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Why Your Staffing Firm is Leaking Gross Margin … and how to dramatically increase profits by fixing the leaks
In my experience, the majority of staffing firms are leaving gross margin on the table. They do so by paying temporary employees above market and/or charging customers below market. I say this from the perspective of a consultant that helps staffing firms capture higher gross margins. I see a tremendous amount of gross margin leakage.
Millions in lost profits
Few staffing firm owners were aware of the extent of their gross margin leakage until I made it visible to them. The leakage is typically a few cents here or a couple dollars per hour there, which cumulatively results in millions of lost profits.
Gross margin – the most important driver of profitability
When we think about ways to increase profits, we usually think about lowering OPEX or increasing sales. In fact, for many staffing firms the fastest path to higher profits is higher gross margins. Consider, for example, a staffing firm earning 4% net operating profits. They can increase net operating profits by 25% (to 5%) by raising gross margins by merely 100 basis point (1%). While gross margin improvements will rapidly increase profits, it’s also the most challenging profit driver to get right.
Lessons from Freakonomics
According to the book Freakonomics by Dubner and Leveitt, real estate agents listing their own homes sell them for 3% more than when they sell their client’s homes. In fact, real estate agents hold out several days longer when selling their own homes. Why? Because they earn 100% of the incremental gains. When selling their client’s homes, agents push to close deals faster because they only receive a sliver of the higher selling price in their commission. There is little incentive for a real estate agent to capture the highest price when selling their client’s home.
What staffing professionals and real estate agents have in common
In staffing we have not one, but two price negotiations at stake: the bill rate with the client and the pay rate with the candidate. Recruiters and sales execs – like real estate agents – have little incentive to maximize gross margins because they only receive a tiny fraction of the incremental gains as commissions. Yet it’s these incremental gains that can dramatically increase operating profits.
Get Control of Your Gross Margin
When we think about increasing gross margins, we often focus on pay rates (“pay less”) OR bill rates (“charge more”). The fact is, we must focus on both. We need end-to-end sales and recruiting processes that consistently lead to the optimal pay and bill rates. We don’t want to overpay employees and we don’t want to undercharge clients. Our incentive compensation systems, workflows and management controls must work together to maximize gross margins.
Refining your sales and recruiting process
The processes and negotiations that lead sales and recruiting to the right bill and pay rates are critical to the level of profitability your firm achieves. Similarly, your margin rules, commission structure and management controls are key success factors in maximizing gross margins. Our negotiation methodology – MinMaxTM Negotiating – is widely considered best practice in the staffing industry. MinMaxTM will produce higher margins and works best when integrated into your firm’s workflows, training programs and staffing tools.
Simple margin rules are inadequate
I often see firms that employ simple margin controls such as general markup rules. In my experience, simple rules depress total available profits by as much as several hundred basis points. High profit firms employ more nuanced margin controls and rules that account for a wide range of scenarios and strategies.
Who would have thought that playing games during work hours could be good for the bottom line? In fact, the Next Big Thing in staffing operations is gamification. Indeed, Bullhorn has announced extensive support for gamification in the Bullhorn ATS beginning in 2017. Bullhorn gamification will allow employees to run tournaments where coworkers draft teams, track live statistics, and compete to win. Gamification increases employee engagement, collaboration, and productivity. We can use Bullhorn gamification to set up contests in pursuit of business objectives including gross margin improvement.
Where to start
Start by modeling the positive financial impact of higher gross margins on EBITDA. Improving gross margins is a high ROI initiative that will yield a quick payback. Gross margin leakage can often be cured through basic process and control changes, training programs and coaching. Our methods typically result in 50 to 150 basis point (.5% to 1.5%) improvements in gross margins for an entire business within nine to twelve months. For some firms, we’ve even seen significantly greater results.
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