The predictable agency profit killer: ill-considered growth beyond 10 staff
The Recruitment Industry Benchmarking Report that Nigel Harse and Deb Charman compile each month is an invaluable resource for all its 126 subscribers across Australia and New Zealand.
Of special interest to industry observers and pundits, like me, is the aggregated data released annually, and what this reveals about the effectiveness and productivity of our industry.
excellent. The highlights being:
- RIB Average and RIB Median Employee headcount reached its highest level on record (17.6 Full Time Equivalent employees, a rise of 10% on last year), now surpassing pre-GFC levels with an average of 7 out of 10 agencies increasing their headcount levels in FY15.
- June 2015 was the 19th consecutive month of year-on-year profit-before-tax improvement with 55% of RIB participants reporting improved annual profits which pushed RIB FY15 results to a new annual record level.
- 27% of participants recorded their most profitable financial year on record .
- Temp and contract hours recorded the 18th consecutive month of year-on-year improvement.
- Average perm placement fee has now registered two consecutive quarters of year-on-year growth with the Q4 (April – June) average setting a new record high and reflecting a healthy 21% year on year growth.
However, as with any aggregated data, it is when you start digging down into the data subsets that you start to find the really interesting data. And so it is with this year’s RIB Report.
The data I was fascinated by was the productivity performance differences between those agencies comprising of less than 10 employees compared to those agencies employing 11 to 20 people (FTE).
Here’s what the RIB data reported:
| Productivity area | < 10 staff * | 11 – 20 staff ^ | All agencies # |
| Gross Profit generated per $1 of remuneration |
$2.10 (median)
$2.40 (average) |
$1.80 (median)
$1.90 (average) |
$1.80 (median)
$1.90 (average) |
| Pre-tax Profit per person | $45,200 (median)
$63, 805 (average) |
$12,578 (median)
$23,425 (average) |
$38,250 (median)
$44,207 (average) |
The performance difference that the average agency of less than 10 FTEs can generate is very significant, compared to a slightly bigger agency.
This data supported my previously unsubstantiated view that there is a real profit risk for the owners of recruitment agencies when they go beyond about a dozen staff.
Here are a dozen reasons for the substantial productivity decline apparent in agencies between 11 and 20 FTEs:
- Owner (and likely major fee-earner) spends more time in, and money on, non-fee generating activity associated with running a larger business eg banks, lawyers, consultants, social media, brand, rec-to-recs, training etc.
- As a result of the above, the owner is not only contributing less fee income, they are in the consulting area less frequently, meaning fewer opportunities for them to model the core consulting skills and core company behaviours.
- Underperforming staff have less scrutiny amongst a larger team and consequently deliver sub-par performance for longer before leaving or being fired.
- Original staff members, mostly solid to high performers, don’t ‘feel the love’ from the owner liked they used to, consequently becoming disillusioned and leaving (or worse; becoming gossips and staying).
- Internal cliques form, causing disruption and an internal focus, taking away from the previous sound culture and external focus. Higher base salaries are needed to attract experienced staff to replace the departing ‘originals’.
- A Team Leader structure is established without the team leaders necessarily having the skills to do the job properly.
- New recruits are hired without any structured onboarding or training, increasing the likelihood that they will fail and/or leave.
- Expansion occurs into a second (or even third) office, increasing fixed costs without a commensurate rise in revenue.
- Enlarged and (almost always) upgraded head office accommodation is more expensive per square metre and, therefore, substantially more costly per annum.
- Relatively expensive non-fee earning staff are hired (eg bookkeeper/accountant, payroll clerk etc).
- Pressure to justify higher overheads leads to chasing, and winning, low margin/fee or unprofitable business.
The lesson to be learned in expanding a recruitment agency beyond 10 to 12 staff is that you are now transitioning into a different sort of business; it’s a business that requires more structure, deeper and new skills from a greater number of employees and most of all it requires much more planning.
If you don’t plan for your small business (in the context of the Australian recruitment industry) to profitably transition into a medium-sized business then you will most likely wake up one day with the stark realisation
that you are working a lot harder, with more stress, for less money, compared to when your business was half its current size.
Don’t let that happen to you.
I acknowledge and greatly appreciate Nigel and Deb’s permission to republish data from the F15 RIB Review. If you are interested in how benchmarking your agency’s performance can assist you improve productivity please contact Nigel or Deb via this link.
Ross, thanks for the article. As you know I also follow the RIB Report closely and am forever grateful to Nigel & Deb for providing this service to the industry.
I agree with your comments. But from HHMC's perspective, we look at the growth beyond 10 consultants slightly differently. Those that take the plunge into growing their business are usually transitioning from what we label lifestyle businesses to owner-dominant businesses. They are generally starting to see an increase in equity value that could be realised in a trade sale process – lifestyle businesses have little equity value – and this is a conscious decision that business owners need to make.
The ANZ Recruitment Industry needs more of these business owners that are prepared to back themselves and grow their business. We don't want all the medium to large businesses to be foreign owned. However there are structural issues here – we don't have supportive banks and there is very little Private Equity involvement. We don't have the "pull factors" of other countries that provide an incentive or a goal for business owners.
Of course business owners need to help themselves as well – get better advice, create more robust strategies, be better leaders. Too many business owners become complacent too quickly – they need to push themselves and invest more fully in their businesses.
The great news is that the industry is producing good profits, on average, and that's a healthy position to be in. It is a very exciting time for the industry.
Thanks for your comment, Rod. In my experience, your observation that 'too many business owners become complacent too quickly' is accurate. Recruitment agency owners taking professional development consistently investing in professional development for their staff is still more the exception than the rule in our industry.I hope the more profitable times that we are in at the moment will encourage long term investment in the capabilities of both owners and employees.