as someone does and said line manager gets to keep their marriage intact!

    I wonder if our industry has the ticker to 'just say no!' to companies seeking PSA submissions. I realise there will always be bottom feeders who will accept any proposed fee structure, but do we need to sell our skills, our experience and our industry so short in order to jump through PSA hoops? I think and I hope not.

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  4. Ross,

    Excellent post!

    At Mindset we have grown our business consistently and significantly over the years (including last year) and have never signed a PSA.

    We haven't done so for many/all of the reasons you've stated. We have a sound a philosophy in our buiness which states we don't do something unless we can make money or achieve some other strategic objective. A corollary to this is that we'd much prefer to let other companies make the loss that a PSA will inevitably incur. As you have pointed out a fee structure around 7% has an opportunity cost of around 13-23% depending on recruitment/search methodology. A no-brainer to me!

    Mindset has a very loyal client base, once a company partners with us they seldom look elsewhere for alternatives. Surely this is the true test of success, not a worthless PSA document?

    Having said that, if any corporate recruiters or commercially-minded HR people (an oxymoron?) are reading this and want to offer us a PSA with realistic $ and guranteed work volumes we'll happily talk to them....but I'm not hearing the phone ringing!!

    Aaron

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  5. PSA'a are literally not worth the paper the are written on. I regularly place people with companies that have PSA's in place. As point 8 states:

    "we reserve the right to use suppliers outside this agreement as and when necessary"

    This one clause makes the PSA completely redundant but it is absolutely essential for them to have it in the agreement. This is because the agencies that do sign up to PSA's will not be able to fill their jobs anyway so ultimately they will have no choice but to go out to the market.

    I see PSA's as nothing more than something they throw in your face to discourage marketing calls.

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  6. I agree completely Ross, a PSA client becomes like a cookoo in your nest, demanding attention over your other smaller clients who never haggle over price and respect your service.
    Jennifer

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  7. Bernard Morrison14/4/10 8:58 PM

    It's important to make the distinction between a sole provider arrangement and a panel arrangement. I suspect this article refers to the former. To that extent, I couldn't agree more with your comments.
    Nevertheless, I have had experience using a panel supplier win to springboard a business into a new market. I'm sure opportunity cost still existed in the short term, but as a route to gaining quick market share and market kudos, it was inavaluable. On more than one occasion.

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  9. Yes, you are absolutely right, Bernard. Sole provider PSAs are, mostly, very different. These sort of PSAs were not the sort of PSAs I was referring to although I failed to make that distinction. PSAs in a panel situation can, and do, work for the panel providers but in my experience these are very much in the minority.

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  10. Vlasta Eriksson15/4/10 10:17 AM

    Great Article and you are so right. We all aim to be on that PSA but in a long run they suck up a lot of resources with very little return. Gaining a market share is great but at what price and quality.
    PSA need to be a win-win if they not just walk away. The only achievement you gain is screwing the price down for the industry.

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  11. One word... Telstra

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  12. Every contributor has agreed with your words. It's obvious - the industry should just refuse to fill in these ridiculous tenders. Having said that we have found that if one is invited to tender it is rare to be rejected and as we are in the final process of streamlining our applications so that none takes longer than one working day to prepare it becomes a minor irritation.

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  13. Um - it's actually illegal under Australian Law to have an exclusive dealing arrangement (Trade Practices Act s47). That's why exclusivity can never be gauranteed. And seriously, if any buyer did not try to get the lowest possible price and highest service level then that manager should be sacked.

    Basically, tenders are competition in their rawest form and PSA's are probably the best process for the a manufacturer or service provider to acheive this.

    Building relatiopnships is important but if the cost of building a relationship is 10% on my bottom line then will you help me find another job as I am about to lose this one!

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  14. Um - there is a legal distinction to be drawn between conditional offer of supply (the activity proscribed by Section 47) and conditional offer to purchase. It is also arguable that teh expression "to a limited extent" permits exclusivity for a defined term provided teh arrangment is retested in the open market at the end of term. The ACCC's lack of prosecutions of sole supplier arrangements suggests they are kosher. Sole supplier arrangements are definitely more commercially agreeable. I wholeheartedly agreet hat PSA's can be difficult business, but they seem almost benign compared to Standing Offer Arrangments and Common Understandign Arrangements. Now those two are more worthy of avoiding!

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