25 November 2014

Why most small recruitment agencies stay small

Our industry is one that is dominated by small recruitment agencies. Yet, I would imagine that most of the owners of these small agencies would like to grow if they could grow profitably. Unfortunately much of the growth, if it does occur is not profitable growth.

The Recruitment Industry Benchmarking (RIB) Report has 126 members across Australia and New Zealand and states an average member's staff size of 16 (12 fee earners and 4 support staff). IBIS World suggested in one recent report detailing our industry, that there were about 24,000 employees across about 7,000 businesses, giving an average employee number of just under four per company.

What prevents a large majority of recruitment agencies from growing profitably?
After twenty five years in the recruitment industry, I have seen plenty of agencies that have never made the transition from successful small agency to successful medium-to-large agency.

Here are the top ten reasons why, in no particular order: 
  1. Unfocused owner(s): The owner(s) has either outside interests that take them away from the business or the owner(s) spends too much time bogged down with transacting jobs and other desk-level work rather than working on the business or, when there is more than one shareholder/owner, the shareholders/owners can’t or don’t want to (for whatever reason) continue working together and the partnership dissolves.
  2. Unfocused hiring: Consultants are hired without a thorough recruitment process being undertaken or are hired into a poorly-defined role or a hired to broaden, rather than deepen, an agency’s capability. 
  3. Unfocused consultants: Consultants have a poorly defined target market or are expected to equally build up both temp and perm businesses on the one desk.
  4. Unaccountable and/or unethical culture: Scheduled meetings and meeting times are an approximation rather than a commitment. Expectations with respect to results, activities and behaviour are either not communicated or if they are, the consequences of non-compliance are inconsistently enforced. Any behavior that generates fees is actively encouraged, or not discouraged, regardless of the ethical or legal nature of that behaviour.
  5. Unprofitable consultant remuneration: The agency owner/managers provide increased selling and support resources and there is no corresponding ‘payment’ of those costs through an amended commission or bonus scheme for consultants. Bonuses or commissions are paid out for performance over a too-short time span leading to cash flow problems or threshold/deficit problems. Consultants are paid commissions or bonuses on performance benchmarks that constitute average performance not high performance.
  6. Unprofitable clients: Clients who take too long to make decisions, take too long to pay their bills or engage too many recruiters to fill their vacancies are all clients that should be educated to change their behavior, or fired.
  7. Unprofitable candidates: Most consultants interview far too many average candidates that are easy to find (ie they apply to online jobs) rather than invest the same time (or less) in sourcing, activating and interviewing high quality candidates that are hard to find (ie the candidates who aren’t applying for any jobs because they are broadly happy where they are).
  8. Unreliable use of technology: Database protocols for every single user that are unclear and not enforced contribute to one of the most significant missed opportunities in building a small agency’s intellectual capital.
  9. Undefined processes: As the mastermind behind the global success of McDonald’s, Ray Kroc understood that a company’s long term growth was underpinned by the consistency of product and service delivery, no matter the person or the location. Almost all small recruitment agency owners lack this focus on process consistency and show little interest in understanding how such process consistency would dramatically improve the prospects of profitable growth.
  10. Unreliable cash flow: A recruitment agency that has a heavy reliance on permanent recruitment and/or debtors that don’t consistently pay within the stated payment terms lacks the critical foundation for growth. Sustainable growth requires an ongoing investment in staff, technology, accommodation and marketing. All of these require cash.
Q: How do you avoid falling into the trap of no growth or profitless growth?
A: Ensure you have a business model that will enable you to scale and expand your business profitably.
Most recruitment agencies do not have such a model and even those that have it don’t necessarily keep it (eg HJB). Hays would be the most profitable example of such a model.

There’s nothing wrong with staying a small recruitment agency but far too much money has been lost in attempting to grow a recruitment agency without the owner/leader responsible having a genuine understanding of what underpins that growth and how they will execute on that understanding.

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1 comment:

  1. Hi Ross, this is excellent. I'd emphasise some points over some others, but cannot disagree with the list.

    ReplyDelete