Working with Outsourced Recruiters

Updated: August 18, 2009

There are many different options for working with outsourced recruiters. There are permanent recruiters, temporary recruiters, leased employees through third parties and more. The purpose of this paper is to review some of the many different options that exist in terms of working with third parties to fill a company's recruiting needs.

In permanent recruiting, companies can pay fees via retainer or on a contingency basis. With contingency hiring, the outsourcing partner is paid once the candidate has been placed within the firm. In other words, the fee is "contingent" on the successful placement of a candidate. Within contingency search, there is often a period of guarantee. This means that if the candidate leaves within a certain time frame, the agency or outsourcing partner will endeavor to find a successful replacement or refund the full or partial fee, depending on the agreement. In my experience, many outsourcing partners will recommend only a 30 or 60 day guarantee period. I always try to negotiate for a minimum of 90 days if not longer and it is often a point that is negotiable. The fees with contingency search vary by outsourcing partner. I have found that typically one can expect to be quoted 25% to 30% of either the first year's base pay or first year's cash compensation, depending on the outsourcing partner. This is another area I have found to be negotiable, especially in these difficult economic times. I have worked with partners for as low as 10% on base pay for an introductory rate or 18% for the first three placements and then 15% for the remaining placements per year in a situation where I had a good volume of openings. With the internet opening avenues such as Monster and Linked In, agencies have to be more competitive with their pricing than ever before. Unless otherwise specified in the agreement, there is nothing to stop a company from working with multiple contingency-based firms. Since only the firm that places the individual is paid, there is only a little downside to working with more than one partner. The downside is that the same candidates may be called upon and the wrong message can be delivered with firms performing on top of each other. Since the recruiter's compensation is normally either fully or partially commission-based, and this can drive the recruiters behavior. Therefore, an employer hiring a contingency-based firm should be aware of this point. "They must concentrate their efforts on those mandates that they can fill with a minimum effort. The more difficult mandates tend to get much less, if any, attention because the probability of filling them is slim" (Davis, p.1). With this point, one might consider a retained search firm, which will be described later, for those difficult-to-fill positions. Other considerations are that they may have many mandates to fill, the more a client shows an interest in a candidate the more the recruiter might push (whether or not the candidate is right for the job), and recruiters may be tempted to submit a number of candidates, regardless of the actual fit in order to make a placement (Davis, p.1).

With retained search, companies pay an up-front fee which is often non-refundable for the recruiting services. The fee often is only a portion of the full fee. Typically firms work with only one retained consultant as a time as there is a non-refundable fee paid up-front. The fees associated with retained search vary and can typically be quoted at roughly 30% of total cash compensation. Again these fees and the legal terms within the agreements are negotiable. References should also be sought from other clients that work in the same field, especially if the recruiter came through by cold calling versus a referral. Some retained search firms also work for a flat negotiated fee that is not based on the candidate's compensation. One recruiter writes in favor of retained search, "for high-impact positions, it makes more sense to pay a qualified professional firm to commit trained, experienced and motivated resources to a process designed to identify and attract the best candidates in the business" (Davis, p.2). I tend to agree with this recruiter that retained search works well either for high-impact positions or hard-to-fill positions. Currently, we are using a retained search firm to help us fill an opening for a Chief Financial Officer and that process is going well.

One critical success factor that cannot go without mention is momentum. Whether fee-based permanent recruiting or whether the in-house recruiter is filling their firm's position, momentum is critical. When a human resources or outside agency is given an assignment, it is often given with a sense of urgency. Candidates are sourced and screened and then there is often this period of slow-down where momentum is lost. Whether companies are doing their own recruiting or paying someone else to recruit for them, I would urge the hiring manager's to keep the momentum going throughout the process.

In discussing outsourcing partners for recruiting, there are potential partners beyond permanent or regular recruiting. I am referring to partners that can help companies source and place temporary and leased employees. There are several reasons employees choose to lease employees from other firms and/or hire temporary employees. The reason may be that they do not have headcount to add to permanent staff. A company may not have a budget for salary but in the bucket of outsourced advisors, they may have available funds. The company for which I work is currently in a mode called run-off. This means we are not writing any new insurance policies, but instead we are only running off existing policies. In this case it makes more sense to refill positions lost due to unwanted attrition with temporary workers. Some companies hire temporary or leased workers instead of independent contractors for tax purposes. The IRS has a very strict definition of the difference between an independent contractor and an employee. If a company fails the test and has hired an independent contractor, they could be charged with penalties and back taxes. Hiring an employee through another company's payroll would avoid this particular problem.

As you read this paper, you may be asking yourself, what is a temporary employee and what is a leased employee? They are very similar concepts. A temporary employee is hired through a staffing firm. They go on the staffing firm's payroll and if they call in sick, their manager is the staffing firm. A leased employee is a very similar concept but is usually longer-term at lower mark-up rates. The staffing firm "payrolls" both the temporary and/or leased employees and charges their client a mark up which includes the payroll expense plus a profit. A temporary employee can work for a week, a month, or a year. A leased employee typically works longer term and instead of calling into the agency for a sick day, they might have a local manager on-site at the office where they work. The payroll is still handled by the staffing firm.

As with most solutions, there are pros and cons of working with temporary and leased employees. The pros include the ability to easily adjust in a swift manner to workload changes. The agencies that provide temporary help can provide businesses with qualified staff in a quick and concise manner (Schaefer, p.1). The use of temporary employees allows the employer to "try before they buy". In other words, it allows the employer time to evaluate the employee's performance prior to making a longer-term commitment. Cost is a consideration. The cost of hiring a temporary worker can be less expensive than hiring a regular employee with benefits in certain situations. A cost-benefit analysis can reveal this cost savings. Time can also be a consideration. If a job is expected only to last for a finite period of time such as six months, it may be more efficient to hire a temp (Schaefer, p.1). On the side of the cons or negatives, working with temporary and/or leased employees can present some consequences.

There are many reasons a firm might consider using temporary or leased employees. There are legal considerations as recent court decisions would suggest, such has benefit eligibility questions and treatment with the same care and respect as regular workers. There are also concerns regarding training and safety. Every temporary employee that starts with a new company requires training and a training period of time. This can be a concern for shorter-term assignments and also for jobs where there are safety considerations. The safety considerations arise if the temporary employee has not been sufficiently trained in the task that requires safety training. Morale issues can arise when temporary employees work side-by-side next to regular employees as they may have different benefits and different expectations. This leads us full circle back to those legal implications we mentioned at the start of the discussion on challenges with temporary employees. If either the permanent or temporary worker feels they are being treated unfairly because of different benefits or different expectations, it can raise the possibility of legal action (Schaefer, p.1).

Readers of this paper may be wondering how reliability factors in when discussing temporary employees versus regular employees? "Joe Broschak, Assistant Professor of Organizational Behavior at the University of Illinois at Urbana-Champaign, shared some of his findings about a particular study of temporary workers: "On average, these temporary workers displayed better performance relative to goals compared to their full-time counterparts." For those temps later hired as full-time employees, Broschak reported that "they continued to become better workers after becoming permanent" (Shaefer, p.1). While the writer appreciates Broschak's report, the writer has experienced many temporary workers who did not appear as engaged as a regular employee, nor were the same compensation vehicles used in order to increase motivation.

There are a few best practices when considering your temporary employee outsourcing partner. Ridenour suggests that businesses consider asking the following questions in order to choose the right staffing company: "What type of staffing help do you need? How was your first interaction with the companies you contacted? Is the company a member of the American Staffing Association? Will the company do a presentation for you and your management team? How well run is the organization? How does the company recruit and retain its qualified and reliable workforce? How are potential staffing company employees screened and tested? Does the company fully understand your needs? And, Does the company carry workers' compensation for its employees" (Schaefer, p.2)?
The goal in recruitment is to identify the best pool of talent and then to further narrow that down to an employee who will be an excellent fit for the open position and for the company. Is it better to fill an open position with our without the help of an outsourcing partner? Let's look the pros and cons of utilizing an outsourcing partner for filling regular (i.e. non temporary) roles within a company. The pros are that an outsourcing partner can free up resources within the client company, candidates that might not have otherwise been sourced could be uncovered because a whole new network is opened up and also because of the added resources making active recruiting calls including to passive candidates. In terms of freeing up resources within the firm (as mentioned above), it can take hours, days, and even weeks to sort through resumes and determine appropriate candidates, and that is just the beginning of the work. Some recruiters tend to specialize in specific industries, and this could be a pro. On the side of the cons or the potential negatives, the client company can get too many resumes and if working with more than one contingency recruiter could find themselves in the middle of an unpleasant situation. The recruiter might not be able to get your company's culture across properly to the candidates. If you utilize too many contingency firms, recruiters can step on each other's toes and potentially embarrass the firm. If you use one retained search firm and they cannot deliver, that is an issue. In summary, there are many pros and many cons and each situation is different. I highly recommend needs analysis after the job description of any opening is clearly vetted. Further to that point, the first step is ensuring that the relevant parties agree and understand the job description and the job specifications. This is the case whether or not an outside recruiter is utilized.

Reference List
Davis, Alan. Why a Retained Search Firm Cannot Do Contingency. Alan Davis & Associates White Paper. Retrieved May 15, 2009, from http://www.alandavis.com/htmlsite/articles.html.

Schaefer, Patricia. The Pros and Cons of Hiring a Temp. Copyright 2005 Attard Communications, Inc. Retrieved May 15, 2009, from http://www.businessknowhow.com/manage/hire-temp.htm

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