The future of recruitment agencies

This is a €40 billion question. According to the numbers published by the WEC (World Employment Confederation) for the year 2016, direct recruitment activities generated a turnover of €37.8 billion in the seven biggest world markets.


Just for Europe, 1.5 million candidates have been hired through agencies, and there are more than 75.000 recruitment companies operating in this sector. And this is excluding temporary work, consulting and RPO activities (adding all these solutions, the global turnover reaches €491 billion). Recruitment is a gigantic market, everywhere in the globe, in a constant growth for decades.


But there are rising voices to contest the legitimacy of the recruitment agencies. Too expensive, not efficient, not understanding clearly the staffing needs of their clients… The list is getting longer and longer. Recently, the CEO of Odoo Belgium posted a message on LinkedIn stating: “we pay a 10K€ fee for a IT developer, we prefer to give you that money when you join us!”. The message, rather provocative, is quite clear though: instead of going through a recruitment agency to find a candidate, the company wants to avoid an intermediary cost and targets directly the potential candidates. 


What was very interesting here, outside the inner message, is the noise it generated: almost 1.000 reactions and 100 comments, saluting on one hand the boldness of the initiative, questioning on the other hand the recruitment strategy and the maths behind it. The point being: it was probably more of a communication manoeuvre here, but all the reactions are the sign that a good number of companies are wondering today if it is still worth working with external partners to recruit candidates.


The incompressible need of working with external partners


If you need a pen, you buy a pen. That sounds logical. But what if, tomorrow, you learn how to build a pen? Are you still going to go in a store to buy it? It might not be cheaper, but you have a know-how you may use and value. As companies are learning how to find and attract candidates in a talent shortage market, the need of paying consequent fees to recruitment agencies might fade away. 


Nevertheless, figures are saying otherwise. Thus, why do companies still work with recruitment agencies to hire a part of their workforce? Hereunder some of the 6 main reasons to explain it:


  • An undersized recruitment team: even if you have a top performing recruiter within your company, you cannot decently ask him/her to recruit, from scratch, 20 qualified and rare candidates each month. Recruitment takes time, and resources. Partnering with a recruitment agency can be a good solution to accelerate your hires, and complement your internal team. 


  • An existing pool of candidates: the core business of recruitment agencies is to build and nurture a pool of qualified and quickly available candidates. It can save months of search to use their existing networks. If you need to hire fast, that’s a viable solution.


  • Flexible solutions: agencies are creative when designing solutions for their clients. One shot, decreasing fee if you hire several candidates, performing technical or personality tests, financial or replacement guarantees in case of resignation / dismissal etc. For every request, a solution.


  • A talent shortage market: engineers, qualified workers, healthcare specialists, sales & marketing professionals… the list of “in tension” candidates goes bigger every year. In 2019, according a global survey led by Manpower Group, 54% of the employers reported that there was a talent shortage in their activities (against 30% in 2009). In such a tense market, where hiring a candidate has become a real challenge, the role of recruitment agencies makes sense.


  • Digital recruitment and connected candidates: beside rarity on certain skill sets, candidates have changed their habits regarding recruitment. It’s especially the case with young generations, but not only: candidates apply mostly online, through new supports (smartphone, tablets), they often use social media to perform background checks of companies, they’re eager to have more content when applying (videos, testimonials etc.). This is a massive trend, and if big companies can afford to invest money to stay in line with it, small and medium actors encounter difficulties to follow the movement.


  • Externalize the financial risk: on a very pragmatic point of view, going through an external agency generates an opportunity to have control on recruitment costs. If you have an internal recruitment team, not performing that well, you still need to pay them to find candidates. With recruitment agencies, the flat cost might be higher, but you pay them on the delivery (when the candidate signs the work contract). All upfront costs are covered by the agency, and if they don’t find the candidate, the client doesn’t pay anything.


New economical models: the programmed end of “no cure no pay”


The model described above is usually called “no cure no pay”: the client pays only if there is a positive result. This was the industry standard for decades, and a very profitable model when the candidate market is balanced: clients outsource this non-core activity to specialists, and recruitment agencies manage to answer quickly and efficiently their clients, having high fill-in rates and constant revenues. 


With a talent shortage market, the equation is different. For recruitment agencies, a “no cure no pay” approach is a bit like rolling the dice: if you don’t manage find suitable candidate(s), you are not paid at all. Said otherwise, you lose money as you still need to cover your own costs (paying your recruitment consultants, cost of job adds, access to CV databases etc.). The probabilities of success have decreased over the years, as candidates are increasingly rare and demanding, and clients picky on what they want. All of that made the “no cure no pay” model less and less sustainable for agencies, and consequently, they are switching to new economical models, more balanced for them.


As described above, recruitment agencies can draw creative and flexible solutions for their clients. But they also need to protect their interests, and basically ensure their survival. Therefore, we observed for some years now the rise of new solutions, amongst following:


  • Exclusivity clause: an agency negotiates with the client to work as the exclusive partner on one or several job openings. Exclusivity is usually limited in time (some weeks, or months for specific profiles); for agencies, it’s a security check that the client is not entrusting the mission to competitors, increasing de facto success rate.


  • Upfront fee (or Retainer fee): the client pays, at the beginning of the mandate, a part of the estimated total fee, for the agency to correctly launch the search. It allows agencies to dedicate clear ressources (one or several persons full-time, budget for job ads etc.) as the client is financially committed to the search success.


  • 3/3 rule: divide the estimated total fee in three thirds, the client pays each third of the amount at 3 stages of the recruitment process (for example: a recruitment fee of 12.000€ is divided in 3 payment terms, 4.000€ at the beginning of the mandate, 4.000€ at the proposal of a validated shortlist of candidates, 4.000€ at the candidature signature)


In an uncertain and unstable market, small and mid-sized recruitment agencies tend to switch to these new solutions, for different reasons: more commitment from the client, better cost control, more financial resources to spend in finding candidates, higher selectivity in their mandates, more time dedicated to the client relationship management (reporting, job intake, communication), and overall better results. They calculate more in depth their chances of success, and then they make the decision to work or not on a job opening. And yes, an increasing number of agencies are now refusing to work on mandates as the return of investment is not profitable enough.


Big agencies can continue to work through “no cure no pay” model, because they have the financial stability to do so. But don’t be mistaken, the quality of collaboration might decrease: big agencies tend to accept a lot of client mandates, betting that on the number of searches they’re performing, at least one of them will lead to a deal, and a recruitment fee. It’s a random situation: the client gives a mandate to several agencies, an agency takes mandates from several clients, generating low quality in job intake, poor candidate shortlisting and attraction, lower retention, higher probability of failure. It often leads to a very low commitment, and frustration in both parts.


What kind of future?


Recruitment agencies are not about to disappear a near future, that’s for certain. Because the cake is big enough for everyone to live on it, and also because recruitment agencies are still considered as specialists, giving them a real legitimacy in the HR market. In addition, if you do the maths, doing your own recruitment today is not necessarily cheaper than partnering with an agency. But there is a learning curve, as well as a scale effect, and at some point in time, it will become cheaper for almost every company to attract and hire a qualified candidate. Even for small and medium actors.


Agencies are aware of that. Not all of them though, and the ones who don’t are jeopardizing their future. Not now, but soon enough. The urge to change is heavy (and it already began), and since a decade, we observe major changes in the collaboration models between clients and agencies. Closest collaboration, exclusivity, more commitment from both actors, building long-term relationship and trust. We are switching from a pure transactional model (client-supplier) to a partnership model. The candidate-oriented market has reshuffled the cards, allowing performing recruitment agencies to find a strongest and more balanced role in the equation. 


In that regard, 2020 will be a point of rupture. With the current COVID-19 crisis everyone is going through, everywhere on the globe, the need for change is going to be critical. Consequences (social, financial, economical) are yet to be discovered, but lessons will need to be learned. Some agencies will disappear, some will survive, some will merge, the number of mandates will be reduced for an uncertain period of time. The shape of the recruitment ecosystem will be very different in the coming years, and it’s primarily up to recruitment agencies to draw it, starting now.


Nicolas Caillet

HR Associate at AION Consulting

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